Please refer to important disclosures at the end of this report 1
Y/E March (` cr) 2QFY14 2QFY13 % chg (yoy) 1QFY14 % chg (qoq)
Net Sales 5,726 5,187 10.4 6,160 (7.0)
EBITDA 833 719 15.8 915 (9.0)
EBITDA margin (%) 14.5 13.9 68bp 14.9 (32)bp
Adj. PAT 481 441 9.3 549 (12.2)
Source: Company, Angel Research
Hero MotoCorp (HMCL) reported an in-line performance for 2QFY2014, led by a
strong sequential growth in net average realization (up 2.4%). The company
registered a healthy growth of ~7% in retail volumes in 1HFY2014 driven by a
~9% growth in rural sales. However, wholesale volumes remained flat in
1HFY2014. According to the Management, while the festival season sales for the
industry are expected to witness a flat growth, the company expects to post a
modest growth in festival sales which would lead to a low single digit volume
growth for HMCL in FY2014. The company expects margins to remain under
pressure in 2HFY2014 despite the price hike in October, on account of the
raw-material cost pressures and also due to the unfavorable currency movement.
The company also indicated that they expect savings to the tune of `60-`80cr in
2HFY2014 led by cost control initiatives. While we are not factoring any cost
savings currently, we would keenly watch the progress on this front. We maintain
our cautious stance on volume growth going ahead and expect HMCL to clock a
modest volume CAGR of ~5% over FY2013-15; however, profitability is set to
improve going ahead primarily driven by phasing out of royalty payments from
1QFY2015. We believe that the stock is trading at fair valuations currently and
offers limited upside from current levels. We maintain our Neutral rating.
2QFY2014 performance in line with estimates: The top-line recorded a decline of
7% qoq to `5,726cr, in line with our estimates of `5,688cr. The performance was
mainly impacted by the 9.2% qoq decline in volumes. The company continued with
its recent trend of losing market share in the motorcycle segment (down 170bp to
51.4% in 1HFY2014 as compared to 53.1% in FY2013) and gaining strength in the
scooter segment (up 150bp to 20.2% in 1HFY2014). The net average realization
however, grew strongly by 2.4% qoq driven by price hikes taken in 1QFY2014 and
also due to superior product-mix led by favorable model-mix and higher share of
spares revenue. EBITDA margins declined slightly by 32bp qoq to 14.5%, broadly
in line with our expectations of 14.8%. As a result, the operating profit and net profit
posted a decline of 9% and 12.2% qoq to `833cr and `481cr respectively.
Outlook and valuation: At `2,088, the stock is trading at 14.3x FY2015E earnings.
We maintain our Neutral rating on the stock.
Key financials (Standalone)
Y/E March (` cr) FY2012 FY2013 FY2014E FY2015E
Net Sales 23,579 23,768 25,059 28,156
% chg 21.6 0.8 5.4 12.4
Net Profit 2,378 2,118 2,091 2,906
% chg 18.4 (10.9) (1.3) 38.9
EBITDA margin (%) 15.3 13.8 14.2 14.5
Adj. EBITDA margin* (%) 11.9 10.4 10.9 13.7
EPS (`) 119.1 106.1 104.7 145.5
P/E (x) 17.5 19.7 19.9 14.3
P/BV (x) 9.7 8.3 7.3 5.8
RoE (%) 65.6 45.6 39.1 45.1
RoCE (%) 49.2 38.9 41.8 50.1
EV/Sales (x) 1.6 1.6 1.4 1.3
EV/EBITDA (x) 10.4 11.5 10.1 8.8
Source: Company, Angel Research; Note: * OPM adjusted for change in treatment of royalty
costs; CMP as of October 23, 2013
NEUTRAL
CMP `2,088
Target Price -
Investment Period -
Stock Info
Sector
Bloomberg Code HMCL@IN
Shareholding Pattern (%)
Promoters 39.9
MF / Banks / Indian Fls 10.4
FII / NRIs / OCBs 42.8
Indian Public / Others 6.9
Abs. (%) 3m 1yr 3yr
Sensex 2.3 11.0 3.0
Hero MotoCorp 17.0 16.2 12.5
20,768
6,178
HROM.BO
BSE Sensex
Nifty
Reuters Code
Face Value (`)
Automobile
Market Cap (` cr)
Beta
52 Week High / Low
41,691
0.7
2,128/1,434
35,125
2
Avg. Daily Volume
Net Debt (` cr) (4,070)
Yaresh Kothari
022-3935 7800 Ext: 6844
yareshb.kothari@angelbroking.com
Hero MotoCorp
Performance Highlights
2QFY2014 Result Update | Automobile
October 24, 2013
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
2
Exhibit 1: Quarterly financial performance (Standalone)
Y/E March (` cr) 2QFY14 2QFY13 % chg (yoy) 1QFY14 % chg (qoq) 1HFY14 1HFY13 % chg (yoy)
Net Sales 5,726 5,187 10.4 6,160 (7.0) 11,886 11,435 3.9
Consumption of RM 4,096 3,770 8.6 4,456 (8.1) 8,551 8,373 2.1
(% of Sales) 71.5 72.7 72.3 71.9 73.2
Staff Costs 229 192 19.2 222 3.4 450 397 13.5
(% of Sales) 4.0 3.7 3.6 3.8 3.5
Other Expenses 569 506 12.5 567 0.3 1,136 1,009 12.6
(% of Sales) 9.9 9.8 9.2 9.6 8.8
Total Expenditure 4,894 4,468 9.5 5,244 (6.7) 10,138 9,779 3.7
Operating Profit 833 719 15.8 915 (9.0) 1,748 1,656 5.5
OPM (%) 14.5 13.9 14.9 14.7 14.5
Interest 3 3 0.3 3 0.3 6 6 0.5
Depreciation 287 290 (0.9) 274 4.6 561 593 (5.3)
Other Income 115 99 16.2 112 2.9 228 204 11.8
PBT (excl. Extr. Items) 658 526 25.1 750 (12.2) 1,408 1,261 11.7
Extr. Income/(Expense) - - - - - -
PBT (incl. Extr. Items) 658 526 25.1 750 (12.2) 1,408 1,261 11.7
