auto analysis

8/10/2019 Auto analysis

1/8

E: MOSL Es ti ma tes

16 October 2014

2QFY15 Results Update | Sector: Automobiles

Hero MotoCorpCMP: INR2,792 TP: INR2,969 Buy

Quarterly Performance (INR Million)

Y/E March FY14

1Q 2Q 3Q 4Q

FY15 FY14 FY15E Est Var.

2QE (%)1Q 2Q 3QE 4QE

Total Volumes ('000 nos) 1,559 1,416 1,681 1,589 1,715

Growth YoY (%) -5.1 6.3 6.9 4.2 10.0

1,693

19.5

1,813 1,773 6,246

7.9 11.5 2.8

6,994

12.0

1,693 0.0

19.5

Net Realization 39,293 40,223 40,727 40,616 40,810

Growth YoY (%) 4.0 4.1 4.2 2.0 3.9

40,552

0.8

41,260 41,919 40,226

1.3 3.2 3.6

41,145

2.3

40,953 -1.0

1.8

Net Sales 61,268 56,965 68,459 64,557 69,994

Change (%) -1.3 10.6 11.3 6.3 14.2

68,635

20.5

74,821 74,306 251,249

9.3 15.1 6.5

287,756

14.5

69,313 -1.0

21.7

RM Cost (% sal es) 72.7 71.9 73.0 72.5 73.0

Staff Cost (% sales) 3.6 4.0 3.6 3.7 3.8

Other Exp (% sales ) 9.3 10.0 10.8 10.9 10.2

72.4

4.2

10.6

72.5 72.7 72.6

3.8 3.5 3.7

10.0 9.7 10.3

72.7

3.8

10.1

73.0 -60bp

3.9 30bp

9.9 70bp

EBITDA 8,825 8,029 8,671 8,369 9,098

EBITDA Margins (%) 14.4 14.1 12.7 13.0 13.0

8,830

12.9

10,226 10,507 33,895

13.7 14.1 13.5

38,660

13.4

9,174 -3.7

13.2 -40bp

Other Income 1,449 1,452 1,266 1,802 1,502

Interest 30 30 30 29 30

Depreciation 2,744 2,869 2,732 2,728 2,915

2,454

49

750

1,700 1,000 5,969

35 11 118

1,000 1,249 11,074

6,655

125

5,914

1,650 48.7

35 41.1

975 -23.1

PBT 7,502 6,583 7,174 7,414 7,655

Tax 2,016 1,769 1,928 1,870 2,027

Effective Tax Rate (%) 26.9 26.9 26.9 25.2 26.5

10,484

2,851

27.2

10,891 10,248 28,673

2,886 2,647 9,966

26.5 25.8 34.8

39,277

10,411

26.5

9,814 6.8

2,601 9.6

26.5 70bp

Adj. PAT 5,486 4,814 5,247 5,544 5,628

Growth (%) -10.9 9.3 7.5 -3.4 2.6

7,634

58.6

8,005 7,600 18,707

52.6 37.1 -11.7

28,866

54.3

7,213 5.8

49.8 870bp

Jinesh Gandhi ([email protected]); +91 22 3982 5416

Chirag Jain ([email protected]); +91 22 3982 5418

Investors are advised to refer through disclosures made at the end of the Research Report.

Operationally in line, higher other income drives beat

Net sales grew 20.5% YoY to INR68.63b (est. INR69.3b) on volume growth of19.5% YoY (-1.3% QoQ), while realizations grew 0.8% YoY (-0.6% QoQ). Scooter

sales were robust with 13% growth, while motorcycle grew 20%.

Adj. EBITDA margin at 12.9% (est. 13.2%) declined 40bp YoY (down 10bp QoQ).

RM cost savings of 60bp QoQ was offset by higher fixed cost.

PAT grew significantly by 58.6% YoY to INR7.6b (est. INR7.2b), led by expiry of

fixed royalty amortization and higher other income (69% YoY growth).

Other highlights: a) HMCL has lined up 10 new launches, including refreshes and

variants for the festive season, b) recently-launched Splendor iSmart, upgraded

Pleasure and Karizma R & ZMR variants have received encouraging response, c)

company expects strong retails during the current festive season, d) HMCL increased

product prices by 0.5% effective October 2014 as industry growth recovers and

competitive intensity moderates, e) appointed Mr Markus Braunsperger (ex BMW

executive) as Chief Technology Officer.

