Hero MotoCorp NEUTRAL. Performance Highlights. CMP `2,245 Target Price - 4QFY2012 Result Update Automobile. Investment Period - Key financials

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1 4QFY212 Result Update Automobile Hero MotoCorp Performance Highlights Y/E March (` cr) 4QFY12 4QFY11 % chg (yoy) Angel est. % diff NEUTRAL CMP `2,245 Target Price - Investment Period - Net sales 6,35 5, ,34. Adj. EBITDA (5.6) Adj. EBITDA margin (%) (18)bp 12.6 (7)bp Adjusted PAT (8.2) Hero MotoCorp (HMCL) reported weak 4QFY212 results as margin pressures on account of adverse forex movement resulted in lower-than-expected bottom line. We expect moderation in demand in the domestic two-wheeler industry and increased competitive intensity going ahead to pressurize volume growth. We believe the stock is fairly valued at current levels and maintain our Neutral rating on the stock. Lower-than-expected 4QFY212 performance: HMCL reported in-line net sales growth of 11.9% yoy (flat qoq) to `6,35cr, driven by volume growth of 8.1% yoy (down 1.1% qoq) and a 3.1% yoy (flat qoq) increase in average net realization. Volume growth during the quarter was driven by a 7.4% (down 2.1% qoq) and 17% yoy (11.6% qoq) increase in motorcycle and scooter sales, respectively. Adjusted EBITDA margin (adjusted for royalty payments) came in slightly lower than expected at 11.9% (down 18bp yoy) due to adverse currency impact on indirect imports (lag of one quarter). However, royalty expenses declined by ~9% during the quarter on account of depreciation in Yen against INR. As a result, adjusted operating profit grew by 1.3% yoy (flat qoq) to `72cr. Net profit, however, registered strong growth of 2.3% yoy (down 1.5% qoq) to `64cr, aided by lower tax rate and higher other income. Outlook and valuation: We broadly maintain our volume estimates for HMCL and model in volume growth of 9.1%/1.6% in FY213E/14E. We believe the benefits of lower raw-material costs will be limited due to higher advertising and R&D expenses that HMCL intends to incur going ahead. Further, due to increased competitive activity in the industry, HMCL s market share will also remain under pressure. At `2,245, HMCL s stock is fairly valued at 15.2x FY214E earnings (historical multiple 15x). We maintain our Neutral rating on the stock. Key financials Y/E March (` cr) FY211 FY212E FY213E FY214E Net sales 19,245 23,368 26,16 29,296 % chg Adj. profit 2,8 2,378 2,82 2,957 % chg (3.6) Adj. OPM (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Automobile 44, ,279/1,482 55, ,32 5,239 HROM.BO HMCL@IN Shareholding Pattern (%) Promoters 52.2 MF / Banks / Indian Fls 7.1 FII / NRIs / OCBs 33.5 Indian Public / Others 7.2 Abs. (%) 3m 1yr 3yr Sensex (.8) (8.9) 9.1 Hero MotoCorp Yaresh Kothari Ext: 6844 yareshb.kothari@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: Quarterly performance Y/E March (` cr) 4QFY12 4QFY11 yoy chg (%) 3QFY12 qoq chg (%) FY212 FY211 % chg Net Sales 6,35 5, , ,579 19, Consumption of RM 4,418 3, , ,282 14, (% of Sales) Staff Costs (3.5) (% of Sales) Other Expenses ,943 2,55 (5.5) (% of Sales) Total Expenditure 5,11 4, , ,96 16, Operating Profit (1.9) 3,619 2, OPM(%) Interest (63.8) (3.2) (192.1) Depreciation (6.1) 1, Other Income PBT (excl. Extr. Items) ,865 2, Extr. Income/(Expense) (79.8) - PBT (incl. Extr. Items) ,865 2, (% of Sales) Provision for Taxation (8.8) (% of PBT) Reported PAT (1.5) 2,378 1, Adjusted PAT (1.5) 2,378 2, PATM Equity capital (cr) EPS (`) (1.5) Exhibit 2: Quarterly volume performance Volume (units) 4QFY12 4QFY11 yoy chg (%) 3QFY12 qoq chg (%) FY212 FY211 % chg Total two-wheelers 1,572,27 1,454, ,589,276 (1.1) 6,235,25 5,42, Domestic 1,53,436 1,424, ,543,212 (.8) 6,69,29 5,269, Exports 41,591 29, ,64 (9.7) 165, , Motorcycles 1,444,244 1,345, ,474,815 (2.1) 5,779,621 5,4, Domestic 1,412,354 1,322, ,438,16 (1.8) 5,651,66 4,926, Exports 31,89 23, ,655 (13.) 128, , Scooters 127,783 19, , , , Domestic 118,82 12, , , , Exports 9,71 6, , ,36 18,