(% of Sales) 11.5 10.1 12.2 11.8 11.0
Provision for Taxation 177 85 106.9 202 (12.2) 378 205 84.7
(% of PBT) 26.9 16.3 26.9 26.9 16.3
Reported PAT 481 441 9.3 549 (12.2) 1,030 1,056 (2.5)
Adj PAT 481 441 9.3 549 (12.2) 1,030 1,056 (2.5)
Adj. PATM 8.4 8.5 8.9 8.7 9.2
Equity capital (cr) 39.9 39.9 39.9 39.9 39.9
Adjusted EPS (`) 24.1 22.1 9.3 27.5 (12.2) 51.6 52.9 (2.5)
Source: Company, Angel Research
Exhibit 2: 2QFY2014 ¡V Actual vs Angel estimates
Y/E March (` cr) Actual Estimates Variation (%)
Net Sales 5,726 5,688 0.7
EBITDA 833 842 (1.1)
EBITDA margin (%) 14.5 14.8 (26)bp
Adj. PAT 481 488 (1.3)
Source: Company, Angel Research
Exhibit 3: Quarterly volume performance
(units) 2QFY14 2QFY13 % chg (yoy) 1QFY14 % chg (qoq) 1HFY14 1HFY13 % chg (yoy)
Total two-wheelers 1,416,211 1,332,805 6.3 1,559,282 (9.2) 2,975,493 2,973,095 0.1
Domestic 1,383,127 1,298,624 6.5 1,527,980 (9.5) 2,911,107 2,894,249 0.6
Exports 33,084 34,181 (3.2) 31,302 5.7 64,386 78,846 (18.3)
Motorcycles 1,243,962 1,201,143 3.6 1,393,686 (10.7) 2,637,648 2,722,097 (3.1)
Domestic 1,212,672 1,170,409 3.6 1,364,546 (11.1) 2,577,218 2,657,063 (3.0)
Exports 31,290 30,734 1.8 29,140 7.4 60,430 65,034 (7.1)
Scooters 172,249 131,662 30.8 165,596 4.0 337,845 250,998 34.6
Domestic 170,455 128,215 32.9 163,434 4.3 333,889 237,186 40.8
Exports 1,794 3,447 (48.0) 2,162 (17.0) 3,956 13,812 (71.4)
Source: Company, Angel Research
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
3
Top-line driven by strong growth in net average realization: For 2QFY2014, the
top-line recorded a decline of 7% qoq to `5,726cr which is in line with our
estimate of `5,688cr. The top-line performance was impacted due to a 9.2% qoq
decline in volumes led by slowdown in demand and competition from Honda
Motors and Scooters India (HMSI). While motorcycle sales declined by 11% qoq;
scooters sustained their strong sales momentum and witnessed a sequential growth
of 4% during the quarter. The company continued with its recent trend of losing
market share in the motorcycle segment (down 170bp to 51.4% in 1HFY2014 as
compared to 53.1% in FY2013) and gaining strength in the scooter segment (up
150bp to 20.2% in 1HFY2014). The net average realization for HMCL grew
strongly by 2.4% qoq driven by the full impact of the price hike which was carried
out in 1QFY2014 and also due to superior product-mix led by favorable modelmix
and higher share of spares revenue. HMCL took a price increase of `500-
`1,500/ motorcycle in April 2013 (effective from May 2013).
On a yoy basis, the top-line registered a healthy growth of 10.4% led by a 6.3%
and 4.1% yoy growth in volumes and net average realization respectively. The
volume growth appears healthy on a yoy basis due to the low base of last year
which was impacted on account of the inventory correction exercise undertaken by
the company. Led by a healthy growth in top-line and 68bp yoy expansion in
margins, the operating profit posted a strong growth of 15.8% yoy to `833cr.
However, the bottom-line grew only by 9.3% yoy on account of the higher tax rate
(26.9% as against our expectation of 16.3% in 2QFY2013) due to expiration of tax
benefits at the Haridwar plant
Exhibit 4: Volume growth remains under pressure
Source: Company, Angel Research
Exhibit 5: Strong growth in net average realization
Source: Company, Angel Research
1,544,315
1,589,276
1,572,027
1,640,290
1,332,805
1,573,135
1,527,351
1,559,282
1,416,211
20.1
11.3
8.1 7.2
(13.7)
(1.0)
(2.8)
(4.9)
6.3
(20.0)
(15.0)
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(units) Total volume yoy growth (RHS) (%)
37,456
37,650
37,929
37,846
38,649
39,102
39,758
39,293
40,223
6.8
5.0
3.1
2.7
3.2
3.9
4.8
3.8 4.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
36,000
36,500
37,000
37,500
38,000
38,500
39,000
39,500
40,000
40,500
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(`) Net average realisation/unit yoy growth (RHS) (%)
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
4
Exhibit 6: Net sales in-line with estimates
Source: Company, Angel Research
Exhibit 7: Domestic market share trend
Source: Company, SIAM, Angel Research
Operating performance broadly in line with estimates: On the operating front, the
EBITDA margin declined slightly by 32bp qoq to 14.5%, broadly in line with our
expectations of 14.8%. While a superior product-mix benefited EBITDA margins
leading to an 80bp decline in raw-material expense as a percentage of sales;
higher other expenditure arrested further expansion in margins. The adjusted
EBITDA margin contracted 74bp qoq to 10.8%, against our expectations of 11.3%,
as the performance was impacted due to the higher royalty outgo led by
unfavorable forex movement. Royalty payment for the quarter stood at `212cr as
against `202cr in 1QFY2014. As a result, operating profit and net profit posted a
decline of 9% and 12.2% qoq to `833cr and `481cr respectively.