Valuation and view: well positioned for upcyle

HMCL is embarking on a favorable product lifecycle, with two promising new

launches in FY15 (110cc Scooter, 250cc premium motorcycle). Expect 12.6%

volume CAGR over FY14-17E (v/s FY12-14 flat volumes).

We shall review the estimates post tomorrowsearnings call at 11:00 am IST (dial

in details: +91-22-3960-0782/6746-8382). Based on our current estimates, the stock trades at 19.3x/15x FY15E/16E EPS.

Maintain Buy with a target price of INR2,969 (14.8x FY16E).

BSE SENSEX S&P CNX

25,999 7,748

Bloomberg HMCL IN

Equity Shares (m) 199.7

M.Cap. (INR b) / (USD b) 557.5/9.0

52-Week Range (INR) 3,080/1,9

1, 6, 12 Rel. Per (%) 2/11/10

Financials & Valuation (INR Million)

Y/E Mar 2015E 2016E 2017E

Net Sales 287,756 328,910378,433

EBITDA 38,660 47,194 55,259

Adj PAT 28,866 37,057 43,906

EPS (INR) 144.5 185.6 219.9

Gr. (%) 54.3 28.4 18.5

BV/Sh.(INR 341.9 431.1 542.5

RoE (%) 46.5 48.0 45.2

RoCE (%) 53.4 57.3 53.4

P/E (x) 20.0 15.6 13.2

P/BV (X) 8.5 6.7 5.3


2/8

Hero MotoCorp

16 October 2014 2

Volume growth of 19.5% driven both by scooters and motorcycles

Volumes grew by 19.5% YoY driven by 13.1% growth in scooter, while

motorcycle sales grew at much faster pace of 20.4% on account of festive

season.

After witnessing deferred of replacement cycle over last 2 years, it is now seeing

good replacement demand. This has been reflected in stronger growth of 21.1%

YoY in the less then 125cc motorcycle category.

Sequentially, HMCL lost significant market share by 290bp to 39.6% in 2QFY15 in

the domestic 2W segment, due to loss in market share in both Motorcycle and

Scooters.

Exhibit 1: Trend in Segment Mix ('000 units)

2QFY15 2QFY14 YoY % 1QFY15 QoQ % FY14 FY13 YoY %

< 125cc 1,453 1,201 21.1 1,465 -0.8 5,378 5,287 1.7

% of total 85.9 84.8 85.4 86.1 87.1

> 125cc 44 43 2.1 58 -23.8 160 212 -24.6% of total 2.6 3.1 3.4 2.6 3.5

Total Motorcycles 1,498 1,244 20.4 1,523 -1.6 5,538 5,499 0.7

% of total 88.5 87.8 88.8 88.7 90.5

Scooters 195 172 13.1 192 1.3 708 574 23.2

% of total 11.5 12.2 11.2 11.3 9.5

Total 2Ws 1,693 1,416 19.5 1,715 -1.3 6,246 6,074 2.8

Of which ex orts 31 34 9 30 3.9 148 161 8

% of total 1.8 2.4 1.8 2.4 2.7

Source: Company, MOSL

Exhibit 2: Trend in Market Share

2QFY15 2QFY14

Chg YoY

(BP) 1QFY15

Chg QoQ

(BP)

Total Motorcycles 43.5 41.4 200 45.7 -230

Scooters 15.7 19.2 -350 18.5 -280

Total 2W 34.7 34.8 -20 37.6 -300

Total 2W (Domestic) 39.6 39.2 40 42.5 -290


EBITDA margins broadly stable sequentially

Net sales grew 20.5% YoY to INR68.63b (est INR69.3b) on volume growth of

19.5% YoY (-1.3% QoQ), while realizations grew 0.8% YoY (-0.6% QoQ). Scooter

sales were robust with 13% growth, while motorcycle grew 20%.

Adj. EBITDA margins at 12.9% (est 13.2%) declined 40bp YoY (down 10bp QoQ).

RM cost savings of 60bp QoQ was offset by higher fixed cost.

