INDUSTRY AUTOS CMP (as on 16 Oct 2018) Rs 2,898 Target Price Rs 3,602 Nifty 10,585 Sensex 35,162 KEY STOCK DATA Bloomberg HMCL IN No. of Shares (mn) 200 MCap (Rs bn) / ($ mn) 578 / 7,855 6m avg traded value (Rs mn) 1,472 STOCK PERFORMANCE (%) 52 Week high / low Rs 3,895 / 2,692 3M 6M 12M Absolute (%) (15.5) (23.9) (23.3) Relative (%) (12.3) (26.4) (31.1) SHAREHOLDING PATTERN (%) Promoters 34.63 FIs & Local MFs 14.78 FPIs 38.87 Public & Others 11.72 Source : BSE Abhishek Jain abhishekkumar.jain@hdfcsec.com +91-22-6171-7314 New launches hold key Hero Motocorp s (HMCL) numbers were broadly in line with estimates. Net revenue at Rs 91bn (+8.6% YoY) was led by 5.5% volume growth (2.1mn units) and 3% increase in net ASP. EBITDA fell 5% YoY at Rs 13.8bn, with contraction in margin (-220bps YoY/-45 bps QoQ) at 15.2% owing to delay in price hike and unfavourable product mix. APAT stood at Rs. 9.76bn (-3%YoY, est Rs 9.2 bn) supported by higher other income. Management sounded positive for 8-10% growth in festive season despite headwinds like third party insurance and increase in fuel prices. Two new rollouts in the fast-growing 125CC Scooter (on 22nd Oct) and Xtreme 200 in premium MC segments will help to accelerate volume growth. Dealer inventory stands at comfortable level 4-6 weeks. Rural India, which constitutes ~55% of HMCL s volumes, is showing signs of consumption uptick led by 1) three successive normal monsoons 2) farm loan waiver 3) MSP hike and 4) improved government rural spending and CY19 elections. Moreover, overall 2W finance penetration in India is ~36% whereas in rural market it covers only 20%, providing substantial scope for improvement. Thus, rural demand will get elevated with improvement in access to finance. However, near term challenges persist in the form of sharp increase in insurance costs and RESULTS REVIEW 16 OCT 2018 Hero MotoCorp BUY disruption in West Bengal 2W sales (as license became mandatory). Considering HMCL s superior return ratios (ROCE ~34%), consistent market leadership and healthy dividend yield (~3%), we continue to remain positive on the stock. Strong FCF and higher cash (Rs ~70bn) on balance sheet give the capability to do sizable acquisition in order to push growth. Expect EPS CAGR 7% over FY18-21E. Maintain BUY with TP of Rs 3602(16x Sept-20E EPS). Highlights of the quarter Market share: HMCL s domestic Motorcycle market share remain strong at 50.8% at the end of H1FY19 on the back of strong volume growth in HF Deluxe, Splendor and Passion Pro. However, the company lost market share by 168bps in scooter segment (10.4% in 2Q) owing to absence of products in 125CC segment. Export outlook: Export volumes increased by 27% YoY in 2Q to 59K. Management expects good growth going ahead on the back of incremental volumes from neighboring markets such as Bangladesh and Nepal. Near-term outlook: Expect decent volume growth(7-8%) in 3Q led by festive season demand and new launches. Financial Summary (Rs mn) YoY (%) QoQ (%) FY18 FY19E FY20E FY21E Net Sales 90,909 83,717 8.6 88,098 3.2 3,22,305 3,56,967 3,95,668 4,22,549 EBITDA (adj.) 13,787 14,557 (5.3) 13,773 0.1 52,802 55,103 62,326 67,989 APAT 9,763 10,105 (3.4) 9,098 7.3 36,974 38,356 43,365 46,531 Diluted EPS (Rs) 48.9 50.6 (3.4) 45.6 7.3 185.1 192.1 217.1 233.0 P/E (x) 15.7 15.1 13.3 12.4 EV / EBITDA (x) 9.9 9.5 8.2 7.2 RoE (%) 33.7 31.0 31.4 29.8 