For HMCL, indirect imports account for ~9.5% of net sales, half of which are Yen
denominated. Direct imports form ~5.5% of net sales, however, they are
denominated mostly in US$. The company compensates its vendors with a lag of
one quarter. Going ahead, the Management expects margin pressures in
2HFY2014 as the company will compensate its vendors for the unfavorable
currency movement and also due to increase in commodity prices (like steel,
copper and rubber). While the company has raised prices by ~1.5% in October, it
reckons that it will not be sufficient to completely offset the commodity and
currency cost pressures. However, it expects cost savings of `60cr-`80cr to accrue
in 2HFY2014 from the cost saving exercise which it is currently running.
Exhibit 8: EBITDA margin performance in-line...
Source: Company, Angel Research
Exhibit 9: ... leading to in-line growth in net profit
Source: Company, Angel Research
5,826
6,031
6,035
6,247
5,187
6,188
6,146
6,160
5,726
28.0
16.9
11.9
10.0
(11.0)
2.6
1.8
(1.4)
10.4
(15.0)
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(` cr) Net sales (LHS) yoy change (RHS) (%)
14.7 15.8 16.4 15.9 17.5
20.6 21.1 20.8 19.5
54.8 56.1 56.1 56.5
50.0 51.9 54.0 54.1
48.7
44.0 45.2 44.4 45.3
39.8 42.5 43.5 43.8
39.2
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2QFY12
3QFY12
4QFY2012
1QFY2013
2QFY2013
3QFY2013
4QFY2013
1QFY2014
2QFY2014
(%) Scooter Motor-cycle Total 2-wheeler
15.7 15.6 15.3 15.0 13.9 12.6 13.8 14.9 14.5
73.0 73.4 74.1 74.1 73.2 74.5 73.1 72.7 71.9
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(%) EBITDA margin Raw material cost/sales
604
613
604
615
441
488
574
549
481
10.4 10.2 10.0 9.9
8.5
7.9
9.3 8.9 8.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0
100
200
300
400
500
600
700
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(` cr) Net profit (LHS) Net profit margin (RHS) (%)
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
5
Conference call ¡V Key highlights
ƒÞ The Management has indicated that retail sales for the company have grown
by ~7% in 1HFY2014 as against 0.1% growth witnessed in wholesale
volumes. Further, the company expects to exceed last year's festival season
(October-November) sales of 1.1m during the ongoing festival season. The
five year warranty scheme announced by the company has been received well
by the market and is enabling the company to clock good retail sales.
ƒÞ According to the Management, the rural sector continues to perform well and
accounts for ~47% of total sales. Retail sales grew by ~9% in rural markets
and ~5% in urban markets in 1HFY2014.
ƒÞ Imports constitute ~15% of net sales, of which direct imports (USD
denominated) form 5.5%, while indirect imports (50% Yen denominated) form
9.5%. HMCL compensates its vendors with a lag of one quarter. Around 70%
of the royalty payments (Yen denominated) due to Honda for FY2014 have
been hedged. The USD-INR leg of the transaction however, remains
unhedged.
ƒÞ HMCL currently pays royalty on Ignitor, Impulse, Passion XPro, and Maestro
and it does not exceed 5% of net sales. Royalty amortization for 2QFY2014
stood at `212cr (`860cr in FY2013).
ƒÞ HMCL has undertaken an extensive cost reduction initiative, the benefits of
which would be gradually visible over the next few years. The exercise includes
product re-engineering, alternate vendor sourcing, localization and savings on
logistics costs which is expected to result in savings of `1,500cr by FY2017.
The company expects savings of `60cr-`80cr in 2HFY2014.
ƒÞ The company expanded its reach in FY2013 by adding 500 touch points to
increase its tally to 5,500 touch points at the end of FY2013. The company
expects to add about 500 more touch points in FY2014.
ƒÞ Capital expenditure plans for the next three years stands at `2,600cr of which
`1,100cr would be incurred in FY2014. The new plant at Rajasthan with an
installed capacity of 0.75mn will be operational by 4QFY2014. HMCL expects
to increase the Scooter capacity by 15,000 units/ month from the current
levels of 60,000 units/ month.
ƒÞ The Management expects R&D expenses to be ~0.75% of net sales in
FY2014. And going ahead, R&D cost is expected to be ~1.25% of net sales.
ƒÞ Exports remained muted in 1HFY2014 due to the poor demand environment
across key markets of South Asia. Currently, the company has presence in ten
markets and plans to venture into eight new markets across Latin America and
Africa in 2HFY2014. The Management re-iterated its long term target of
clocking 1mn units of export sales by FY2017.
ƒÞ HMCL has increased prices by `500-`1,500/ vehicle (average hike of `1,000)
across all models in October to offset the increase in the commodity prices.
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
6
Investment arguments
ƒÞ Expect the demand scenario to remain moderate; however profitability to
improve gradually: We expect the demand environment to remain sluggish in
FY2014 as the consumer sentiments remain weak due to macro-economic
concerns and rising fuel and product prices. Nonetheless, better monsoons
and festival demand are expected to revive demand in FY2015. We expect the
company to register a ~5% volume CAGR over FY2013-15E. Additionally, the
profitability is set to improve sharply once the royalty costs are paid out
completely in 1QFY2015. Consequently, we expect the bottom-line to register
a strong CAGR of 17.1% over FY2013-15E.
