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Spark Capital: Hero Motocorp 1QFY15 Outlook Review (Rating: Buy; TP: 2930)




Spark Capital Advisors(India) Private Limited


06 Aug 2014





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Hero Motocorp – 1QFY15 Outlook Review (Rating: Buy; TP: 2930) How does our one year outlook change? We remain positive on HMCL as we see strong volume growth in domestic motorcycle (MC) and scooter despite competition from HMSI. Furthermore, we expect EBITDA margin improvement through FY16 driven by volume growth and company’s margin transformation initiatives. We retain a Buy rating on the stock with a price target of Rs. 2,930 based on 15x FY16 EPS of Rs. 196 Domestic MC is expected to record a 11% CAGR from FY14-FY16 on the back of urban demand pickup, continued growth in rural markets and new product pipeline. Scooters are expected to continue the strong growth with a CAGR of 23.5%. With the recent increase in scooters capacity, start of the Neemrana plant and planned new launches, we believe scooters can be scaled to ~100,000 units per month by the end of FY16 For FY15, we expect EBITDA margins to improve 30bps yoy as the benefit from the LEAP program (estimated Rs. 4.8bn) is expected to be offset by impact of Haridwar excise anomaly (estimated Rs. 2.8bn), higher royalty on three models (estimates Rs. 0.6bn) and higher vendor compensation (Rs. 660mn in 1QFY15). Further in FY16, we expect an 80bps improvement in margins as the benefit from the LEAP program would be significantly higher (estimated Rs. 7.5bn) Neemrana plant is expected to add 0.75mn of capacity taking overall capacity to 7.6mn units. We expect utilization rate in FY15 to remain high (~92%) on the expanded capacity How does our 3 year Outlook change? We continue to expect scooters to outgrow the two-wheeler industry account for 29%+ of domestic industry by FY18. We believe HMCL is well placed to benefit from this trend given its product pipe line and branding Given HMCL’s dominant positioning in entry MCs, we believe the company has higher exposure in rural market driven states such as UP, Bihar, MP, Jharkhand and WB. We also believe that these states will be the drivers of MC volumes in India (through FY18), given sheer base of population and significantly lower than country average penetration levels While exports accounted for <2% of volumes in FY14, we expect it to grow substantially (40%+ CAGR) and result in ~5% of volumes in FY18

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