Hero Motocorp (Q4 FY12)

• Revenues rise 11.9% yoy due to 8.1% yoy growth in volumes and 3.6% higher realizations
• OPM at 15.3% was lower than expectations on the back of higher than expected raw material costs
• 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 Rs2,493

Net sales increase by 12% yoy

Hero Motocorp Ltd (HML) reported 11.9% yoy increase in revenues to Rs60,349mn. Growth was driven by 8.1% yoy increase in volumes and 3.6% yoy higher realizations. Growth in realizations, which were higher than our expectations, was on account of better product mix and price hikes implemented over the past few quarters. On sequential basis, revenues for Q4 FY12 remained flat as 1.1% fall in volumes was offset by 1.2% increase in realizations.

Margins remain flat as higher RM costs offset impact of lower overheads

HML reported an OPM of 15.3% in Q4 FY12, down 6bps and 30bps qoq. Operating profit per vehicle increased 3.2% yoy to Rs5,886 but lower 0.8% qoq. While 8.1% yoy growth in volumes resulted in benefits of operating leverage (overheads lower by 38bps yoy as a percentage of sales), higher raw material costs (37bps yoy) had an offsetting impact.

Key takeaways from the conference call

• The inventory level with the dealers is in the normal range with 2 weeks of stock and 5-6 days of stock in transit.

• 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. Also the company is in final stages of discussion for setting up the distribution network in these countries.

• Scooters segment capacity is at 50,000 units per month. Although the capacity utilization is near optimum levels, the company does not expect too much supply constraints.

• While the impact of higher steel prices of Q4 FY12 will be seen in Q1 FY13, the gain on account of Yen depreciation will offset the impact. Of total imports of 15% of net sales, 5.5% is direct (majority dollar denominated) and remaining is vendor imports (majority yen denominated).

• With plans of capex to increase its manufacturing capacity likely to be announced in a few days, the company has announced a dividend of Rs45 per share leading to a payout of only 37.6% much lower than past couple of years.

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

• In terms of branding, the company has received an outstanding response for its Splendor model under the new Hero brand. Going ahead, the company has plans to do this for all products.

• Production at Haridwar accounted for 35% of production in FY12 and the company expects this contribution to increase to 40% in FY13. 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 22-23% in FY14 from an estimated 16% in FY13.

Source: Company, India Infoline Research

Maintain BUY with a revised 9-month price target of Rs2,493

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 14.4% and 19.6% CAGR in revenues and profitability during FY11-14E respectively.