HERO MOTOCORP Stock Research Report by ICICI Securities
Sector: Automobile – 2 & 3 Wheelers
CMP Rs. 2547, Target Rs. 2912 (14% upside potential)
Target Period: 12 Months
HERO MOTOCORP Stock Research Report: Limited downside risks across key parameters
Hero MotoCorp’s (HMCL) Q4FY23 EBITDA margin was up 153bps QoQ at 13% (consensus: 11.9%). The beat was driven by 144bps QoQ rise in gross margin due to lower commodity costs and savings from LEAP programme. We expect domestic 2W market to grow by ~12% in FY24E led by a favourable base and limited drivers of further increase in TCO, with growth being led by both rural and urban markets. Thus, for HMCL, >10% volume growth, stability in input commodity costs, and focus towards premiumisation of portfolio through Xtec series of models within existing brands, we believe should help EBITDAM sustain at >13% in FY24E-25E vs recent lows of ~11%. Management believes repricing of Vida will help the company accelerate its EV penetration and help regain part of its lost market share in scooters. However, we believe, it is too early to build the numbers into our estimates. We believe HMCL’s pipeline of new products (new launches were at an all-time high in FY24), retail financing penetration at 59%, low rural demand base and stable commodity costs should help retails recover in the coming quarters. Maintain ADD with a revised DCF-based target price of Rs2,912 (earlier: Rs2,940), implying 12x FY25E core EPS with FY23-FY25E EBITDA CAGR at 21%.
Key takeaways from earnings call:
● HMCL is looking forward to >10% domestic 2W market growth in FY24 – it being also a year of inclusive growth driven by both premium models and entry/executive models. With cost drivers of TCO stabilising, HMCL is optimistic of rural 2W demand revival in FY24, with green shoots already visible in the past few months. With multiple festivities in Mar’23 and marriage season driving retails in Mar-Apr’23, HMCL is looking forward to steady retails till Jun’23. Thereafter, low base would help growth momentum to persist. With price rejig in EVs w.r.t. keeping on-road prices sub-Rs150k/unit in order to comply with FAME subsidy rules, HMCL is looking forward to Vida driving a scale-up in FY24. The anticipated scale-up should provide new scope for ramping-up market share in scooters from ~7% in ICE segment. Inventory levels are generally at 6 weeks of retail and have largely remained stable thereabouts in recent months. Retail finance penetration at ~59% as against sub-45% levels pre-covid, is helping the industry tackle the major increase in TCO for consumers in FY21-FY23. HMCL is strategically targeting the 125-150cc bike customers through its Xtec models across Glamour, Passion and Splendor Plus brands.
● Company is confident of attaining profitability in the long-term range of ~14-16% as against recent lows of 11% — led by scale, cost-cutting and better mix. The ~150bps QoQ rise in EBITDAM in Q4FY23 was fully driven by gross margin improvement as volumes increased hardly 2% QoQ. Also, spares income on absolute basis was flattish QoQ at ~15% of revenues, hence we don’t think the gross margin increase was driven by spares. HMCL is building-in the cash burn needed to scale up the EV portfolio in the initial period and yet looking forward to an improving margin trajectory, with operating leverage being the largest lever for margin improvement ahead.
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