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Hero Motocorp (HMCL) - Qtr. Update - Dated - August 05, 2014




Axis Capital Limited


06 Aug 2014





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Hero MotoCorp’s (Bloomberg: HMCL IN) operating performance was 6% below our and consensus estimates owing to higher input costs. The management has guided for double-digit volume growth in domestic market and reiterated its cost rationalization plans (savings in the quarter were Rs 970 mn). We like Hero for its superior return ratios, and also believe competitive fears are somewhat unfounded (given that Honda's market share gains have been driven more by aggressive channel expansion and less by development of strong sub-brands). However, the two wheeler segment is not the best way to play a cyclical recovery in Autos (vs. cars/CVs) given the relatively low discretionary nature of 2W purchases. We largely maintain our estimates and our HOLD rating with TP of Rs 2,726 - 16x FY16E EPS (vs. 15x earlier as market share concerns abate). Our TP implies 5% upside from CMP Rs 2,584. At CMP, the stock trades at 16.5x and13.9x our FY15E/16E EPS of Rs 142/168. Key takeaways from the conference call  Demand outlook robust: Management indicated demand scenario remains robust and it has seen rebound in replacement demand driving motorcycle growth. While some rural pockets are impacted due to delayed rainfall, rural demand also remains robust  Cost rationalization plans have already started to bear fruit. For the quarter, the total saving is ~ Rs 970mn/month (Rs 310mn adjusted for hike given to vendors). Management indicated that it has initiated ideas which will result in savings worth Rs 4.5 bn. Overall, these initiatives should help improve gross margin by 300 bps over next 3 years  With commissioning of Neemrana plant, the total capacity increases to 7.65 mn units (6.9mn units earlier). Hero has already acquired land for a new plant in Gujarat which will eventually take its capacity to 9.2 mn units  Impact of excise duty anomaly on margin: Management indicated that 4% price cut it took to pass on excise duty cut has impacted gross margin at its Haridwar plant (as the plant is exempt from payment of excise duty and hence never benefitted from the excise cut in the first place) which contributes 40% to volumes. It however still has to pay higher excise duty (12%) on the auto components. The overall impact during the quarter was Rs 940 mn (1.4% of sales) Regards, Ashish Nigam (Sr. VP – Automobiles) ashish.nigam@axiscap.in; 91 22 4325 1148 Ronak Sarda (Asst. VP – Automobiles) ronak.sarda@axiscap.in; 91 22 4325 1137

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