Hero MotoCorp (HERHON) 3573

Transcription

1 Result Update Rating matrix Rating : Buy Target : 4275 Target Period : 12 months Potential Upside : 20% What s changed? Target Changed from 4475 to 4275 EPS FY18E Changed from to EPS FY19E Changed from to 225 Rating Unchanged Quarterly performance ( Crore) Q2FY18 Q2FY17 YoY Q1FY18 QoQ Revenues 8, , , EBITDA 1, , , EBITDA (%) bps bps Reported PAT 1, , Key financials Crore FY16 FY17E FY18E FY19E Net Sales 28,443 28,475 31,655 37,783 EBITDA 4, , , ,055.5 Net Profit 3, , , ,492.8 EPS ( ) Valuation summary FY16 FY17E FY18E FY19E P/E (x) Target P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) Crore Total Debt (FY17) ( Crore) 0crore Cash & Investments (FY17) ( Crore) Crore EV ( Crore) crore 52 week H/L ( ) 4091 / 2849 Equity capital ( crore) 39.9 Face value ( ) 2 Price performance 1M 3M 6M 12M Bajaj Auto Ltd Hero MotoCorp Ltd TVS Motor Company Ltd Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Operational out-performance November 13, 2017 Hero MotoCorp (HERHON) 3573 Hero Motocorp Ltd (HMCL) reported Q2FY18 numbers, above our estimates on the operational front. Revenues came at 8362 crore, up 7.3% YoY/up 4.9% QoQ, lower than our estimates of 8820 crore. The topline is lower on account of GST related accounting changes for company s Haridwar plant & fall in net ASPs. Net blended ASPs stood at vs our estimate of Total volumes for the quarter stood at units (highest ever quarterly sales), up 10.9% YoY/9.1% QoQ. The motorcycle volumes ( units) were up 13.4% YoY/8.9% QoQ, while the scooter volumes ( units) declined by 4.4% YoY/up 11.1% QoQ. Reported EBITDA came at 1456 crore (up 6.3% YoY/12.3% QoQ) against expectation of 1440 crore. EBITDA margins came in at 17.4% (down 15 bps YoY/up 115 bps QoQ) against expectations of 16.3%. The beat on the margins is on account of lower than estimated other expense to sales. Reported PAT came in at 1011 crore (up 0.6% YoY/10.6% QoQ), against our expectation of 1061 crore. PAT came lower than our estimates on account of lower than estimated other income. Pent up demand+revival in rural economy=volume growth The two-wheeler (2-W) industry witnessed fastest growth among all subsegments (PV, CV, 3-W) in H1FY17E, with domestic volumes growing 17% in H1FY17 (HMCL domestic volume growth-~17%). However, H2FY17 & Q1FY18 were interspersed with one time structural events of demonetisation & GST implementation which put on the growth momentum. However H1FY18 witnessed revival in growth where 2-W again exhibited the highest growth (10.7% YoY) in the entire auto space. Going ahead, we expect HMCL s 2-W volumes to grow 8.6%, 10.1% in FY18E, FY19E, respectively on account of 1) 2 continuous years of normal monsoon (FY17& FY18E) will lead to cash flow in hand of farmers & strong rural growth 2) Higher market share (>50%) in states (Northern, Central & Eastern India) with low two wheeler penetration. Farm loan waiver & economic recovery in some of these states will lead to higher growth. It is reflected in Q1FY18 state-wise volume numbers, where U.P. clocked highest 2W volumes & growth. 3) 125 cc scooter & 200cc bike launch in H2FY18 will help HMCL address the fast growing segment where it is currently under-penetrated Maintain dominance in bread & butter segment HMCL has maintained its dominant share in the executive segment. Success in this category is critical for any player given that it accounts for ~60% of motorcycle market. HMCL s market share in the executive segment increased from 66% in FY15 to >70% in FY17. With Glamour (fastest growing in the 125 cc category) in its armour, the company is well positioned to capture the general trend of transition from lower cc motorcycles to 125 cc variants. We expect the company to maintain margins of 16.5%/16.3% in FY18E, FY19E as the 100 bps adverse impact of expiry of incentives at Haridwar plant will be offset by ramp up in Halol & commencement of AP plant. Best play on rural theme Long term structural drivers exist in the form of the government s focus on doubling farm income, reducing replacement cycles & low finance penetration. Hence, we maintain our BUY recommendation. We value HMCL at 19x FY19E EPS to arrive at a target price of ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY18 Q2FY18E Q2FY17 YoY (%) Q1FY18 QoQ (%) Comments Total Operating Income 8,362 8,820 7, , The miss on revenue is attributable to GST related accounting changes for Haridawar plant & fall in ASP. Revenue would have grown 11.5%, adjusting for the accounting change of Haridwar plant Raw Material Expenses 5,698 6,033 5, , Employee Expenses Other expenses Lower than expected Operating Profit (EBITDA) 1,456 1,440 1, , EBITDA would have grown 10% YoY, adjusting for accounting change of Haridwar plant EBITDA Margins (%) bps bps EBITDA margins were higher than estimates due to lower than expected other expense Other Income Interest Depreciation PBT after Exceptional Items 1, , , , Total Tax PAT 1, , , PAT came lower than estimated due to lower than estimated other income EPS (Adjusted) Key Metrics Motorcycle