ƒÞ Capacity expansion to meet future increase in demand:
HMCL has a current installed capacity of 7mn units across its three plants in
Haridwar, Dharuhera and Gurgaon. The company is setting up two new
plants in Rajasthan (0.75mn units) and Gujarat (1.5mn units) which will come
on stream in FY2014 and FY2015 respectively, thus taking the overall capacity
to 9.25mn units. As a result of capacity expansion, HMCL remains well-poised
to meet increasing demand going ahead.
Outlook and valuation
The company registered a healthy growth of ~7% in retail volumes in 1HFY2014
driven by a ~9% growth in rural sales. However, wholesale volumes remained flat
in 1HFY2014. According to the Management, while the festival season sales are
expected to witness a flat growth for the industry; the company expects to post a
marginal growth in festival sales which would lead to a low single digit volume
growth for HMCL in FY2014. The company expects margins to remain under
pressure in 2HFY2014 despite the price hike in October, on account of the rawmaterial
cost pressures and also due to the unfavorable currency movement. The
company also indicated that it expects savings to the tune of `60-`80cr in
2HFY2014 led by cost control initiatives. While we are not factoring any cost
savings currently, we would keenly watch the progress on this front. We maintain
our cautious stance on volume growth going ahead and expect HMCL to clock a
modest volume CAGR of ~5% over FY2013-15; however, profitability is set to
improve going ahead primarily driven by phasing out of royalty payments from
1QFY2015.
Exhibit 10: Change in estimates
Y/E March Earlier Estimates Revised Estimates % chg
FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E
Net Sales (` cr) 25,543 28,228 25,059 28,156 (1.9) (0.3)
OPM (%) 14.5 14.5 14.2 14.5 (27)bp (6)bp
EPS (`) 110.5 148.1 104.7 145.5 (5.2) (1.7)
Source: Company, Angel Research
At `2,088, the stock is trading at 14.3x FY2015E earnings. We believe that the
stock is trading at fair valuations currently and offers limited upside from current
levels. We therefore maintain our Neutral rating on HMCL.
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
7
Exhibit 11: Key assumptions - Volumes
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Total motorcycles 4,385,858 5,040,971 5,779,621 5,499,245 5,406,365 5,857,790
Domestic 4,293,991 4,926,390 5,628,513 5,362,730 5,273,401 5,661,998
< 125cc 4,055,304 4,589,003 5,303,622 5,165,222 5,087,744 5,454,061
>125cc 238,687 337,387 324,891 197,508 185,658 207,936
Exports 91,867 114,581 151,108 136,515 132,964 195,792
< 125cc 82,824 102,524 131,026 122,015 114,694 172,041
>125cc 9,043 12,057 20,082 14,500 18,270 23,751
Total scooters 214,272 361,473 455,584 574,336 735,558 845,205
Domestic 208,440 342,991 414,389 549,808 725,747 834,609
Exports 5,832 18,482 41,195 24,528 9,811 10,596
Total two-wheelers 4,600,130 5,402,444 6,235,205 6,073,581 6,141,923 6,702,994
Source: Company, Angel Research
Exhibit 12: Angel vs consensus forecast
Y/E March (` cr) Angel estimates Consensus Variation (%)
FY14E FY15E FY14E FY15E FY14E FY15E
Total op. income 25,059 28,156 25,262 28,099 (0.8) 0.2
Net profit 2,091 2,906 2,177 2,818 (3.9) 3.1
Source: Bloomberg, Angel Research
Exhibit 13: One-year forward P/E band
Source: Company, Angel Research
Exhibit 14: HMCL ¡V Premium/Discount to Sensex P/E
Source: Company, Angel Research
0
500
1,000
1,500
2,000
2,500
3,000
Apr-03
Mar-04
Mar-05
Feb-06
Jan-07
Jan-08
Dec-08
Dec-09
Nov-10
Nov-11
Oct-12
Oct-13
(`) CMP (`) 8x 12x 16x 20x
(80)
(60)
(40)
(20)
0
20
40
60
80
Apr-02
Mar-03
Mar-04
Feb-05
Feb-06
Jan-07
Jan-08
Dec-08
Dec-09
Nov-10
Nov-11
Oct-12
Oct-13
(%) Absolute premium Five-yr average premium
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
8
Exhibit 15: Automobile - Recommendation summary
Company Reco. CMP
(`)
Tgt. price
(`)
Upside
(%)
P/E (x) EV/EBITDA (x) RoE (%) FY13-15E EPS
FY14E FY15E FY14E FY15E FY14E FY15E CAGR (%)
Ashok Leyland Accumulate 17 18 6.5 97.2 11.2 7.2 4.6 1.1 9.1 56.7
Bajaj Auto Accumulate 2,097 2,345 11.8 16.9 14.3 11.6 9.5 40.2 37.4 18.0
Hero MotoCorp Neutral 2,088 - - 19.9 14.3 10.1 8.8 39.1 45.1 17.1
Maruti Suzuki Neutral 1,528 - - 16.3 14.6 7.4 6.1 14.3 14.0 14.9
Mahindra &
Mahindra Accumulate 867 996 14.8 15.0 13.2 8.0 6.7 21.3 20.7 9.5
Tata Motors Neutral 375 - - 9.7 8.6 4.3 3.9 28.6 24.9 15.3
TVS Motor Neutral 50 - - 10.0 8.3 3.9 2.9 18.1 18.9 17.1
Source: Company, Angel Research
Company background
Hero MotoCorp (HMCL) is a leading 2W manufacturer globally and the market
leader in the domestic motorcycle segment with a ~54% market share. HMCL has
three manufacturing facilities in India, located at Gurgaon, Dharuhera and
Haridwar, with a total capacity of ~7mn units/year as of FY2013.