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Net revenue grew 8.6% YoY in 2Q, driven by 5.5% volume growth. The company witnessed 8% growth in the domestic motorcycle segment, partially offset by 14% de- growth in the Scooter segment Net ASP improved 3% YoY led by price hikes (Rs 500 in July- 18), increase in spare parts revenue and non-adoption of aggressive pricing strategies. Spare parts revenue came at Rs 7.13bn vs Rs6.02 bn in The Company has taken price hike of Rs 700/unit in oct-18, that will reflect in margin from 3QFY19 Other expenses gone up owing to higher marketing and advertisement expenses Quarterly Financials Snapshot: Standalone (Rs mn) YoY (%) QoQ (%) Volumes (mn units) 21,34,047 20,22,805 5.5 21,06,629 1.3 Net ASP 42,600 41,387 2.9 41,820 1.9 Net Sales 90,909 83,717 8.6 88,098 3.2 Material Expenses 62,997 57,078 10.4 61,650 2.2 Employee Expenses 4,341 3,837 13.2 4,131 5.1 Other Operating Expenses 9,784 8,246 18.7 8,544 14.5 EBITDA 13,787 14,557 (5.3) 13,773 0.1 Depreciation 1,518 1,360 11.6 1,482 2.4 EBIT 12,269 13,197 (7.0) 12,291 (0.2) Other Income 2,237 1,176 90.2 1,157 93.3 Interest Cost 21 16 37.2 15 42.7 PBT 14,485 14,357 0.9 13,433 7.8 Tax 4,722 4,252 11.0 4,336 8.9 APAT 9,763 10,105 (3.4) 9,098 7.3 Adj EPS 48.9 50.6 (3.4) 45.6 7.3 Margin Analysis: Standalone YoY (%) QoQ (%) Material Expenses % Net Sales 69.3 68.2 112 70.0 (68) Employee Expenses % Net Sales 4.8 4.6 19 4.7 9 Other Operating Expenses % Net Sales 10.8 9.8 91 9.7 106 EBITDA Margin (%) 15.2 17.4 (222) 15.6 (47) Tax Rate (%) 32.6 29.6 298 32.3 32 APAT Margin (%) 10.7 12.1 (133) 10.3 41 Page 2
We expect volumes to grow at a CAGR of 7% over FY18-21E. We believe the government s increased thrust on improving rural income and recent hike in MSP will drive 2W demand in rural markets. Expect to gain market share with new launches under scooter (high margin 125cc) and premium motorcycle segments (Xtreme 200). Management believes new launches under scooter and premium motorcycle segments would drive overall market share gain. Volume Assumptions (in 000 units) FY17 FY18 FY19E FY20E FY21E Economy 1,419 1,885 2,111 2,364 2,435 % YoY 21.5 32.8 12.0 12.0 3.0 Executive 4,239 4,591 4,949 5,197 5,197 % YoY (2.9) 8.3 7.8 5.0 - Premium 35 23 26 29 31 % YoY (48.7) (34.2) 12.0 10.0 10.0 Domestic Motorcycles 5,694 6,499 7,086 7,590 7,664 % YoY 1.6 14.1 9.0 7.1 1.0 Domestic Scooters 790 884 893 1,055 1,249 % YoY (3.5) 11.9 1 18 18 Exports 180 204 244 295 357 % YoY (14.2) 13.4 19.4 21.0 21.0 Total Volumes 6,664 7,587 8,224 8,940 9,270 % YoY 0.5 13.9 8.4 8.7 3.7 Avg net ASP/vehicle(in spare sales) 42,729 42,480 43,405 44,258 45,582 % YoY (0.4) (0.6) 2.2 2.0 3.0 Source: SIAM, HDFC sec Inst Research Impact of loss of excise exemption at Haridwar would be diluted by ramp-up in Halol plant (100% increase in production in FY19 to 600k) and Andhra plant ( 2HFY20) Page 3
GM Contracted YoY EBITDA Margin Contracted YoY/QoQ Net ASP (YoY) RM/vehicle (YoY) EBITDA (Rs mn) EBITDA margin - RHS Domestic Scooter volumes degrew 14% YoY at 202K units in 2Q owing to absence of products in 125cc segment and lower dispatches ahead of new launches 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% Dealer inventory stands at 4-6 weeks. Motorcycles Mix Improved In Econ Segment Scooter Market Share Gone Down Ecomony Executive Premium Dom scooter vol (in '000) HMCL MS - RHS Scooter Industry growth over last few months has been driven by 125cc segment. Share of this segment in overall scooters segment has increased to ~22% in 1HFY19 vs 16% in FY18. 100 80 60 40 20-1 1 0 0 0 0 0 0 0 76 73 72 72 71 70 69 71 69 24 27 27 27 28 30 31 29 31 250.0 200.0 150.0 100.0 50.0-14.50% 14.00% 13.50% 13.00% 12.50% 12.00% 11.50% 11.00% 10.50% 10.00% Source: SIAM, HDFC sec Inst Research Source: Company, SIAM, HDFC sec Inst Research Page 4