volumes ('000s) 1, , , , Scooter volumes ('000s) Export volumes('000s) Net Blended ASP ( /unit) 41,339 43,604 42, , Lower than expected RM/Vehicle ( /unit) 28,169 29,827 28, , EBITDA/Vehicle ( /unit) 7,346 7,118 7, , Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Revenue 32,932 31, ,050 37, Revenue estimates revised downward to reflect downward revision in volumes EBITDA 5,418 5, ,373 6, EBITDA Margin (%) bps bps Margins estimates reduced marginally to reflect thea adverse impact of expiry of benefit in Haridwar plant, going forward. However, it will be partly offset by benefit in Halol plant kicking in. Also, operating leverage benefit will help sustain margins PAT 3,959 3, ,705 4, EPS ( ) Assumptions Current Earlier Comments FY16 FY17E FY18E FY19E FY18E FY19E Motorcycle volumes ('000s) 5,736 5,834 6,361 6,962 6,439 7,047 Estimates reduced after release of recent month volume figures Scooter volumes ('000s) , ,099 Estimates reduced Export volumes('000s) Gross Blended ASP ( /unit) 47,178 45,926 44,141 46,691 47,417 51,032 RM/Vehicle ( /unit) 29,123 28,530 29,558 32,044 29,773 32,111 EBITDA/Vehicle ( /unit) 7,102 7,058 7,276 7,596 7,370 7,824 ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Pent up demand to drive volume growth The two-wheeler (2-W) industry witnessed fastest growth among all subsegments (PV, CV, 3-W) in H1FY17E, with domestic volumes growing 17% in H1FY17 (HMCL domestic volume growth-~17%). However, H2FY17 & Q1FY18 were interspersed with one time structural events of demonetisation & GST implementation which put on the growth momentum. However H1FY18 witnessed revival in growth where 2-W again exhibited the highest growth (10.7% YoY) in the entire auto space. Going ahead, we expect HMCL s 2-W volumes to grow 8.6%, 10.1% in FY18E, FY19E, respectively on account of 1) 2 continuous years of normal monsoon (FY17& FY18E) will lead to cash flow in hand of farmers & strong rural growth 2) Higher market share (>50%) in states (Northern, Central & Eastern India) with low two wheeler penetration. Farm loan waiver & economic recovery in some of these states will lead to higher growth. It is reflected in Q1FY18 state-wise volume numbers, where U.P. clocked highest 2W volumes & growth. 3) 125 cc scooter & 200cc bike launch in H2FY18 will help HMCL address the fast growing segment where it is currently under-penetrated.we expect revenues to grow at 15% CAGR in FY17-19E to crore. Exhibit 1: Growth in revenues ( crore) ,768 25, ,585 28,443 28, FY13 FY14 FY15 FY16 FY17E FY18E FY19E , , (2) (%) Total Operating Income Growth ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 2: Product mix 2,200 1,700 1, ('000s) 700 1,413 1,364 1,394 1,246 1,499 1,401 1,523 1,498 1,410 1,369 1,477 1,402 1,416 1,441 1,527 1,573 1,291 1,444 1,638 1, Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Motorcycles Scooters LEAP gains to support margins HMCL s margins remained under pressure in FY13 & FY14 as the product mix deteriorated. However, with the launch of the LEAP programme, HMCL has managed to show a significant cost reduction. Annual savings through LEAP have been 169 crore in FY14, 329 crore in FY15 & 283 crore in FY16. However, the company continues to focus on export markets and is likely to invest heavily in advertising & sales promotion. The management has continued its plans to enter 50 markets by 2020 and is targeting volumes sales of ~1.2 million units from exports. HMCL plans to enter some larger markets like Nigeria, Argentina and Mexico. We expect EBITDA margins of 16.4%, 16% in FY18E, FY19E respectively. Exhibit 3: Margins trend ( crore) ,284 3,540 3,542 4,455 4,635 5,205 6, (%) 0 FY13 FY14 FY15 FY16 FY17E FY18E FY19E EBITDA EBITDA Margins (%) - ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 4: Raw material costs, other expenses hit margins ( ) (%) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Raw material costs /unit Other expenses /unit EBITDA Margins (%) Profitability to remain at elevated levels With expected revenue CAGR of ~15.2% in FY17-19E, and operating margins at elevated levels of ~16%, we expect profit to increase at ~15.3% CAGR in FY17-19E to ~ 4,493 crore. Exhibit 5: Trend in profitability ( crore) ,118 2,109 (0.4) ,386 3,160 3, ,756 4,493 (10.9) FY13 FY14 FY15 FY16 FY17E FY18E FY19E PAT Growth (%) 5 - (5) (10) (15) Strong FCFs as working capital cycle continues to remain impressive HMCL continues to boast of a negative working capital cycle even as the industry faces a slowdown. Even with fairly aggressive capex planned in FY18E, FY19E, FCF generation is likely to be strong as the working capital management remains strong. We believe FY19E will witness an FCF of ~ 4000 crore. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 6: Negative working capital cycle fuels strong FCFs; capex withstanding ( crore) (13.2) (10.1) (8.8) (8.9) (8.4) , , , , ,250.0 (16.2) (17.2) ,250.0 FY13 FY14 FY15 FY16 FY17E FY18E FY19E (20) (18) (16) (14) (12) (10) (8) (6) (4) (2) 0 (days) FCF Capex Working Capital Cycle ICICI Securities Ltd Retail Equity Research Page 6