PAT grew significantly by 58.6% YoY to INR7.6b (est INR7.2b), led by expiry of

fixed royalty and higher other income (69% YoY growth).


3/8

Hero MotoCorp

16 October 2014 3

Exhibit 3: Realization declines QoQ marginally Exhibit 4: Volume growth recovers to 19.5% in 2QFY15

23.920.1

Volumes ('000 units) Growth (%)

17.0 19.511.3

8.1 7.4

-1.0 -3.0

10.2

-10.01.9

10.0

1Q 2Q 3Q 4Q 1Q-13.7

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

FY12 FY13 FY14 FY15

Source: Company, MOSL Source: Company, MOSL

Exhibit 5: Margin rise QoQ on fixed royalty expiry Exhibit 6: EBITDA/unit improves QoQ on higher margins

EBITDA (INR m) EBITDA Margins (%)

10.711.5 11.1 10.8 10.7

9.0 8.7 9.611.110.0 9.6 9.7 10.1

12.9

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

FY12 FY13 FY14 FY15


Other highlights

Company has lined up 10 new product launches including refreshes and

variants for the upcoming festival season.

Recently launched Splendor iSmart, upgraded Pleasure and Karizma R & ZMR

variant have received encouraging response.

Expect strong retails during the current festive season.

HMCL increased product prices by 0.5% effective Oct-14 as industry growth

recovers and competitive intensity moderates.

Appointed Mr. Markus Braunsperger as Chief Technology Officer from BMW.

Valuation & view

HMCL is embarking on a favorable product life cycle, with two promising new

launches in FY15 (110cc Scooter, 250cc premium motorcycle).

Expect 12.6% volume CAGR over FY14-17E on industry recovery and new

launches (v/s FY12-14 flat volumes).

The stock currently trades at 19.3x/15.0x FY15E/16E EPS. Maintain Buy with a

TP of INR2,969 (14.8x FY16E).

We shall review our estimates after tomorrows earnings call at 11:00 AM IST

(Dial in details: +91-22-3960-0782/6746-8382).

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

FY12 FY13 FY14 FY15

EBITDA (INR/unit)

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

FY12 FY13 FY14 FY15

6,0

20

6,6

53

6,6

28

6,4

49

6,6

34

4,6

19

5,3

23

5,8

45

6,8

05

5,7

09

6,5

41

6,2

56

7,0

88

8

830

36,8

5

8

37,4

5

6

37,6

4

9

37,9

2

9

37,7

9

9

38,6

4

9

39,1

0

2

39,8

1

0

39,2

9

3

40,2

2

3

40,7

2

7

40,6

1

6

40,8

1

0

40

55

2

3,9

36

4,3

08

4,1

70

4,1

02

4,

039

3,

466

3,3

84

3,8

32

4,3

64

4,

032

3,8

91

3,9

36

4,1

32

5

217

1,

530

1,

544

1,

589

1,

572

1,

642

1,

333

1,

573

1,

525

1,

559

1,

416

1,

681

1,

589

1,

715

1

693


4/8

Hero MotoCorp

16 October 2014 4

Exhibit 1: Volumes to register a CAGR of 12.6% over FY14-

17E

Exhibit 2: EBITDA margin to expand on royalty expiry, cost

reduction

15.4

Volumes ('000 units) Volume growth (%)

12.0 12.3

13.4

11.0

Adj. EBITDA Margin (%)

12.714.3 14.6

9.5 10.1

-2.6

2.8

FY12 FY13 FY14 FY15E FY16E FY17E




Exhibit 3: Strong earnings growth of 33% over FY14-17E Exhibit 4: Robust dividend payout

Dividend payout (%) DPS (INR)

9080

6065 70

45

43 65 80 56 50 47

FY12 FY13 FY14 FY15E FY16E FY17E FY12 FY13 FY14 FY15E FY16E FY17E


Exhibit 5: Return ratios to improve on better profitability

RoCE (%) RoE (%)

Exhibit 6: Net cash surplus to rise further



(93,267)



43.6

65.6

49.9 45.6 52.035.3

64.2

46.5

67.8

48.0

63.3

45.2

Hero Motocorp| Story in Charts: Robust 33% EPS CAGR over FY14-17E

PAT (INR m) Growth (%)

54.3

28.4

18.4 18.5

-10.9 -11.7

Net Debt (INR mn)

(23,268)

(35,027)(41,818)

(52,919)(68,252)

23,7

81

,

21,

182

,

18,

707

,

28,8

66

,

37,0

57

,

43,9

06

,


5/8

Hero MotoCorp

16 October 2014 5

Hero MotoCorp: an investment profileCompany description

Hero MotoCorp (HMCL), erstwhile JV between Honda

Corporation Japan and the Munjal family, is the leader

in domestic motorcycle market with ~44% share,

benefiting from a strong dealership network and highpenetration in the rural areas (~45% of sales) as well.