Over 2008-13, HMCL recorded a strong volume CAGR of ~13%, backed by its
strong brands (Passion and Splendor) and a well-entrenched dealership
network, which has a good presence across rural areas (account for ~47% of total
volumes) as well.
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
9
Profit and loss statement (Standalone)
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Total operating income 15,861 19,398 23,579 23,768 25,059 28,156
% chg 28.1 22.3 21.6 0.8 5.4 12.4
Total expenditure 13,096 16,785 19,960 20,484 21,490 24,085
Net raw material costs 10,736 14,111 17,282 17,398 18,107 20,403
Other mfg costs 225 265 300 343 386 433
Employee expenses 438 619 736 821 945 1,048
Other 1,697 1,790 1,643 1,922 2,053 2,200
EBITDA 2,764 2,613 3,619 3,284 3,569 4,071
% chg 58.2 (5.5) 38.5 (9.2) 8.7 14.1
EBITDA margin 17.4 13.5 15.3 13.8 14.2 14.5
Adj. EBITDA margin* 17.4 12.1 11.9 10.4 10.9 13.7
Depreciation & amortization 191 402 1,097 1,142 1,139 606
EBIT 2,573 2,210 2,521 2,143 2,430 3,464
% chg 64.2 (14.1) 14.1 (15.0) 13.4 42.6
(% of total op. income) 16.2 11.4 10.7 9.0 9.7 12.3
Interest and other charges 2 15 21 12 13 14
Other income 261 290 365 398 428 503
Recurring PBT 2,832 2,485 2,865 2,529 2,845 3,953
% chg 59.0 (12.3) 15.3 (11.7) 12.5 38.9
Extraordinary income/(exp.) 0 (80) - - - -
PBT 2,832 2,405 2,865 2,529 2,845 3,953
Tax 600 477 487 411 754 1,048
(% of PBT) 21.2 19.8 17.0 16.3 26.5 26.5
PAT (reported) 2,232 1,928 2,378 2,118 2,091 2,906
ADJ. PAT 2,232 2,008 2,378 2,118 2,091 2,906
% chg 74.1 (10.0) 18.4 (10.9) (1.3) 38.9
(% of total op. income) 14.1 10.4 10.1 8.9 8.3 10.3
Basic EPS (`) 111.8 100.5 119.1 106.1 104.7 145.5
Adj. EPS (`) 111.8 100.5 119.1 106.1 104.7 145.5
% chg 74.1 (10.0) 18.4 (10.9) (1.3) 38.9
Note: Adj. EBITDA margins are calculated after accounting for royalty costs as a part of operating
expense instead of depreciation expense
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
10
Balance sheet statement (Standalone)
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
SOURCES OF FUNDS
Equity share capital 40 40 40 40 40 40
Reserves & surplus 3,425 2,916 4,250 4,966 5,656 7,160
Shareholders¡¦ Funds 3,465 2,956 4,290 5,006 5,696 7,200
Total loans 66 - - - - -
Deferred tax liability 153 247 208 132 132 132
Other long term liabilities 1,471 1,011 302 302 302
Long term provisions 36 38 30 30 30
Total Liabilities 3,684 4,710 5,547 5,471 6,160 7,664
APPLICATION OF FUNDS
Gross block 2,751 5,538 6,308 6,685 7,769 8,952
Less: Acc. depreciation 1,092 1,458 2,523 3,614 4,753 5,359
Net Block 1,659 4,080 3,786 3,071 3,016 3,593
Capital work-in-progress 48 50 39 62 179 195
Investments 3,926 5,129 3,964 3,624 4,189 5,212
Long term loans and advances 342 534 780 780 780
Other noncurrent assets 16 26 36 36 36
Current assets 2,883 1,109 1,541 2,068 2,854 2,901
Cash 1,907 72 77 181 1,301 743
Loans & advances 431 345 476 554 476 681
Other 545 692 988 1,334 1,077 1,477
Current liabilities 4,831 6,017 4,341 4,171 4,893 5,053
Net current assets (1,949) (4,908) (2,801) (2,102) (2,039) (2,152)
Misc. exp. not written off - - - - - -
Total Assets 3,684 4,710 5,547 5,471 6,160 7,664
Note: Cash includes cash with scheduled banks on dividend current accounts
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
11
Cash flow statement (Standalone)
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Profit before tax 2,832 2,405 2,865 2,529 2,845 3,953
Depreciation 191 402 1,097 1,142 1,139 606
Change in working capital 484 185 (691) (787) 1,056 (445)
Direct taxes paid (575) (481) (583) (613) (754) (1,048)
Others (245) (257) (329) (380) - -
Cash Flow from Operations 2,687 2,254 2,360 1,890 4,287 3,067
(Inc.)/Dec. in fixed assets (210) (361) (503) (600) (1,200) (1,200)
(Inc.)/Dec. in investments (363) (999) 1,443 628 (565) (1,023)
Others 45 38 (847) (760) - -
Cash Flow from Investing (528) (1,322) 93 (733) (1,765) (2,223)
Issue of equity - - - - - -
Inc./(Dec.) in loans (12) - - - - -
Dividend paid (Incl. Tax) (1,997) (599) (2,097) (899) (1,402) (1,402)
Others (100) (356) (361) (158) - -
Cash Flow from Financing (2,109) (955) (2,458) (1,056) (1,402) (1,402)
Inc./(Dec.) in cash 49 (23) (6) 101 1,120 (557)
Opening Cash balances 13 63 39 34 181 1,301
Closing Cash balances 63 39 34 135 1,301 743
Note: Closing Cash balances excludes cash with scheduled banks on dividend current accounts
