Hero Motocorp (Q4 FY14)

HMCL reported an OPM of 13.7% in Q4 FY14 reflecting a flat performance on a yoy basis but 67bps qoq improvement.

May 31, 2014 09:05 IST India Infoline News Service

CMP Rs2,334, Target Rs2,700, Upside 15.7% 

  • Revenue growth was at 6% driven by 4.1% volume growth led by scooters, realizations were higher by 1.8% owing to better product mix with higher contribution from scooters along with price hikes implemented over the past four quarters

  • Margins at 13.7% were tad lower than our expectations mainly owing to higher than estimated overheads

  • Tax rate was higher at 25.2%, on back of part reduction of tax benefit at Pantnagar and additional surcharge element introduced in the FY14 budget

  • Cost cutting initiatives to add an estimated 300bps to margins by FY17

  • Maintain BUY with a 9-month price target of Rs2,700

Result table
(Rs m) Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Volume 1,589,642 1,527,351 4.1 1,680,940 (5.4)
Realisation 40,971 40,238 1.8 40,910 0.1
Net sales 65,130 61,458 6.0 68,768 (5.3)
Material costs (46,798) (44,395) 5.4 (49,991) (6.4)
Personnel costs (2,357) (2,259) 4.3 (2,439) (3.4)
Other overheads (7,033) (6,306) 11.5 (7,360) (4.4)
Operating profit 8,942 8,498 5.2 8,978 (0.4)
OPM (%) 13.7 13.8 -10 bps 13.1 67 bps
Depreciation (2,728) (2,655) 2.8 (2,732) (0.1)
Interest (29) (31) (4.6) (30) (1.7)
Other income 1,230 1,045 17.7 956 28.7
PBT 7,414 6,857 8.1 7,171 3.4
Tax (1,870) (1,115) 67.7 (1,922) (2.7)
Effective tax rate (%) 25.2 16.3 896 bps 26.8 -158 bps
PAT 5,544 5,742 (3.4) 5,250 5.6
PAT margin (%) 8.5 9.3 -83 bps 7.6 88 bps
Ann. EPS (Rs) 111.1 115.0 (3.4) 105.1 5.6
Source: Company, India Infoline Research

Net sales in line with expectations

During Q4 FY14, HMCL volumes witnessed 4.1% yoy increase. Realizations also grew 1.8% yoy on back of price hikes implemented through the year, better product mix and higher spare part sales. Resultantly, net sales came in at Rs65.1bn a growth of 6% yoy. On a sequential basis, the blended realizations were modestly up by 0.2%, while volumes declined 5.4% qoq.  

Domestic scooter volumes for HMCL continue to grow in healthy manner and it market share in this segment hovered at ~20%. In the motorcycle segment, HMCL saw its volume rising by 3.2% yoy and is seen to be losing market share to HMSI.


Volume breakup
As a % of net sales Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Domestic
<125cc 1,350,410 1,275,032 5.9 1,428,639 (5.5)
>125cc and <250cc 23,908 56,251 (57.5) 44,943 (46.8)
Scooters 180,381 156,884 15.0 175,809 2.6
Exports
<125cc 22,423 28,162 (20.4) 22,703 (1.2)
>125cc and <250cc 4,209 4,575 (8.0) 3,473 21.2
Scooters 8,196 6,447 27.1 5,373 52.5
Source: SIAM, Company, India Infoline Research

OPM at 13.7% was tad lower than our estimates

HMCL reported an OPM of 13.7% in Q4 FY14 reflecting a flat performance on a yoy basis but 67bps qoq improvement. Sequential improvement in margins was owing to 84bps yoy reduction in raw material costs as a percentage of sales. On a yoy basis as well raw material costs were down 38bps owing to soft commodity prices. Staff costs as a percentage of sales remained flat on both yoy and qoq basis. However, other overheads were higher by 54bps yoy and 10bps qoq.