Post split from Honda, Hero MotoCorp is free to tap

global opportunity in 2W.

Key investment arguments

Strong franchise of Splendor & Passion, and wide

distribution reach makes it best placed to tap strong

demand growth, especially in rural markets.

Post split with Honda, Hero MotoCorp is free to

explore global markets; it is targeting exports of 1munits over by FY17 (of total 10m units).

The company has announced plans to invest

INR25.75b in the coming years for setting up of new

capacities (by 2m units to 9m units), a part

distribution centre (Rajasthan) and R&D centre.

Key investments risks Maintaining market share in increasing competitive

pressure to test pricing power and margins.

Ensure continuous flow of new/refreshed products.

Scaling-up in nascent export business, where it is

late entrant.

Recent Developments

Recently launched Splendor iSmart, upgraded

Pleasure and Karizma R & ZMR variant have

received encouraging response.

Appointed Mr. Markus Braunsperger as ChiefTechnology Officer from BMW.

Valuation and view

Expect 12.6% volume CAGR over FY14-17E on

industry recovery and new launches (v/s FY12-14

flat volumes).

The stock currently trades at 19.3x/15.0x FY15E/16E

EPS. Maintain Buy with a TP of INR2,969 (14.8x

FY16E).

Sector View

Demand drivers in place, driven by increasing

penetration in rural markets and replacement

demand from urban markets.

However, increasing competitive intensity could put

pressure on market share and margins.

2W exports provide huge opportunity, with ~2x

India opportunity in the markets similar to India.

Comparative valuations EPS: MOSL forecast v/s consensus (INR)

Hero Bajaj TVS MOSL Consensus Variation

P/E (x) FY15E 19.3 19.1 24.3 Forecast Forecast (%)

FY16E 15.0 16.2 14.5 FY15 144.5 138.8 4.1

EPS Gr (%) FY15E 54.3 10.9 70.4 FY16 185.6 171.1 8.4

FY16E 28.4 18.0 68.2RoE (%) FY15E 46.5 34.3 28.0

Target price and recommendationFY16E 48.0 34.3 36.1

Current Target Upside Reco.

EV/EBITDA (x) FY15E 13.1 12.7 14.6Price (INR) Price (INR) (%)

FY16E 10.4 10.4 9.0

2,792 2,969 6.3 Buy

Shareholding pattern (%) Stock performance (1-year)

June-13 Mar-12 June-12 Hero MotoCorp Sensex - Rebased

Promoter 39.9 39.9 39.9 3,050

DII 8.4 7.7 8.8

FII 34.3 34.3 30.42,650

Others 17.3 18.1 20.92,250

Note: FII Includes depository receipts

1,850

Oct-13 Jan-14 Apr-14 Jul-14 Oct-14


6/8

Hero MotoCorp

16 October 2014 6

Financials and valuation

Income statement (INR Million) Ratios

Y/E Mar 2014 2015E 2016E 2017E

Net Sales 251,249 287,756 328,910 378,433

Change (%) 6.5 14.5 14.3 15.1

EBITDA 33,895 38,660 47,194 55,259

EBITDA Margin (%) 13.5 13.4 14.3 14.6

Depreciation 11,074 5,914 3,979 4,298

EBIT 22,821 32,747 43,215 50,961

Interest 118 125 125 125

Other Income 5,969 6,655 7,940 9,489

Extraordinary items 0 0 0 0

PBT 28,673 39,277 51,030 60,325

Tax 9,966 10,411 13,973 16,419

Tax Rate (%) 34.8 26.5 27.4 27.2

Reported PAT 18,707 28,866 37,057 43,906

Adjusted PAT 18,707 28,866 37,057 43,906

Change (%) -11.7 54.3 28.4 18.5

Min. Int. & Assoc. Share 0 0 0 0Adj Cons PAT 18,707 28,866 37,057 43,906

Balance sheet (INR Million)