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
12
Key ratios
Y/E March FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Valuation Ratio (x)
P/E (on FDEPS) 18.7 20.8 17.5 19.7 19.9 14.3
P/CEPS 17.2 17.3 12.0 12.8 12.9 11.9
P/BV 12.0 14.1 9.7 8.3 7.3 5.8
Dividend yield (%) 5.3 5.0 2.2 2.9 2.9 2.9
EV/Sales 2.3 1.9 1.6 1.6 1.4 1.3
EV/EBITDA 13.0 14.0 10.4 11.5 10.1 8.8
EV / Total Assets 9.7 7.7 6.8 6.9 5.9 4.7
Per Share Data (`)
EPS (Basic) 111.8 100.5 119.1 106.1 104.7 145.5
EPS (fully diluted) 111.8 100.5 119.1 106.1 104.7 145.5
Cash EPS 121.3 120.7 174.0 163.2 161.8 175.9
DPS 110.0 105.0 45.0 60.0 60.0 60.0
Book Value 173.5 148.0 214.8 250.7 285.2 360.5
Dupont Analysis
EBIT margin 16.2 11.4 10.7 9.0 9.7 12.3
Tax retention ratio 78.8 80.2 83.0 83.7 73.5 73.5
Asset turnover (x) 5.7 6.0 4.7 4.4 4.9 4.8
ROIC (Post-tax) 72.7 55.2 41.4 33.4 35.2 43.2
Cost of Debt (Post Tax) 2.3 36.8 - - - -
Leverage (x) (1.7) (1.8) (0.9) (0.8) (1.0) (0.8)
Operating ROE (44.5) 22.9 - - - -
Returns (%)
ROCE (Pre-tax) 66.8 52.7 49.2 38.9 41.8 50.1
Angel ROIC (Pre-tax) 102.5 70.9 51.2 40.7 49.0 60.7
ROE 61.4 62.5 65.6 45.6 39.1 45.1
Turnover ratios (x)
Asset Turnover (Gross Block) 6.0 4.7 4.0 3.7 3.5 3.4
Inventory / Sales (days) 9 9 9 10 10 10
Receivables (days) 3 2 3 7 7 6
Payables (days) 25 35 40 37 37 37
WC cycle (ex-cash) (days) (59) (83) (61) (40) (41) (40)
Solvency ratios (x)
Net debt to equity (1.7) (1.8) (0.9) (0.8) (1.0) (0.8)
Net debt to EBITDA (2.1) (2.0) (1.1) (1.2) (1.5) (1.5)
Int. Coverage (EBIT / Int.) 1,225.2 145.7 118.4 179.9 193.5 245.6
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
13
Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com
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Disclosure of Interest Statement Hero MotoCorp
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Y/E March (` cr) 2QFY14 2QFY13 % chg (yoy) 1QFY14 % chg (qoq)
Net Sales 5,726 5,187 10.4 6,160 (7.0)
EBITDA 833 719 15.8 915 (9.0)
EBITDA margin (%) 14.5 13.9 68bp 14.9 (32)bp
Adj. PAT 481 441 9.3 549 (12.2)
Source: Company, Angel Research
Hero MotoCorp (HMCL) reported an in-line performance for 2QFY2014, led by a
strong sequential growth in net average realization (up 2.4%). The company
registered a healthy growth of ~7% in retail volumes in 1HFY2014 driven by a
~9% growth in rural sales. However, wholesale volumes remained flat in
1HFY2014. According to the Management, while the festival season sales for the
industry are expected to witness a flat growth, the company expects to post a
modest growth in festival sales which would lead to a low single digit volume
growth for HMCL in FY2014. The company expects margins to remain under
pressure in 2HFY2014 despite the price hike in October, on account of the
raw-material cost pressures and also due to the unfavorable currency movement.
The company also indicated that they expect savings to the tune of `60-`80cr in
2HFY2014 led by cost control initiatives. While we are not factoring any cost
savings currently, we would keenly watch the progress on this front. We maintain
our cautious stance on volume growth going ahead and expect HMCL to clock a
modest volume CAGR of ~5% over FY2013-15; however, profitability is set to
improve going ahead primarily driven by phasing out of royalty payments from
1QFY2015. We believe that the stock is trading at fair valuations currently and
offers limited upside from current levels. We maintain our Neutral rating.
2QFY2014 performance in line with estimates: The top-line recorded a decline of
7% qoq to `5,726cr, in line with our estimates of `5,688cr. The performance was
mainly impacted by the 9.2% qoq decline in volumes. The company continued with
its recent trend of losing market share in the motorcycle segment (down 170bp to
51.4% in 1HFY2014 as compared to 53.1% in FY2013) and gaining strength in the
scooter segment (up 150bp to 20.2% in 1HFY2014). The net average realization
however, grew strongly by 2.4% qoq driven by price hikes taken in 1QFY2014 and
also due to superior product-mix led by favorable model-mix and higher share of
spares revenue. EBITDA margins declined slightly by 32bp qoq to 14.5%, broadly
in line with our expectations of 14.8%. As a result, the operating profit and net profit
posted a decline of 9% and 12.2% qoq to `833cr and `481cr respectively.
Outlook and valuation: At `2,088, the stock is trading at 14.3x FY2015E earnings.