Exports Volume Increased YOY HMCL s Motorcycle Mkt Share Remain Strong HMCL s domestic motorcycle market share remain strong in We keep our target multiple lower 16x (vs 3/5 Years average historical multiple 19/17x) on Heromotocorp, factoring in moderation in volume growth and margin pressure Export volume (in '000) % YoY - RHS 80 70 60 50 40 30 20 10-150% 125% 100% 75% 50% 25% 0% -25% -50% 100 80 60 40 20-9 11 11 10 10 10.7 10.5 9.8 9.2 8 5 5 8 7 7.4 6.8 6.9 7.5 19 18 16 14 17 16.4 15.3 16.3 18.6 14 15 13 17 16 14.7 15.0 15.8 14.4 50 51 55 52 51.4 50.8 51.5 51.2 50.5 Hero HMSI Bajaj TVS Others Source: SIAM, HDFC sec Inst Research Peer Set Comparison Mcap (Rs bn) CMP (Rs/sh) Reco TP Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E Maruti Suzuki 2,160 7,150 BUY 8,252 255.6 267.6 326.2 28.0 26.7 21.9 17.8 15.9 13.4 19.8 18.1 19.4 Bajaj Auto 756 2,611 BUY 3,411 139.5 159.3 183.5 18.7 16.4 14.2 12.2 10.6 8.8 22.5 22.8 23.2 Tata Motors* 632 186 NR 297 20.7 9.5 19.2 9.0 19.7 9.7 7.7 4.7 3.8 9.1 3.3 6.6 Hero Motocorp 578 2,898 BUY 3,602 185.1 192.1 217.1 15.7 15.1 13.3 9.9 9.5 8.2 33.8 31.0 31.4 Ashok Leyland 351 120 BUY 150 5.3 6.9 8.0 22.5 17.5 14.9 11.5 9.5 8.1 23.5 26.2 26.7 SML Isuzu 10 665 BUY 988 5.9 29.8 49.3 113.3 22.3 13.5 24.9 9.8 7.0 2.1 10.4 15.6, *FV Page 5
Income Statement Standalone Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 2,84,750 3,22,305 3,56,967 3,95,668 4,22,549 Growth (%) 0.1 13.2 10.8 10.8 6.8 Material Expenses 1,90,118 2,18,346 2,46,307 2,72,616 2,89,023 Employee Expenses 13,960 15,401 16,941 18,636 20,499 Other Operating Expenses 34,324 35,755 38,616 42,091 45,038 EBITDA 46,348 52,802 55,103 62,326 67,989 EBITDA Margin (%) 16.3 16.4 15.4 15.8 16.1 EBITDA Growth (%) 4.0 13.9 4.4 13.1 9.1 Depreciation 4,927 5,556 5,875 6,389 6,902 EBIT 41,421 47,246 49,227 55,937 61,086 Other Income (Including EO Items) 5,224 5,258 5,567 6,013 6,350 Interest 61 63 - - - PBT 46,585 52,442 54,794 61,950 67,436 Tax (Incl Deferred) 12,813 15,468 16,438 18,585 20,905 RPAT 33,771 36,974 38,356 43,365 46,531 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 33,771 36,974 38,356 43,365 46,531 APAT Growth (%) 6.9 9.5 3.7 13.1 7.3 Adjusted EPS (Rs) 169.1 185.1 192.1 217.1 233.0 EPS Growth (%) 6.9 9.5 3.7 13.1 7.3 Balance Sheet Standalone Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital Equity 399 399 399 399 399 Reserves 1,00,714 1,17,289 1,29,245 1,45,809 1,65,306 Total Shareholders Funds 1,01,113 1,17,689 1,29,645 1,46,210 1,65,708 Long Term Debt 484 457 - - - Short Term Debt - - - Total Debt 484 457 - Net Deferred Taxes 824 1,324 1,324 1,324 1,324 Long Term Provisions & Others 753 1,747 1,747 1,747 1,747 TOTAL SOURCES OF FUNDS 1,02,986 1,21,217 1,32,716 1,49,282 1,68,781 APPLICATION OF FUNDS Net Block 45,899 47,692 52,126 56,238 59,335 CWIP 2,707 2,038 3,500 5,000 4,000 Investments 7,105 12,055 12,341 13,341 13,340 LT Loans & Advances 11,625 10,980 12,494 13,848 8,451 Total Non-current Assets 67,336 72,765 80,461 88,427 85,126 