7 Return ratios to remain at elevated levels With a strong asset turnover and high dividend payout, return ratios will remain strong, which is one of the major reasons why we are comfortable with HMCL even in the wake of other issues. However, in the past two years, owing to a slowdown in profitability growth, return ratios have declined slightly. Exhibit 7: Return ratios to remain high (%) FY13 FY14 FY15 FY16 FY17E FY18E FY19E RoCE RoE Asset turnover 2.2 Decent dividend payout policy, net debt negative profile With strong CFO generation meeting most capex needs, HMCL has maintained a healthy balance sheet. This has led to a strong dividend payout policy as investment requirements in two-wheelers remain low vis-à-vis other automotive segments. Accumulated profits (exappropriations) have largely added to the huge liquid investment portfolio. Thus, the company has a strong balance sheet with negative net debt while the cash & cash equivalents including investment comprise ~44% of the asset side. Going ahead, we expect strong cash flow generation to further lead to an increase in cash & cash equivalents to ~ 6851 crore by FY19E. Exhibit 8: Net debt negative as strong cash, equivalents form ~44% of total assets ( crore) , , , , , , , (%) 0 FY13 FY14 FY15 FY16 FY17E FY18E FY19E 20 Cash & Cash Equivalents As % of total assets HMCL has also been a decent dividend payer with payouts at ~45% on an average (FY07-15, excluding FY10, FY11 that saw special dividends taking payouts ~100%). Going ahead, we expect dividend payouts to stay at decent levels. ICICI Securities Ltd Retail Equity Research Page 7