We maintain our Neutral rating on the stock.
Key financials (Standalone)
Y/E March (` cr) FY2012 FY2013 FY2014E FY2015E
Net Sales 23,579 23,768 25,059 28,156
% chg 21.6 0.8 5.4 12.4
Net Profit 2,378 2,118 2,091 2,906
% chg 18.4 (10.9) (1.3) 38.9
EBITDA margin (%) 15.3 13.8 14.2 14.5
Adj. EBITDA margin* (%) 11.9 10.4 10.9 13.7
EPS (`) 119.1 106.1 104.7 145.5
P/E (x) 17.5 19.7 19.9 14.3
P/BV (x) 9.7 8.3 7.3 5.8
RoE (%) 65.6 45.6 39.1 45.1
RoCE (%) 49.2 38.9 41.8 50.1
EV/Sales (x) 1.6 1.6 1.4 1.3
EV/EBITDA (x) 10.4 11.5 10.1 8.8
Source: Company, Angel Research; Note: * OPM adjusted for change in treatment of royalty
costs; CMP as of October 23, 2013
NEUTRAL
CMP `2,088
Target Price -
Investment Period -
Stock Info
Sector
Bloomberg Code HMCL@IN
Shareholding Pattern (%)
Promoters 39.9
MF / Banks / Indian Fls 10.4
FII / NRIs / OCBs 42.8
Indian Public / Others 6.9
Abs. (%) 3m 1yr 3yr
Sensex 2.3 11.0 3.0
Hero MotoCorp 17.0 16.2 12.5
20,768
6,178
HROM.BO
BSE Sensex
Nifty
Reuters Code
Face Value (`)
Automobile
Market Cap (` cr)
Beta
52 Week High / Low
41,691
0.7
2,128/1,434
35,125
2
Avg. Daily Volume
Net Debt (` cr) (4,070)
Yaresh Kothari
022-3935 7800 Ext: 6844
yareshb.kothari@angelbroking.com
Hero MotoCorp
Performance Highlights
2QFY2014 Result Update | Automobile
October 24, 2013
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
2
Exhibit 1: Quarterly financial performance (Standalone)
Y/E March (` cr) 2QFY14 2QFY13 % chg (yoy) 1QFY14 % chg (qoq) 1HFY14 1HFY13 % chg (yoy)
Net Sales 5,726 5,187 10.4 6,160 (7.0) 11,886 11,435 3.9
Consumption of RM 4,096 3,770 8.6 4,456 (8.1) 8,551 8,373 2.1
(% of Sales) 71.5 72.7 72.3 71.9 73.2
Staff Costs 229 192 19.2 222 3.4 450 397 13.5
(% of Sales) 4.0 3.7 3.6 3.8 3.5
Other Expenses 569 506 12.5 567 0.3 1,136 1,009 12.6
(% of Sales) 9.9 9.8 9.2 9.6 8.8
Total Expenditure 4,894 4,468 9.5 5,244 (6.7) 10,138 9,779 3.7
Operating Profit 833 719 15.8 915 (9.0) 1,748 1,656 5.5
OPM (%) 14.5 13.9 14.9 14.7 14.5
Interest 3 3 0.3 3 0.3 6 6 0.5
Depreciation 287 290 (0.9) 274 4.6 561 593 (5.3)
Other Income 115 99 16.2 112 2.9 228 204 11.8
PBT (excl. Extr. Items) 658 526 25.1 750 (12.2) 1,408 1,261 11.7
Extr. Income/(Expense) - - - - - -
PBT (incl. Extr. Items) 658 526 25.1 750 (12.2) 1,408 1,261 11.7
(% of Sales) 11.5 10.1 12.2 11.8 11.0
Provision for Taxation 177 85 106.9 202 (12.2) 378 205 84.7
(% of PBT) 26.9 16.3 26.9 26.9 16.3
Reported PAT 481 441 9.3 549 (12.2) 1,030 1,056 (2.5)
Adj PAT 481 441 9.3 549 (12.2) 1,030 1,056 (2.5)
Adj. PATM 8.4 8.5 8.9 8.7 9.2
Equity capital (cr) 39.9 39.9 39.9 39.9 39.9
Adjusted EPS (`) 24.1 22.1 9.3 27.5 (12.2) 51.6 52.9 (2.5)
Source: Company, Angel Research
Exhibit 2: 2QFY2014 ¡V Actual vs Angel estimates
Y/E March (` cr) Actual Estimates Variation (%)
Net Sales 5,726 5,688 0.7
EBITDA 833 842 (1.1)
EBITDA margin (%) 14.5 14.8 (26)bp
Adj. PAT 481 488 (1.3)
Source: Company, Angel Research
Exhibit 3: Quarterly volume performance
(units) 2QFY14 2QFY13 % chg (yoy) 1QFY14 % chg (qoq) 1HFY14 1HFY13 % chg (yoy)
Total two-wheelers 1,416,211 1,332,805 6.3 1,559,282 (9.2) 2,975,493 2,973,095 0.1
Domestic 1,383,127 1,298,624 6.5 1,527,980 (9.5) 2,911,107 2,894,249 0.6
Exports 33,084 34,181 (3.2) 31,302 5.7 64,386 78,846 (18.3)
Motorcycles 1,243,962 1,201,143 3.6 1,393,686 (10.7) 2,637,648 2,722,097 (3.1)
Domestic 1,212,672 1,170,409 3.6 1,364,546 (11.1) 2,577,218 2,657,063 (3.0)
Exports 31,290 30,734 1.8 29,140 7.4 60,430 65,034 (7.1)
Scooters 172,249 131,662 30.8 165,596 4.0 337,845 250,998 34.6
Domestic 170,455 128,215 32.9 163,434 4.3 333,889 237,186 40.8
Exports 1,794 3,447 (48.0) 2,162 (17.0) 3,956 13,812 (71.4)
Source: Company, Angel Research
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
3
Top-line driven by strong growth in net average realization: For 2QFY2014, the
top-line recorded a decline of 7% qoq to `5,726cr which is in line with our
estimate of `5,688cr. The top-line performance was impacted due to a 9.2% qoq
decline in volumes led by slowdown in demand and competition from Honda
Motors and Scooters India (HMSI). While motorcycle sales declined by 11% qoq;
scooters sustained their strong sales momentum and witnessed a sequential growth
of 4% during the quarter. The company continued with its recent trend of losing
market share in the motorcycle segment (down 170bp to 51.4% in 1HFY2014 as
compared to 53.1% in FY2013) and gaining strength in the scooter segment (up
150bp to 20.2% in 1HFY2014). The net average realization for HMCL grew
strongly by 2.4% qoq driven by the full impact of the price hike which was carried
out in 1QFY2014 and also due to superior product-mix led by favorable modelmix
and higher share of spares revenue. HMCL took a price increase of `500-
`1,500/ motorcycle in April 2013 (effective from May 2013).
