Hero Motocorp (Q1 FY13)

CMP Rs2,104, Target Rs2,367, Upside 12.5%

• Revenues rise 10% yoy due to 7.4% yoy growth in volumes and 2.4% higher realizations
• OPM at 15% was lower than expectations on the back of lower than expected realizations
• Higher production from Uttaranchal plant results in lower effective tax rate
• Volume growth has slowed down, but we expect Hero Motocorp to report higher than industry growth
• Margins are expected to recover on the back of better vendor sourcing and fixed nature of royalty payments
• Maintain BUY rating with a revised 9-month price target of Rs2,367

Net sales increase by 10% yoy

Hero Motocorp Ltd (HML) reported 10% yoy increase in revenues to Rs62,473mn. Growth was driven by 7.4% yoy increase in volumes and 2.4% yoy higher realizations. Growth in realizations, which were lower than our expectations, was on account of product mix shifting towards the <125cc category. Price hike implemented in May 2012 helped offset the impact to some extent. On sequential basis, revenues for Q1 FY13 grew 3.5% mainly driven by 4.5% rise in volumes, which was offset by 1% fall in realizations.

OPM rises 42bps yoy but declines by 34bps qoq, lower than our expectations

HML reported an OPM of 15% in Q1 FY13, a rise of 42bps yoy but a fall of 34bps qoq. This was lower than our expectations. Operating profit per vehicle increased 5.4% yoy to Rs5,704 but was lower by 3.1% qoq. While raw material costs have been relatively soft in Q1 FY13, higher staff costs and increased ad spends restricted the gains on margins.

Depreciation was higher by 26.6% yoy owing to the rupee depreciation impact on the royalty payout to the Honda Group. Effective tax rate was at 16.3% as compared to 16.7% in Q1 FY12 owing to increased output at the Haridwar plant.

• The inventory level with the dealers has increased from the normal range of two weeks to about four weeks owing to the slowdown in demand.

• The company has firmed up plans for the export launch as it has zeroed it on Africa and Latin America. In terms of models the company although has plans to sell all its models at a global scale but initially will focus on 100cc-125cc segment.

• In the scooters segment, the company witnessed capacity constraints in June 2012, which was however resolved in July 2012 as the company raised its manufacturing capacity.

• The company has guided for a capex of Rs25bn over the next couple of years. Of which Rs4bn will be spent on the Neemrana plant with a capacity of 750,000 per annum and Rs11bn will be incurred on the Gujarat plant which will have a capacity of 1.2mn units.

• The company has raised prices of its products by Rs500-1,000 from May 2, 2012 to offset the rising raw material costs.

• Production at Haridwar accounted for 38% of production in Q1 FY13 and the company expects this to be maintained at the current levels. This will lead to a lower tax rate in FY13. However, with 100% tax exemption at Haridwar ending in FY13, the tax rate will inch up to around 23-25% in FY14 from an estimated 16% in FY13. 

Maintain BUY with a revised 9-month price target of Rs2,367

We maintain our BUY rating on the stock considering a continued outperformance of the company in terms of two wheeler volume growth. Increasing trend in competition has not put any dent in the market share of the company. Margin improvement trend is expected to continue as 1) sourcing from new low cost vendors, 2) fixed royalty cost getting apportioned over higher number of vehicles sold and 3) better pricing power. We expect the company to deliver 14.7% and 15.1% CAGR in revenues and PAT during FY12-14E respectively.