Q3FY23 Review: Hero Motocorp: Rural recovery critical for EPS growth

9 Feb 2023 , 11:31 AM

Hero’s Q3 results were largely in line with analysts’ of IIFL Capital Services estimates. Despite revival in domestic 2W industry in FY23 (+18% YoY), Hero’s domestic volumes are up only 9% due to market-share loss. Weakness in rural markets and low-end entry-level segments seem to be hurting Hero more than peers. Sharp fall in export volumes have not helped either. Management is confident of double-digit revenue growth in the 2W industry in FY24, and believes Hero can do better. Margin benefit from fall in commodity prices is already reflected in Q3 results. Incremental margin uptick will come from operating leverage if volumes improve and from normalisation of high marketing spend (seasonally high in Q3).

Q3 rev grew 2% YoY with higher realisations (price hike, spare parts) offsetting decline in volumes. Gross margin improved 250bps QoQ (140bp beat). This was driven by lower input costs, higher spare parts revenue and cost cutting initiatives. Ebitda margin was flattish QoQ at 11.5% (30bp miss). The miss was due to sharp rise in operating expenses (+22% YoY). Absolute Ebitda came in 2% below analysts’ of IIFL Capital Services estimate.

Mgmt mentioned that EV business hurt margins by 70bps in Q3. In the initial years, EVs may be loss-making. Parking EV business in a separate subsidiary will: 1) Prevent standalone earnings from being dragged down by EV losses, 2) enable Street to continue valuing ICE business on earnings multiple, 3) give EV business heads freedom to grow the business without worrying about profitability in the initial years. This strategy has been adopted by other OEMs in India.

Analysts of IIFL Capital Services maintain buy with target price of Rs 3000.