SELL. was 12% above our and consensus estimates. The variance was on account of higher than expected gross margins.

Transcription

1 Hero MotoCorp Q4FY13 Results: Strong quarter, structural concerns persist Phillip Capital (India) Pvt. Ltd. AUTOMOBILES: Quarterly Update 30 April 2013 HMCL s reported a strong set of numbers with gross margins partially aided by the currency movements registering a sharp sequential jump. Recent steps by the industry players (including a price hike) seem to indicate that price competition may not be on the cards, nonetheless, increased aggressiveness by Honda is likely to continue to impact marketshares (and consequently volume growth) of the incumbents in the near to medium term. In addition, concerns on HMCL s ability to develop ramp up new products and develop export markets persist. Maintain SELL with a target price of Rs1600. Results ahead of estimates. HMCL Q4FY13 PAT at Rs 5.74bn (down 5% Y o Y) was 12% above our and consensus estimates. The variance was on account of higher than expected gross margins. Yen, commodity costs benefit margins. Gross margins at 27.8% (up 187 bps Q o Q) were ~100bps ahead of our expectations. The management sighted two key reasons for the improvement (a) Currency movements (HMCL s indirect imports are ~9% of total sales, about half of which is yen denominated) and (b) Benefit from a decline in commodity prices. Overall EBITDA margins at 13.8% were ~100bps ahead of our and street estimates. Going forward, although there might be some variations on quarter to quarter basis, we expect two pressure points on HMCL to persist as (a) HMCL will need to ramp up new products with demand for the core Splendor/ Passion waning (refer to our note Diminishing brand equity, dated 22 nd October 2012) and (b) higher advertising spends will be required to support the new launches & establish the Hero brand. Management Outlook and concall highlights: Domestic demand for FY14: The management indicated that volume growth continues to remain weak. While it expects FY14 to better than FY13, growth is still likely to be in single digits. Margins further improvement likely: The management has recently undertaken a comprehensive cost rationalization exercise the benefits could be felt in the next 3 5 quarters. Near term, the positive impact of currency movements (recent yen appreciation) and commodity reduction could flow through in the coming quarters. Outlook Risks rise, Maintain SELL: While the current quarter was stronger than expected; nonetheless we continue to see structural risks with HMCL s brand equity (in light of the split with Honda) and consequently, on its ability to maintain market share in an increasingly competitive industry. Honda s aggressiveness is makes the competitive landscape harsh. We broadly maintain our EPS estimates (lower volume growth offsets a small improvement in margins). We maintain a SELL rating and a target price of Rs1600 (which implies an FY14 earnings multiple of 14X) SELL HMCL IN CMP RS 1649 TARGET RS 1600 ( 3%) Company Data O/S SHARES (MN) : 200 MARKET CAP (RSBN) : 319 MARKET CAP (USDBN) : WK HI/LO (RS) : 2279 / 1435 LIQUIDITY 3M (USDMN) : 10.1 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 52.2 FII / NRI : 32.1 FI / MF : 7.1 NON PROMOTER CORP. HOLDINGS : 1.4 PUBLIC & OTHERS : 7.2 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 10 Feb 11 Dec 11 Oct 12 HMCL BSE Sensex Source: Bloomberg PhillipCapital Research Other Key Ratios Rs mn FY13 FY14E FY15E Net Sales 235, , ,622 EBIDTA 32,845 35,286 38,087 Net Profit 21,182 22,764 29,492 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Source: PhillipCapital India Research Est. Deepak Jain ( ) djain@phillipcapital.in Varun Vijayan ( ) vvijayan@phillipcapital.in

2 Q3FY13 volume Analysis Year to March Q3FY13 Q3FY12 % change Q2FY13 % change PC comments Two wheelers 1,527,351 1,571,755 (2.8) 1,573,135 (2.9) Demand remains weak; however HMCL gained market in Q4 Realisation (INR) 39,758 37, , Sequential growth a positive surprise, reflects a marginal improvement in product mix. Q3FY13 financial analysis Year to March Q3FY13 Q3FY12 % change Q2FY13 % change PC comments Revenues (net) 60,725 59, ,513 (1.3) Other operating income Total revenues 61,458 60, ,876 (0.7) Raw material 44,395 44, ,854 (3.2) Gross margins benefit from currency movements Staff costs 2,259 1, , Other expenses 6,306 4, , Marketing costs continue to remain at elevated levels. Total expenditure 52,960 51, ,090 (2.1) EBIDTA 8,498 9,253 (8.2) 7, EBITDA ~6% above estimates Interest (net) Depreciation 2,655 2,804 (5.3) 2,832 (6.2) Sequential decline on currency movements lower royalty payout Other income 1,045 1,050 (0.4) PBT 6,857 7,469 (8.2) 5, Tax 1,115 1,433 (22.2) Adjusted net profit 5,742 6,036 (4.9) 4, PAT ~12% above expectations Q3FY13 margin analysis (as % of net revenues) Year to March Q3FY13 Q3FY12 % change Q2FY13 % change PC comments Raw material (97.5) 74.1 (186.9) Sharp sequential decline on yen depreciation and some benefit of raw material costs Staff costs Other expenses Reflects higher marketting expenses EBIDTA (150.4) bps ahead of estimates Adjusted net profit (65.8) Tax rate (293.0) Sharp sequential decline on yen depreciation and some benefit of raw material costs Source: Company, PhillipCapital India Research 2 of 6