Cash flow statement (INR Million)

E: MOSL Estimates

Y/E Mar 2014 2015E 2016E 2017E

Basic (INR)

EPS 93.7 144.5 185.6 219.9

Cash EPS 149.1 174.2 205.5 241.4

Book Value 280.4 341.9 431.1 542.5

DPS 65.0 70.0 80.0 90.0

Payout (incl. Div. Tax.) 81.2 57.5 51.9 49.3

Valuation(x)

P/E 30.9 20.0 15.6 13.2

Cash P/E 19.4 16.6 14.1 12.0

Price / Book Value 10.3 8.5 6.7 5.3

EV/Sales 2.1 1.8 1.6 1.3

EV/EBITDA 15.8 13.6 10.8 8.8

Dividend Yield (%) 2.2 2.4 2.8 3.1

Profitability Ratios (%)

RoE 35.3 46.5 48.0 45.2

RoCE 41.2 53.4 57.3 53.4Turnover Ratios (%)

Asset Turnover (x) 4.5 4.7 4.4 4.0

Debtors (No. of Days) 13.4 13.4 13.4 13.4

Inventory (No. of Days) 9.7 9.7 9.7 9.7

Creditors (No. of Days) 38.5 38.4 38.9 39.0

Leverage Ratios (%)

Net Debt/Equity (x) 0.0 0.0 0.0 0.0

Y/E Mar 2014 2015E 2016E 2017E

Share Capital 399 399 399 399

Reserves 55,599 67,879 85,684 107,933

Net Worth 55,999 68,278 86,084 108,332

Debt 245 -1,766 -1,766 -1,766

Deferred Tax 0 0 0 0

Total Capital Employed 56,243 66,512 84,318 106,567

Gross Fixed Assets 69,089 88,631 98,631 103,631

Less: Acc Depreciation 46,657 52,570 56,550 60,848Net Fixed Assets 22,433 36,060 42,081 42,783

Capital WIP 8,541 1,000 1,000 1,000

Investments 40,888 40,888 40,888 40,888

Current Assets 28,052 41,048 60,783 91,096

Inventory 6,696 7,668 8,765 10,085

Debtors 9,206 10,543 12,051 13,866

Cash & Bank 1,175 10,266 25,598 50,614

Loans & Adv, Others 10,976 12,570 14,368 16,532

Curr Liabs & Provns 44,730 53,543 61,493 70,259

Curr. Liabilities 28,787 36,089 41,250 47,461

Provisions 15,943 17,455 20,243 22,798

Net Current Assets -16,678 -12,495 -710 20,837

Total Assets 56,243 66,512 84,318 106,567

Y/E Mar 2014 2015E 2016E 2017E

OP/(Loss) before Tax 28,673 39,277 51,030 60,325

Depreciation 2,491 3,904 3,979 4,298Others 0 0 0 0

Interest 0 0 0 0

Direct Taxes Paid -9,966 -10,411 -13,973 -16,419

(Inc)/Dec in Wkg Cap 105 2,898 3,547 3,469

CF from Op. Activity 21,421 35,793 44,708 51,798

(Inc)/Dec in FA & CWIP -2,134 -9,990 -10,000 -5,000

(Pur)/Sale of Invt -4,649 0 0 0

Others 0 0 0 0

CF from Inv. Activity -6,783 -9,990 -10,000 -5,000

Inc/(Dec) in Net Worth 0 0 0 0

Inc / (Dec) in Debt 0 0 0 0

Interest Paid -118 -125 -125 -125

Divd Paid (incl Tax) -15,199 -16,587 -19,251 -21,657CF from Fin. Activity -15,317 -16,712 -19,376 -21,782

Inc/(Dec) in Cash -680 9,091 15,332 25,016

Add: Opening Balance 1,810 1,175 10,266 25,598

Closing Balance 1,130 10,266 25,598 50,614


7/8

Hero MotoCorp

16 October 2014 7

N O T E S


8/8

Hero MotoCorp

16 October 2014 8

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