3 In-line net sales growth of 11.9% yoy: HMCL reported in-line net sales growth of 11.9% yoy (flat qoq) to `6,35cr, driven by volume growth of 8.1% yoy (down 1.1% qoq) and a 3.1% yoy (flat qoq) increase in average net realization. Volume growth during the quarter was driven by a 7.4% (down 2.1% qoq) and 17% yoy (11.6% qoq) increase in motorcycle and scooter sales, respectively. Exhibit 3: Volumes up 8.1% yoy Exhibit 4: Net average realization up 3.1% yoy (units) Total volume yoy growth (RHS) 1,8, ,6, ,4, ,2, 1,, , 8.7 6, 4, 2, 8.1 (%) (`) Net average realisation/unit yoy growth (RHS) 39, , 37, , 35, , , 32, (%) QFY1 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 4QFY1 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Exhibit 5: In-line growth in net sales Exhibit 6: Domestic market share trend (` cr) Net sales (LHS) yoy change (RHS) 7, , , 4, , , 1, 11.9 (%) (%) Scooter Motor-cycle Total 2-wheeler QFY1 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12.. 4QFY1 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Slightly lower-than-expected adjusted EBITDA margin: HMCL s adjusted EBITDA margin (adjusted for royalty payments) came in slightly lower than expected at 11.9% (down 18bp yoy) due to adverse currency impact on indirect imports (lag of one quarter). However, royalty expenses declined by ~9% during the quarter on account of depreciation in Yen against INR. Royalty expense stood at ~`25cr in 4QFY212 (`22cr in 3QFY212) as against normalized levels of `177cr. Other expenses as a percentage of net sales, however, declined by 3bp qoq mainly due to lower rebranding expenses, thereby supporting margins to some extent. As a result, adjusted operating profit grew by 1.3% yoy (flat qoq) to `72cr. 3

4 Exhibit 7: EBITDA margin trend (%) EBITDA margin Raw material cost/sales QFY1 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Exhibit 8: Net profit up 2.3% yoy (` cr) Net profit (LHS) Net profit margin (RHS) QFY1 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 (%) Sharp increase in other income and lower tax rate supported the bottom line: During the quarter, the company s net profit registered strong growth of 2.3% yoy (down 1.5% qoq) to `64cr; however, it was lower than our expectations of `658cr due to weak performance at the operating level. Further, higher other income (up 41.2% yoy) and lower tax rate (19.2% in 4QFY212 vs. 23.9% in 4QFY211) supported the company s bottom-line growth to a large extent. Higher production from HMCL s tax exempt plant at Uttarakhand resulted in lower tax rate during the quarter. 4

5 Conference call Key highlights Management expects the domestic two-wheeler industry to register sluggish growth in FY213E; however, it expects the company to outperform the industry s growth. Current installed capacity is ~6.6mn and is expected to reach 7mn units by August 212. The scooters segment s capacity stands at ~5, units/month. Current inventory at the dealer s end remains at normal levels of two to three weeks. Management indicated that it would target African and Latin American markets initially to launch 1cc-125cc bikes. HMCL plans to increase exports to 1mn units by FY217. HMCL increased the prices of its motorcycles by `5-1,/vehicle, effective from. The company had taken a price hike in March as well to compensate for the increase in excise duty post Union Budget FY Haridwar plant accounted for ~35% of the company s total production in FY212 and this is likely to go up to 4% in FY213E. As a result, tax rate is expected to decline from 17% in FY212 to 16% in FY213E, as production from Haridwar plant is 1% exempt from tax until FY213E. From FY214E, the company will get only 3% tax benefit from the production done at Haridwar, hence tax rate will increase to 23-24% in FY214E. The company s imports form 15% of its net sales, of which direct imports (USD denominated) form 5.5%, while indirect imports (Yen denominated) form 9.5%. HMCL compensates its vendors with a lag of one quarter. HMCL declared a dividend of `45/share in FY212 and indicated that it would maintain a 4% dividend payout ratio in future. HMCL has been selling Hero-branded vehicles (currently Splendor) since last month and has received favorable response till now. The company also plans to begin sales of the rebranded Passion soon. The company expects to complete the rebranding exercise by the end of FY213. 5

