Hero MotoCorp Rating ‘Hold’; operating figures along expected lines

Hero MotoCorp’s (HMCL’s) Q2FY21 operating numbers were in line with consensus estimates with Ebitda margin at 13.7% (down 81bps y-o-y). Topline grew ~24% (tad below consensus) to ~Rs 94 bn as ASP’s dropped 1.9% q-o-q to 51.6k/unit. HMCL witnessed demand recovery on the back of improving rural sentiment aided by strong monsoon and the same could sustain in the ongoing festive season.

We have earlier preferred higher rural-facing exposure segments; however, we believe post reopening of urban public transportation/educational institutions, scooters/3Ws could witness strong pent-up demand. We agree near-term demand trends could support HMCL’s growth (stock reflects that: up ~60% since Mar’20), however, lack of any other visible catalysts makes us maintain our Hold rating.

Key highlights of the quarter
HMCL reported Ebitda margin of 13.7%, down 81bps, even as gross margins declined 339bps y-o-y. ASP rose 15.3% to Rs 51.6k/vehicle led by BS-VI related price hikes and better product mix. PAT grew 25% y-o-y to Rs 9.5 bn even as taxes normalised (up 82% y-o-y) and other income declined 185bps with yield tapering off. HMCL invested an additional Rs 840 mn in Ather Energy (holding 34.58%) in Q2FY21. HMCL has entered into a distribution agreement to develop and sell a range of premium motorcycles under the Harley-Davidson brand through a network of brand-exclusive Harley-Davidson dealers and HMCL’s existing dealer network in the country.

Festive season remains the key as inventory normalises post channel filling
HMCL’s inventory levels are up to 6-8 weeks (our estimate) in Oct’20 in anticipation of strong festive demand with its strong presence in the entry segment. Early industry feedback on demand remains muted. However, HMCL has indicated that it has witnessed both better growth as well as market share gains. As commodity cost headwinds rise, HMCL needs to witness strong retail pull so as to pass on the additional cost inflation to customers. This remains a key monitorable.

Maintain Hold rating
We believe HMCL is witnessing a good demand revival on the back of continued rural recovery, enhanced need for mobility as public transportation remains erratic and hence the subsequent downtrading. HMCL continues to launch new products in the >125cc segment which are expected to help in making market share inroads in premium segment. We roll over to Sep’22e and maintain our target multiple at 17x Sep’22e EPS of Rs 171. We maintain our Hold rating with a revised TP of Rs 2,908 (earlier: Rs 2,662).