Q4FY23 Review: Hero Motocorp: Margin surprise on last leg of commodity fall

8 May 2023 , 11:10 AM

Hero’s Q4 Ebitda beat analysts of IIFL Capital Services’ estimate by 11% due to benefit from fall in commodity prices. This seems to be the last leg of margin tailwind from input costs. Since our FY24/FY25 estimates were already building higher margins vs FY23, upgrade to our EPS estimates is restricted to about 2%. Despite 16% growth in FY23, 2W industry volumes were about 25% lower than FY19 peak. Mgmt has guided to double-digit industry volume growth in FY24. Revival in rural demand (currently soft) is a critical prerequisite for this growth, in our view. In theory, Hero is a good proxy to play recovery in 2W industry. However, persistent market-share loss has resulted in Hero’s growth being lower than the industry.

Q4 Ebitda 11% higher than estimate: 

Q4 rev grew 12% YoY (in line), led by 7% volume growth and 5% ASP. Gross margin (GM) improved 140bps QoQ, driven by incremental input cost benefit. Ebitda margin rose 150bps QoQ to 13.0%, beating our expectations by 120bps. Absolute Ebitda came in 11% above our estimate. PAT beat was higher at 18%, due to spike in other income.

2W industry has legroom for growth, but margin tailwinds are behind us: 

Despite 16% growth in FY23, 2W industry volumes are 25% below FY19 peak. Mgmt guided to double-digit volume growth in FY24 (we forecast 10%). Continued weakness in rural markets due to sub-normal monsoon or otherwise, is a risk to 2W growth. The sharp QoQ gross margin expansion seen in Q4 came from the last leg of fall in commodity prices. Going forward, this may not be a tailwind. Hero recently cut price of its EV Scooter sharply by Rs20-25k. This would prolong the “path to profitability” and create a drag on overall margins, if EV volumes scale up.

Persistent market-share loss a concern; Retain ADD: 

Hero has been losing market-share in domestic 2Ws. Two of its key brands – Passion and Glamour – have seen sharp fall in volumes. As a result, one model namely, Splendor accounted for 74% of volumes in Q4FY23. High model concentration poses a big risk, in our view. Mgmt mentioned that Hero is planning to launch one new model every quarter. If Hero finds traction with these launches, market-share may revive.

Analysts of IIFL Capital Services maintain add with target price of Rs 2820.