6 Investment arguments Expect the demand scenario to moderate slightly: We believe demand momentum will slightly moderate going ahead after strong volume growth over the past three years, mainly due to macroeconomic concerns. We expect HMCL to slightly underperform the industry s growth during the period, owing to increasing competition in the industry. Capacity expansion to meet increasing demand: HMCL commenced expansion plans at its Haridwar plant in Uttarakhand, with the first plant commissioned in April 28, with an initial capacity of 5, units. The company has increased its total installed capacity to 6.15mn units in FY211 from 5.4mn units in FY21, with capacity of 2.25mn at Haridwar and 1.95mn each at Dharuhera and Gurgaon. HMCL plans to further expand its capacity to 7mn units by August 212 through de-bottlenecking at existing plants. As a result of capacity expansion, HMCL will be able to meet the increasing demand and, as such, is expected to post a volume CAGR of 1% over FY212-14E. The Haridwar plant also avails tax benefits, including a 1% excise exemption for 1 years and a 1% income tax exemption for the first five years and 3% for the next five years. Besides the Haridwar plant, two plants in Gurgaon also enjoy tax benefits. Outlook and valuation We broadly maintain our volume estimates for HMCL and model in volume growth of 9.1%/1.6% in FY213E/14E. We believe the benefits of lower raw-material costs will be limited due to higher advertising and R&D expenses that HMCL intends to incur going ahead. Further, due to increased competitive activity in the industry, HMCL s market share will also remain under pressure. We believe HMCL s current valuations factor in the healthy ~12% earnings CAGR that the company is likely to register over FY212-14E. At `2,245, HMCL is fairly valued at 15.2x FY214E earnings (historical multiple 15x). Thus, we maintain our Neutral rating on the stock. 6

7 Exhibit 9: Key assumptions Y/E March (units) FY9 FY1 FY11 FY12 FY13E FY14E Domestic 3,487,614 4,293,991 4,926,39 5,651,66 6,129,753 6,742,728 < 125cc 3,32,95 4,55,34 4,589,3 5,32,34 5,772,569 6,349,826 > 125cc 185, , ,387 33, , ,92 Exports 78,176 91, , , , ,1 < 125cc 69,644 82,824 12, ,38 128,25 147,229 > 125cc 8,532 9,43 12,57 14,247 15,957 17,871 Motorcycle 3,565,79 4,385,858 5,4,971 5,779,621 6,273,735 6,97,828 Domestic 153,193 28,44 342, ,224 48, ,11 Exports 3,17 5,832 18,482 37,36 48,568 6,71 Scooters 156,21 214, , , , ,811 Total volume 3,722, 4,6,13 5,42,444 6,235,25 6,83,26 7,521,64 Growth (yoy, %) Domestic < 125cc > 125cc (2.) Exports (11.4) < 125cc (13.6) > 125cc Motorcycle Domestic Exports Scooters Total volume Exhibit 1: Angel vs. consensus forecast Angel estimates Consensus Variation (%) FY13E FY14E FY13E FY14E FY13E FY14E Net sales (` cr) 26,16 29,296 26,26 29,531 (.6) (.8) EPS (`) (.1) Source: Bloomberg, Angel Research 7

8 Exhibit 11: One-year forward P/E band (`) Share price (`) 8x 12x 16x 2x 3, 2,5 2, 1,5 1, 5 Exhibit 12: One-year forward P/E chart (x) Absolute P/E Five-yr average P/E Apr-3 Jan-4 Nov-4 Sep-5 Jul-6 May-7 Mar-8 Dec-8 Oct-9 Aug-1 Jun-11 Apr-12 Apr-2 Dec-2 Sep-3 May-4 Feb-5 Oct-5 Jul-6 Apr-7 Dec-7 Sep-8 May-9 Feb-1 Oct-1 Jul-11 Apr-12 Source: Company, Bloomberg, Angel Research Source: Company, Bloomberg, Angel Research Exhibit 13: Premium/Discount to Sensex P/E Exhibit 14: Two-wheeler stock performance v/s Sensex (%) Absolute premium Five-yr average P/E (2) (4) (6) (8) Apr-2 Dec-2 Sep-3 May-4 Feb-5 Oct-5 Jul-6 Apr-7 Dec-7 Sep-8 May-9 Feb-1 Oct-1 Jul-11 Apr Mar-8 TVSL HMCL BJAUT Sensex Aug-8 Feb-9 Jul-9 Jan-1 Jun-1 Nov-1 May-11 Oct-11 Apr-12 Source: Company, Bloomberg, Angel Research Source: Company, Bloomberg, Angel Research Exhibit 15: Automobile - Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) P/E (x) EV/EBITDA (x) RoE (%) FY11-14E EPS FY13E FY14E FY13E FY14E FY13E FY14E CAGR (%) Ashok Leyland Buy Bajaj Auto Accumulate 1,593 1, Hero MotoCorp Neutral 2, Maruti Suzuki Accumulate 1,332 1, M&M Accumulate Tata Motors Accumulate TVS Motor Buy Source: Company, Bloomberg, Angel Research 8