3 FINANCIALS Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Net sales 233, , , ,622 Growth, % Other income 2,110 1,854 2,039 2,243 Total income 235, , , ,865 Raw material expenses 172, , , ,112 Employee expenses 7,355 8,209 8,782 9,577 Other Operating expenses 19,432 22,651 24,465 27,089 EBITDA (Core) 36,188 32,845 35,286 38,087 Growth, % 38.3 (9.2) Margin, % Depreciation 10,973 11,418 12,150 6,525 EBIT 25,214 21,428 23,136 31,562 Growth, % 13.9 (15.0) Margin, % Interest paid Other Non Operating Income 3,646 3,984 5,087 6,367 Pre tax profit 28,647 25,292 28,104 37,810 Tax provided 4,866 4,110 5,340 8,318 Profit after tax 23,781 21,182 22,764 29,492 Net Profit 23,781 21,182 22,764 29,492 Growth, % 18.4 (10.9) Net Profit (adjusted) 23,781 21,182 22,764 29,492 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Cash & bank 768 1,816 1,932 2,107 Debtors 2,723 7,107 7,562 8,246 Inventory 6,756 6,461 6,875 7,497 Loans & advances 10,756 10,756 10,756 10,756 Total current assets 21,003 26,140 27,125 28,606 Investments 39,643 44,820 62,264 79,228 Gross fixed assets 63,083 70,083 75,083 80,083 Less: Depreciation 25,228 36,645 48,795 55,320 Add: Capital WIP Net fixed assets 38,244 33,826 26,676 25,151 Total assets 98, , , ,985 Current liabilities 43,008 38,167 40,700 43,315 Provisions 10,901 14,476 15,644 16,813 Total current liabilities 53,908 52,643 56,344 60,128 Non current liabilities 2,083 2,083 2,083 2,083 Total liabilities 55,991 54,725 58,427 62,210 Paid up capital Reserves & surplus 42,499 49,662 57,238 70,375 Shareholders equity 42,898 50,061 57,638 70,774 Total equity & liabilities 98, , , ,985 Source: Company, Phillip Capital India Research Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Pre tax profit 28,647 25,292 28,104 37,810 Depreciation 10,973 11,418 12,150 6,525 Chg in working capital 27,603 5,355 2,833 2,478 Total tax paid 4,866 4,110 5,340 8,318 Cash flow from operating activities 7,151 27,244 37,747 38,495 Capital expenditure 7,915 7,000 5,000 5,000 Chg in investments 11,645 5,178 17,443 16,965 Cash flow from investing activities 3,730 12,178 22,443 21,965 Free cash flow 10,882 15,067 15,303 16,530 Equity raised/(repaid) Dividend (incl. tax) 10,444 14,019 15,187 16,355 Cash flow from financing activities 10,829 14,019 15,187 16,355 Net chg in cash 53 1, Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E Per Share data EPS (INR) Growth, % 18.4 (10.9) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) (0.1) (0.1) (0.1) (0.1) Working capital days (52.6) (43.8) (45.3) (44.9) Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Net debt/equity (%) (1.8) (3.6) (3.4) (3.0) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 6

4 Recommendation Chart Neutral (TP 1660) Neutral (TP 2055) Neutral (TP 2055) Sell (TP 1680) Sell (TP 1600) Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Source: PhillipCapital India Research 4 of 6

5 Management Vineet Bhatnagar (Managing Director) (91 22) Sajid Khalid (Head Institutional Equities) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles, IT Services Deepak Jain (9122) Neha Garg (9122) Varun Vijayan (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Sales & Distribution Kinshuk Tiwari (9122) Pawan Kakumanu (9122) Shubhangi Agrawal (9122) Dipesh Sohani (9122) Economics Anjali Verma (9122) Engineering, Capital Goods Ankur Sharma (9122) Jishar Thoombath (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Infrastructure Vibhor Singhal (9122) Raheel Arathodi (9122) Oil&Gas, Fertiliser Gauri Anand (9122) Saurabh Rathi (9122) Sunil Kamath (Sales Trader) (9122) Rajesh Ashar (Sales Trader) (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Mid caps Kapil Bagaria (9122) Raheel Arathodi (9122) Technicals & Quant Neppolian Pillai (9122) Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Mayur Shah (Execution) (9122) Gurudatt Uchil (Execution) (9122) Contact Information (Regional Member Companies) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 6

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