Hero Motocorp: Motoring ahead - BUY

India Infoline News Service | Mumbai |

Hero Motocorp with increasing market share in the scooters segment, strongest presence in rural markets and robust line-up of new models will be able to retain its market share in spite of fierce competition.

CMP Rs2,100, Target Rs2,350, Upside 11.9%
 

Scooters and rural markets to drive volume

Rising proportion of working women preferring scooters for personal mobility and increasing appeal to the youth will continue to drive higher than industry growth for the scooters segment of the two wheeler industry. While the weakness in urban India sentiment will continue to persist for motorcycle demand, strong rural demand driven by higher incomes will more than offset the impact. Hero Motocorp with increasing market share in the scooters segment, strongest presence in rural markets and robust line-up of new models will be able to retain its market share in spite of fierce competition.

 

Quantum jump in exports seen

Under the JV with the Honda group, Hero Motocorp was restricted to exports to markets where Honda had an erstwhile presence. The split up has now enabled the company to enter newer markets. In the initial stages the company has entered 8 markets and has plans to enter other markets in Middle East and Africa. So far the key companies present in these markets have <100cc motorcycle as their key product.  With Hero Motocorp having leadership position in that segment in domestic markets, it is well poised to make inroads and garner market share. With the technological tie ups the company has made in the recent past its building a robust line up of products enabling them to enter developed markets.

 

Strong earnings CAGR, Valuations attractive

While domestic volumes for Hero Motocorp will grow in line with the industry 8-10% CAGR in the next couple of years, exports are likely to see a substantial jump. Realizations will see a modest rise of 2% on back of increasing proportion of scooters and premium motorcycles. With OPM expected to expand by 100bps (with an upward bias) over the next couple of years and sharp decline expected in royalty, earnings growth is expected to be at 30% during FY14E-16E. Given the robust earnings CAGR, valuations are attractive at P/E of 11.7x FY16E EPS of Rs178.4. We maintain our BUY recommendation with a price target of Rs2,350.


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Revenues
237,681
257,437
287,809
329,497
yoy growth (%)
0.8
8.3
11.8
14.5
Operating profit
32,845
36,042
41,435
48,818
OPM (%)
13.8
14.0
14.4
14.8
Reported PAT
21,182
20,766
29,728
37,152
yoy growth (%)
(10.9)
(2.0)
43.2
25.0
EPS (Rs)
106.1
104.0
148.9
186.0
P/E (x)
19.8
20.2
14.1
11.3
Price/Book (x)
8.4
7.4
5.7
4.4
EV/EBITDA (x)
12.7
11.4
9.8
8.1
RoE (%)
45.6
38.8
45.7
43.9
RoCE (%)
46.4
50.5
61.3
59.0
 Source: Company, India Infoline Research
BSE 3,421.85 [23.10] ([0.67]%)
NSE 3,419.45 [22.25] ([0.65]%)

***Note: This is a NSE Chart

 

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