9 Profit & Loss Statement Y/E March (` cr) FY9 FY1 FY11 FY12E FY13E FY14E Gross sales 13,543 16,781 2,662 25,46 28,11 31,433 Less: Excise duty 1,224 1,22 1,417 1,678 1,95 2,137 Net Sales 12,319 15,758 19,245 23,368 26,16 29,296 Total operating income 12,319 15,758 19,245 23,368 26,16 29,296 % chg Total Expenditure 1,635 13,96 16,785 19,96 22,19 24,843 Net Raw Materials 8,742 1,736 14,111 17,282 19,188 21,474 Other Mfg costs Personnel Other 1,335 1,697 1,89 1,74 1,932 2,168 EBITDA 1,684 2,662 2,46 3,48 3,916 4,453 % chg (7.6) (% of Net Sales) Depreciation & Amortization ,97 1,161 1,245 EBIT 1,54 2,471 2,57 2,31 2,755 3,28 % chg (16.7) (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT 1,781 2,832 2,485 2,865 3,376 3,891 % chg (12.3) Extraordinary Expense/(Inc.) (8) PBT 1,883 2,982 2,45 2,865 3,376 3,891 Tax (% of PBT) PAT (reported) 1,282 2,232 1,928 2,378 2,82 2,957 ADJ. PAT 1,181 2,82 2,8 2,378 2,82 2,957 % chg (3.6) (% of Net Sales) Basic EPS (`) Adjusted EPS (`) % chg (3.6)

10 Balance Sheet Y/E March (` cr) FY9 FY1 FY11 FY12E FY13E FY14E SOURCES OF FUNDS Equity Share Capital Reserves & Surplus 3,761 3,425 2,916 4,25 5,892 7,68 Shareholders Funds 3,81 3,465 2,956 4,29 5,932 7,72 Total Loans ,491 1,11 1,11 1,11 Deferred Tax Liability Total Liabilities 4,24 3,684 4,694 5,548 7,19 8,978 APPLICATION OF FUNDS Gross Block 2,31 2,519 5,38 6,159 6,748 7,237 Less: Acc. Depreciation 943 1,92 1,458 2,556 3,716 4,961 Net Block 1,367 1,427 3,85 3,64 3,31 2,276 Capital Work-in-Progress Goodwill Investments 3,369 3,926 5,129 3,964 7,99 9,876 Current Assets 1,13 2,883 1,55 4,74 3,746 5,115 Cash 22 1, ,69 1,924 3,72 Loans & Advances ,25 Other ,18 Current liabilities 2,53 4,831 6,145 7,77 7,863 8,665 Net Current Assets (1,39) (1,949) (4,64) (2,374) (4,116) (3,55) Mis. Exp. not written off Total Assets 4,24 3,684 4,694 5,548 7,19 8,978 Cash Flow Statement Y/E March (` cr) FY9 FY1 FY11 FY12E FY13E FY14E Profit before tax 1,883 2,982 2,45 2,865 3,376 3,891 Depreciation ,97 1,161 1,245 Change in Working Capital 261 2, Others (185) (2,14) (327) Other income (28) (363) (443) (576) (645) (79) Direct taxes paid (5) (6) (477) (487) (574) (934) Cash Flow from Operations 1,359 2,687 2,367 3,631 3,916 4,74 (Inc.)/Dec. in Fixed Assets (265) (137) (2,865) (85) (6) (5) (Inc.)/Dec. in Investments (82) (557) (1,23) 1,165 (3,945) (1,967) Other income Cash Flow from Investing (787) (331) (3,626) 891 (3,9) (1,758) Issue of Equity Inc./(Dec.) in loans 54 (12) 1,425 (48) - - Dividend Paid (Incl. Tax) 467 2,568 2,437 1,44 1,16 1,168 Others (888) (3,223) (4,439) Cash Flow from Financing (368) (668) (577) (1,524) (1,16) (1,168) Inc./(Dec.) in Cash 24 1,688 (1,836) 2,997 (1,145) 1,148 Opening Cash balances , ,69 1,924 Closing Cash balances 22 1, ,69 1,924 3,72 1

11 Key Ratios Y/E March FY9 FY1 FY11 FY12E FY13E FY14E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) (34) (59) (81) (79) (8) (79) Solvency ratios (x) Net debt to equity (.9) (1.7) (1.3) (1.4) (1.5) (1.5) Net debt to EBITDA (2.1) (2.2) (1.5) (1.8) (2.3) (2.7) Interest Coverage ,

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Hero MotoCorp 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) 12