Hero Motocorp (Q3 FY13)

Revenues rise 2.5% yoy on back of a 3.6% yoy increase in realizations. The improvement was sharp sequentially wherein net sales were better by 19.3% qoq post a weak Q2 FY13

January 18, 2013 10:41 IST | India Infoline News Service
CMP Rs1,819, Target Rs1,945, Upside 6.9%

  • Revenues rise 2.5% yoy on back of a 3.6% yoy increase in realizations. The improvement was sharp sequentially wherein net sales were better by 19.3% qoq post a weak Q2 FY13 
  • Margins at 12.6% were down 304bps yoy and 128bps qoq on back of increased ad spends and higher material costs (unfavorable product mix)
  • Depreciation which includes royalty payments to Honda was noted lower by 2.2% qoq on back of weakening of yen against Rupee
  • On back of slightly better volumes in H2 FY13, we build in flat volumes for the year and assume moderate growth in FY14 
  • Maintain Market Performer with a revised 9-month price target of Rs1,945. 
Result table
(Rs m) Q3 FY13 Q3 FY12 % yoy Q2 FY13 % qoq
Volume 1,573,135 1,589,286 (1.0) 1,332,805 18.0
Realisation 39,333 37,979 3.6 38,921 1.1
Net sales 61,876 60,360 2.5 51,875 19.3
Material costs (45,854) (43,948) 4.3 (37,702) 21.6
Personnel costs (1,982) (1,993) (0.5) (1,922) 3.2
Other overheads (6,253) (4,987) 25.4 (5,059) 23.6
Operating profit 7,786 9,432 (17.4) 7,192 8.3
OPM (%) 12.6 15.6 (304) bps 13.9 (128) bps
Depreciation (2,832) (2,987) (5.2) (2,895) (2.2)
Interest (30) (35) (15.7) (30) 0.3
Other income 901 828 8.8 993 (9.3)
PBT 5,826 7,238 (19.5) 5,261 10.7
Tax (947) (1,108) (14.5) (855) 10.7
Effective tax rate (%) 16.3 15.3 95 bps 16.3 0 bps
PAT 4,879 6,130 (20.4) 4,406 10.7
PAT margin (%) 7.9 10.2 (227) bps 8.5 (61) bps
Ann. EPS (Rs) 97.7 122.8 (20.4) 88.2 10.7
Source: Company, India Infoline Research

Volumes rebound on festive cheer… Gains back some market share

Hero Motocorp Ltd (HMCL) reported 19.3% qoq increase in revenues to Rs61.9bn on back of strong festive sales booked in the quarter. Total volumes sold during the quarter were at 1,573,135 units which were 1% down yoy but up by a healthy 18% on qoq basis. The realizations were higher sequentially by 1.1% on back of a slightly better product mix in motorcycles wherein the dispatches of 125cc-150cc category increased during the quarter.

The quarter sales enabled HMCL to regain market share by 190bps in domestic motorcycle segment on a sequential basis. In the scooters segment also HMCL made smart market share gains of 3.9% at the expense of market leader HMSI. The share of scooters in total domestic volumes continued to increase to 10.2% (vis-à-vis 9.9% in Q2 FY13) on back of the success of the Pleasure and Maestro. Management indicated of increasing the capacity in scooters and slew of product launches in this segment going ahead to further reap this market.

Volume breakup
As a % of net sales Q3 FY13 Q3 FY12 % yoy Q2 FY13 % qoq
<125cc 1,317,851 1,365,069 (3.5) 1,146,518 14.9
>125cc and <250cc 56,533 73,091 (22.7) 23,891 136.6
Scooters 155,738 105,052 48.2 128,215 21.5
<125cc 33,083 32,047 3.2 28,850 14.7
>125cc and <250cc 5,661 4,610 22.8 1,884 200.5
Scooters 4,269 9,409 (54.6) 3,447 23.8
Source: Company, India Infoline Research

Disappointing operational performance… OPM much below estimates

HMCL reported an OPM of 12.6% in Q3 FY13 reflecting a poor operating performance in the quarter. Material costs as percentage of sales unexpectedly jumped by 143bps qoq leading to OPM coming in 190bps below estimates. Further, other overheads came in higher by 35bps qoq on back of higher ad spends incurred on the new launches. The sharp declines in operating profit per vehicle underlined the poor performance wherein at Rs4,950 operating profit per vehicle decreased by 8.3% qoq and a sharp 16.6% yoy. Management attributed the high material costs to the new product launches and guided for some moderation in metal costs as the volumes of the new models pick up. However it guided for similar higher ad spends in the next quarter also.  Depreciation was noted lower by 2.2% qoq on back of weakening of yen against rupee and going ahead management expects to continue to benefit from this trend.

Key takeaways from the conference call

  • Rural sentiment saw improvement in Q3 FY13 on back of better rains. Going ahead management indicated of continuing to carry out special drives to activate the rural market and tap the latent demand.  

  • Inventory levels were noted at normal levels of four weeks during the quarter. Management informed of having increased the credit period for the dealers and guided for Rs6-7bn of receivables at normal inventory levels. Additionally a hike of Rs100 was allowed in dealer margins in October 2012.  

  • On the new plants, the management informed that work had already started at Neemrana plant in Rajasthan and would be operational by Q2 FY14 adding a capacity of ~750,000 units per annum. On the Gujarat plant, work relating land acquisition is ongoing and it is expected to be operational in FY15.  

  • Haridwar plant operated at 8,500units/day during the quarter and management informed of having increased its capacity to 9,500units/day recently. Company guided for increased tax rate of ~23-25% starting FY14 as the tax benefit of Haridwar plant expires at end of FY13.

Cost analysis
As a % of net sales Q3 FY13 Q3 FY12 bps yoy Q2 FY13 bps qoq

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