Cost analysis
As a % of net sales Q4 FY14 Q4 FY13 bps yoy Q3 FY14 bps qoq
Material costs 71.9 72.2 (38) 72.7 (84)
Personnel Costs 3.6 3.7 (6) 3.5 7
Other overheads 10.8 10.3 54 10.7 10
Total costs 86.3 86.2 10 86.9 (67)
Source: Company, India Infoline Research

Update on cost cutting measures

HMCL is currently in midst of a cost cutting program whereby it expects to increase its operating margins by 300bps in the next three years. Cost savings are on three counts 1) price rationalization of products, 2) raw material consolidation through vendor rationalization and 3) savings in outbound logistics costs. For Q4 FY14, the company had savings of Rs600mn and is seeing a run rate of Rs250mn savings per month. For FY14 the company had savings of Rs1,500mn. The company expects to end FY15 at a run rate of Rs500-600mn savings per month.

 

Key takeaways from conference call

  • The company expects 10-11% growth in domestic two-wheeler industry for FY15. Scooters demand will remain strong over the next couple of years and company looks at scooters contribution to total domestic volumes rising to 30% from current 25%

  • During FY14, HMCL had capacity constraints for scooters segment. Capacity during Q4 FY14 was at 60,000 per month which has been increased to 75,000 from Q1 FY15 onwards. If need be the company can raise the capacity to 100,000 units.

  • At Neemrana plant (a capacity of 750,000 units per annum) pre-production run has been completed. While trial production is expected in June 2014, commercial operations are expected to start in Q2 FY15. Gujarat plant will commence operations by Q2 FY16 and will have a capacity of 1.2-1.5mn units per annum. R&D centre is on the course to start operations by the end of Q1 FY16. The company is expected to incur a capex of Rs15-18bn for FY15.

  • Total of more than 500 touch points are expected to be added during FY15 taking the total number in excess of 6,500

  • During FY14, the company saw 4.5% growth from urban markets while rural markets continued to see strong growth of 10%.

  • During FY14, the company through various routes has established export base in 18 countries and expects the volumes to more than double in FY15 with a target of 250,000 units.

  • Through its financing arm which started operations in June 2013, the company financed 52,000 units in FY14. The target for the same is 200,000 units in FY15 through targeted presence at 590 locations.

  • With regards to launches, the management apprised that most of the models showcased in the Auto Expo and prior to it will be launched in the next couple of years.

Maintain BUY with a 9-month price target of Rs2,700

The scooter segment has displayed robust growth in YTD FY14 and HMCL has been able to grow its market share in this segment. We have a positive outlook here and build in 22% growth in HMCL domestic scooter volumes in FY15. The motorcycle sales have remained weak and we expect the weakness to continue in near term. However HMCL may be better placed than its peers, owing to tailwinds in form of rural motorcycle sales growth. We get this optimism from the healthy tractor sales and good monsoons, which generally translate into good rural incomes.  Building in 10.6% total volume growth in FY15 and 13.3% in FY16, we see sharp earnings jump of 36% and 26% respectively. Growth will be aided by substantially reduced royalty payout to Honda. We maintain our BUY recommendation with a 9-month price target of Rs2,700.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 237,681 252,755 281,095 323,691
yoy growth (%) 0.8 6.3 11.2 15.2
Operating profit 32,845 35,401 39,645 46,584
OPM (%) 13.8 14.0 14.1 14.4
Reported PAT 21,182 21,091 28,683 36,057
yoy growth (%) (10.9) (0.4) 36.0 25.7
         
EPS (Rs) 106.1 105.6 143.6 180.6
P/E (x) 22.0 22.1 16.2 12.9
Price/Book (x) 9.3 8.3 6.6 5.0
EV/EBITDA (x) 14.1 13.1 11.7 9.8
RoE (%) 45.6 39.8 45.2 44.0
RoCE (%) 46.4 52.5 62.4 60.4
Source: Company, India Infoline Research

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