Hero MotoCorp - 3QFY23 Result Update

Hero moto Corp

Steady Recovery ahead; Risk Reward Favorable

Hero MotoCorp (HMCL) reported decent performance in 3QFY23 with revenues and EBITDA coming in broadly in line with our estimates, while reported PAT was higher due to sharp increase in non-operating income. Revenue increased by 2% YoY while it decreased 12% QoQ to Rs80.3bn, broadly in line with our estimate of Rs79.8bn. Revenue growth was primarily led by ASP growth of 6% YoY (flat QoQ) to Rs64,782, despite volume decline of 4% YoY (down 12% QoQ) to 12,39,693 units. EBITDA decreased by 4% YoY (down 11% QoQ) to Rs9.2bn, 1% below our estimate of Rs9.3bn, while EBITDA margin contracted by 67bps YoY (up 7bps QoQ) to 11.5% vs our estimate of 11.7%, as lower RM cost benefit nullified by higher other expenses. HMCL’s PAT came in at Rs7.1bn (up 4% YoY and down 1% QoQ), 9% above our estimate of Rs6.5bn, as non-operating income grew by 51% YoY and 99% QoQ to Rs1.8bn. We believe that the better product-mix, regular price hike, likely revival in 2W industry coupled with declining commodity cost would support HMCL’s margin expansion, going forward. In view of likely rural revival post Rabi harvesting, focus on premium segment, HMCL’s market leadership position to capitalize on the demand recovery and attractive valuation.

Focus on Premium Segment and Rural Recovery to Provide Better Traction Ahead   

Though we expect the domestic 2W industry to face a near-term demand weakness, we expect revival in rural market post Rabi harvesting amid better reservoir level. Sentiment would improve going forward on decent agri output at higher pricing. We believe HMCL would be able to capitalize due to its strong market leadership position and market reach. Exports revenue at a better exchange rate would also cushion the margins. Its focus on premium segment would help on market share front as well as on profitability front. It recently launched new scooter XTEC series received good response. Moreover, rising high margin spare parts and accessories would aid margins and profitability going ahead.

Outlook & Valuation 

We expect HMCL’s domestic volume to witness a CAGR of 7% over FY22-FY25E. Considering lower volumes, higher other expenses and lower export performance, we decrease our revenue/EBITDA/PAT estimates by 4%/7%/5% for FY23E and 5%/9%/9% for FY24E. We expect company’s Revenue/EBITDA/PAT to clock 11%/15%/14% CAGR over FY22-FY25E. Stock is currently trading at a valuation of 16x FY24E and 14.6x FY25E. We maintain our BUY recommendation on HMCL with an unrevised Target Price of Rs3,000, rolling forward our valuation to FY25 and valuing the stock at an unrevised P/E multiple of 16.5x FY25E EPS.

Conference Call – Key Takeaways

Company Performance: During the quarter, overall revenue was supported by higher spare revenue of Rs12.6bn (vs. Rs12.4bn in 2QFY23 and Rs11.9bn in 3QFY22). Margins were impacted due to EV Mobility Business to the tune of 70bps. 125cc+ segment declined to ~9% of the overall sales. The inventory currently stands at ~7 weeks and expects inventory in the range of 4-6 weeks going forward. The company took a price hike of ~Rs930 ex-showroom in Dec’22 and did a leap saving of ~80bps in 3QFY23. The company’s market share in scooter segment increased to 9% in 3QFY23 from 6% QoQ. Higher non-operating income was on account of absence of MTM loss, which impacted performance over past 2-3 quarters. Moreover, better profitability from Hero Fin Corp and gain on revaluation of investment in Ather supported higher PAT at consolidated level.

Demand Outlook: Premium products account for 60-70% of the industry volumes, indicating strong demand and expected to continue performing well going ahead. The company expects its spare revenue business to surge going forward on the back of increasing preference towards branded components of organized players and targets the spare revenue to contribute to ~15% going forward. The company expects double-digit revenue growth for FY24. The company indicated that the replacement buying has increased by ~20%. It indicated challenging situation in exports over near term while maintain long-term double-digit volume growth guidance with a target to take export contribution to 10% of overall volume over next 4-5 years.

EV: The company launched its first EV-scooter under VIDA brand initially in 3 cities (Delhi, Bangalore and Jaipur). It has planned a series of launches under this category for next 18-24 months and would increase its penetration to other cities in FY24. It is also developing EV ecosystem with establishment of charging stations in these 3 cities.

Hero Fin Corp update: Company’s performance is improving consistently and contributing decently to consolidated bottom line. Its PAT for the quarter stood at ~Rs1.9bn (vs. Rs1.6bn in 2QFY23)

Key Risks

• Prolonged economic slowdown
• Further rise in competitive intensity
• Adverse exchange rate
• Lower than expected decline in commodity prices.