8 Exhibit 9: Decent dividend payout despite continuing capex plan ( ) ( ) ` FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E - DPS Dividend Payout ICICI Securities Ltd Retail Equity Research Page 8

9 Annual report key takeaways Ravi Sud retired from the position of Chief Financial Officer with effect from March 31, 2017 and is now an advisor to the company. Niranjan Kumar Gupta has taken over the charge from Mr Sud This year, the company introduced the Splendor ismart 110, Achiever 150 and the Glamour 125 three new models, completely designed and developed by in-house engineers at the Centre of Innovation and Technology (CIT) The global footprint of the company has now reached 35 countries spread across Asia, Africa and South and Central America. In FY17, the company added Nigeria and Argentina the largest two-wheeler market in Africa and the second largest two-wheeler market in Latin America respectively The company has planned a capital expenditure of around 2,500 crore for the next two fiscals, towards new product development, digitisation, phase-wise capacity installation and expansion of existing facility at Gujarat and upcoming plants in Andhra Pradesh & Bangladesh. This capex also includes investments towards upgradation and modernisation of existing plant machinery. The company has commenced production at their manufacturing facility in Bangladesh, their second manufacturing facility at a global location, following the facility in Cali, Colombia In FY18, the company has lined up six new launches, including the premium and scooter category The plant in Bangladesh has annual capacity of 150,000 units The first phase capacity of Vadodara plant will have a capacity of 1.2 million units annually. Gradually, overall production capacity will be increased to 1.8 million units annually In keeping with its vision of being future ready, in addition to its own internal EV programme, HMCL has acquired 30.1% stake in Ather Energy, a start-up focused on developing, designing and selling premium electric scooters. HMCL is aiming to leverage its core strengths such as strategic sourcing, supply chain, world class operations, consumer insight and wide exposure to scale up its EV venture ICICI Securities Ltd Retail Equity Research Page 9

10 Outlook & valuation Long term structural drivers exist in the form of the government s focus on doubling farm income, reducing replacement cycles and low finance penetration. Therefore, we maintain our BUY recommendation on the stock. We value HMCL at 19x FY19E EPS to arrive at a target price of Exhibit 10: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( cr) (%) (x) (x) (%) (%) FY16 28, FY17E 28, FY18E 31, FY19E 37, ICICI Securities Ltd Retail Equity Research Page 10