Inventories 6,563 8,236 8,802 9,756 10,419 Debtors 15,619 15,202 16,626 18,428 19,680 Other Current Assets 1,240 3,239 2,000 2,200 2,200 Cash & Equivalents 53,881 69,380 69,860 80,754 1,03,903 Total Current Assets 77,303 96,057 97,288 1,11,139 1,36,202 Creditors 36,000 35,210 32,254 35,617 37,884 Other Current Liabilities & Provns 6,373 12,395 12,779 14,667 14,668 Total Current Liabilities 42,373 47,604 45,033 50,285 52,553 Net Current Assets 34,930 48,452 52,255 60,854 83,650 TOTAL APPLICATION OF FUNDS 1,02,986 1,21,217 1,32,716 1,49,282 1,68,781 Page 6
Cash Flow Standalone (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 46,585 52,442 54,794 61,950 67,436 Non-operating & EO items - - - - - Interest expenses 61 63 65 68 69 Depreciation 4,927 5,556 5,875 6,389 6,902 Working Capital Change 5,912 286 (4,407) (59) 5,751 Tax Paid (11,939) (14,968) (16,438) (18,585) (20,905) OPERATING CASH FLOW ( a ) 45,545 43,378 39,889 49,763 59,253 Capex (11,636) (6,952) (11,500) (12,000) (9,000) Free cash flow (FCF) 33,909 36,426 28,389 37,763 50,253 Investments (2,371) (5,851) (1,000) (1,000) - Non-operating Income (1,178) 1,930 (1,930) - - INVESTING CASH FLOW ( b ) (15,185) (10,873) (14,430) (13,000) (9,000) Debt Issuance/(Repaid) - - - - - Interest Expenses (61) (63) (65) (68) (69) FCFE 33,849 36,364 28,324 37,695 50,184 Share Capital Issuance - - - - - Dividend (19,928) (22,140) (24,609) (26,971) (27,221) FINANCING CASH FLOW ( c ) (19,989) (22,202) (24,674) (27,039) (27,290) NET CASH FLOW (a+b+c) 10,372 10,303 786 9,724 22,963 EO Items, Others - - - - - Closing Cash & Equivalents 53,881 69,380 69,860 80,754 1,03,903 Key Ratios Standalone FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) GPM 33.2 32.3 31.0 31.1 31.6 EBITDA Margin 16.3 16.4 15.4 15.8 16.1 APAT Margin 11.9 11.5 10.7 11.0 11.0 RoE 35.7 33.8 31.0 31.4 29.8 RoIC (or Core RoCE) 63.6 69.2 63.5 62.5 66.2 RoCE 35.7 33.7 31.0 31.4 29.8 EFFICIENCY Tax Rate (%) 27.5 29.5 30.0 30.0 31.0 Fixed Asset Turnover (x) 2.7 2.9 2.9 3.0 3.0 Inventory (days) 8.4 9.3 9.0 9.0 9.0 Debtors (days) 20.0 17.2 17.0 17.0 17.0 Other Current Assets (days) 1.6 3.7 2.0 2.0 1.9 Payables (days) 46.1 39.9 33.0 32.9 32.7 Other Current Liab & Provns (days) 8.2 14.0 13.1 13.5 12.7 Cash Conversion Cycle (days) (24.3) (23.7) (18.0) (18.4) (17.5) Debt/EBITDA (x) 0.0 0.0 - - - Net D/E (x) (0.5) (0.5) (0.4) (0.5) (0.5) Interest Coverage (x) PER SHARE DATA (Rs) EPS 169.1 185.1 192.1 217.1 233.0 CEPS 193.8 213.0 221.5 249.1 267.6 Dividend 85.0 95.0 105.0 115.0 116.0 Book Value 506.3 589.3 649.2 732.1 829.8 VALUATION P/E (x) 17.1 15.7 15.1 13.3 12.4 P/BV (x) 5.7 4.9 4.5 4.0 3.5 EV/EBITDA (x) 11.5 9.9 9.5 8.2 7.2 EV/Revenues (x) 1.9 1.6 1.5 1.3 1.2 OCF/EV (%) 8.6 8.3 7.7 9.7 12.1 FCF/EV (%) 6.4 7.0 5.4 7.4 10.3 FCFE/Mkt Cap (%) 5.8 6.3 4.9 6.5 8.7 Dividend Yield (%) 2.9 3.3 3.6 4.0 4.0 Page 7
RECOMMENDATION HISTORY Hero Motocorp 4,500 4,000 3,500 3,000 2,500 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 TP Jul-18 Aug-18 Sep-18 Oct-18 Date CMP Reco Target 11-Oct-17 3,695 BUY 4,250 2-Nov-17 3,816 BUY 4,360 9-Jan-18 3,739 BUY 4,360 7-Feb-18 3,540 BUY 4,360 12-Apr-18 3,732 BUY 4,360 3-May-18 3,664 BUY 4,403 9-Jul-18 3,636 BUY 4,405 26-Jul-18 3,112 BUY 4,403 3-Oct-18 2,972 BUY 3,602 9-Oct-18 2,740 BUY 3,602 16-Oct-18 2,898 BUY 3,602 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8
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