11 (%) ( ) Recommended history vs. consensus estimate 5, ,500 4, , ,000 2, ,000 Nov-15 Jan-16 Apr-16 Jun-16 Aug-16 Nov-16 Jan-17 Apr-17 Jun-17 Aug Nov-17 Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with BUY Key events Date Event Mar-10 Hero MotoCorp looking to add fourth plant on rural demand growth; capacity of 0.85 mn units Dec-10 Hero Honda and Honda announce break-up of JV after more than two decades. The solo journey of Hero MotoCorp begins Feb-11 Honda Motor Co. plans to enter into 100 cc segment intensifying competition against Hero MotoCorp Apr-11 Hero MotoCorp announces dividend payout, which disappoints investors Nov-11 Hero MotoCorp announces big long term plans of sales for 10 mn units and revenue $10 billion by 2018 Mar-12 Hero looks at various options to gain technology including Ducati. Investors give a thumbs down May-12 Hero MotoCorp announces plans to spend 2,500 crore towards plants in Rajasthan, Gujarat along with R&D centre by 2014 Sep-12 Hero MotoCorp reports weakest monthly volumes since April 2010 as rural demand slows down on weak monsoon Feb-13 Company continues to report YoY volume declines as 2-W industry faces demand slump, competition intensifies Apr-13 The management pushes a new five-year warranty strategy. The market response is very favourable May-14 Hero MotoCorp's new strategy of LEAP starts to show marginal benefits Jun-14 US based PE firm, Bain Capital sells 2.81% stake in the company for ~ 1481 crore Jul-14 HMCL forms subsidiary in Columbia as part of its vision of expanding globalfootprint Sep-14 Company plans to set up manufacturing plant in Chitoor, Andhra Pradesh with investment of ~ 1600 crore and capacity of 1.8 million units Oct-14 HMCL Neemrana plant in Rajashthan goes on stream, taking the combined installed capacity of four plants at 7.65 million per annum Dec-14 Tiger Woods becomes brand endoser for HMCL Mar-15 HMCL JV with Magnetti Marelli, HMC-MM inagurates its first production and development centre at Manesar, Haryana Top 10 Shareholders Name Latest Filing Date % O/S Position (m) Change (m) Hero Group 30-Sep Brijmohan Lall Om Prakash Partnership Firm 30-Sep OppenheimerFunds, Inc. 30-Jun Life Insurance Corporation of India 30-Sep Templeton Investment Counsel, L.L.C. 30-Sep Aberdeen Asset Management (Asia) Ltd. 30-Jun Lazard Asset Management, L.L.C. 30-Jun Aberdeen Asset Managers Ltd. 30-Sep The Vanguard Group, Inc. 30-Sep Franklin Templeton Investment Management Ltd. 30-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Franklin Templeton Investment Management Ltd M +2.8M Life Insurance Corporation of India M -2.5M ICICI Prudential Life Insurance Company Ltd M +2.4M Franklin Templeton Asset Management (India) Pvt. Ltd M -0.6M OppenheimerFunds, Inc M +0.9M Aditya Birla Sun Life AMC Limited -12.0M -0.2M Kotak Mahindra Asset Management Company Ltd M +0.5M Clough Capital Partners, LP -11.1M -0.2M Lazard Asset Management, L.L.C M +0.5M Lyxor Asset Management -10.3M -0.2M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 11

12 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Total operating Income 28, , , ,782.8 Growth (%) Raw Material Expenses 19, , , ,547.2 Employee Expenses 1, , , ,764.3 Other expenses 3, , , ,415.9 Total Operating Expenditure 23, , , ,727.3 EBITDA 4, , , ,055.5 Growth (%) Depreciation Interest Other Income PBT 4, , , ,304.8 Total Tax 1, , , ,835.1 PAT 3, , , ,492.8 Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax 3, , , ,492.8 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities 3, , , ,244.6 (Inc)/dec in Investments -1, , , ,000.0 (Inc)/dec in Fixed Assets -1, , , ,250.0 Others CF from investing activities -2, , , ,400.0 Inc/(dec) in loan funds Dividend paid & dividend tax -1, , , ,636.0 Inc/(dec) in Sec. premium CF from financing activities , , ,642.1 Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital Reserve and Surplus 8, , , ,283.4 Total Shareholders funds 8, , , ,323.3 Total Debt Deferred Tax Liability Others Total Liabilities 9, , , ,813.1 Assets Gross Block 5, , , ,273.2 Less: Acc Depreciation 2, , , ,522.2 Net Block 3, , , ,751.0 Capital WIP Total Fixed Assets 3, , , ,021.7 Investments 4, , , ,239.9 Inventory Debtors 1, , , ,968.9 Loans and Advances Cash Total Current Assets 2, , , ,094.4 Creditors 2, , , ,515.8 Provisions Total Current Liabilities 3, , , ,877.2 Net Current Assets , ,782.7 Application of Funds 9, , , ,813.1 Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA Market Cap / Sales Price to Book Value Solvency Ratios Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 12

13 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Buy Bajaj Auto (BAAUTO) Hold Balkrishna Ind. (BALIND) Buy Bharat Forge (BHAFOR) Buy Bosch (MICO) Hold Eicher Motors (EICMOT) Buy Exide Industries (EXIIND) Buy Hero Moto (HERHON) Buy JK Tyre & Ind (JKIND) Hold Mahindra CIE (MAHAUT) Buy Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Hold ICICI Securities Ltd Retail Equity Research Page 13

14 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 14

15 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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