On a yoy basis, the top-line registered a healthy growth of 10.4% led by a 6.3%
and 4.1% yoy growth in volumes and net average realization respectively. The
volume growth appears healthy on a yoy basis due to the low base of last year
which was impacted on account of the inventory correction exercise undertaken by
the company. Led by a healthy growth in top-line and 68bp yoy expansion in
margins, the operating profit posted a strong growth of 15.8% yoy to `833cr.
However, the bottom-line grew only by 9.3% yoy on account of the higher tax rate
(26.9% as against our expectation of 16.3% in 2QFY2013) due to expiration of tax
benefits at the Haridwar plant
Exhibit 4: Volume growth remains under pressure
Source: Company, Angel Research
Exhibit 5: Strong growth in net average realization
Source: Company, Angel Research
1,544,315
1,589,276
1,572,027
1,640,290
1,332,805
1,573,135
1,527,351
1,559,282
1,416,211
20.1
11.3
8.1 7.2
(13.7)
(1.0)
(2.8)
(4.9)
6.3
(20.0)
(15.0)
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(units) Total volume yoy growth (RHS) (%)
37,456
37,650
37,929
37,846
38,649
39,102
39,758
39,293
40,223
6.8
5.0
3.1
2.7
3.2
3.9
4.8
3.8 4.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
36,000
36,500
37,000
37,500
38,000
38,500
39,000
39,500
40,000
40,500
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(`) Net average realisation/unit yoy growth (RHS) (%)
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
4
Exhibit 6: Net sales in-line with estimates
Source: Company, Angel Research
Exhibit 7: Domestic market share trend
Source: Company, SIAM, Angel Research
Operating performance broadly in line with estimates: On the operating front, the
EBITDA margin declined slightly by 32bp qoq to 14.5%, broadly in line with our
expectations of 14.8%. While a superior product-mix benefited EBITDA margins
leading to an 80bp decline in raw-material expense as a percentage of sales;
higher other expenditure arrested further expansion in margins. The adjusted
EBITDA margin contracted 74bp qoq to 10.8%, against our expectations of 11.3%,
as the performance was impacted due to the higher royalty outgo led by
unfavorable forex movement. Royalty payment for the quarter stood at `212cr as
against `202cr in 1QFY2014. As a result, operating profit and net profit posted a
decline of 9% and 12.2% qoq to `833cr and `481cr respectively.
For HMCL, indirect imports account for ~9.5% of net sales, half of which are Yen
denominated. Direct imports form ~5.5% of net sales, however, they are
denominated mostly in US$. The company compensates its vendors with a lag of
one quarter. Going ahead, the Management expects margin pressures in
2HFY2014 as the company will compensate its vendors for the unfavorable
currency movement and also due to increase in commodity prices (like steel,
copper and rubber). While the company has raised prices by ~1.5% in October, it
reckons that it will not be sufficient to completely offset the commodity and
currency cost pressures. However, it expects cost savings of `60cr-`80cr to accrue
in 2HFY2014 from the cost saving exercise which it is currently running.
Exhibit 8: EBITDA margin performance in-line...
Source: Company, Angel Research
Exhibit 9: ... leading to in-line growth in net profit
Source: Company, Angel Research
5,826
6,031
6,035
6,247
5,187
6,188
6,146
6,160
5,726
28.0
16.9
11.9
10.0
(11.0)
2.6
1.8
(1.4)
10.4
(15.0)
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(` cr) Net sales (LHS) yoy change (RHS) (%)
14.7 15.8 16.4 15.9 17.5
20.6 21.1 20.8 19.5
54.8 56.1 56.1 56.5
50.0 51.9 54.0 54.1
48.7
44.0 45.2 44.4 45.3
39.8 42.5 43.5 43.8
39.2
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2QFY12
3QFY12
4QFY2012
1QFY2013
2QFY2013
3QFY2013
4QFY2013
1QFY2014
2QFY2014
(%) Scooter Motor-cycle Total 2-wheeler
15.7 15.6 15.3 15.0 13.9 12.6 13.8 14.9 14.5
73.0 73.4 74.1 74.1 73.2 74.5 73.1 72.7 71.9
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(%) EBITDA margin Raw material cost/sales
604
613
604
615
441
488
574
549
481
10.4 10.2 10.0 9.9
8.5
7.9
9.3 8.9 8.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0
100
200
300
400
500
600
700
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
(` cr) Net profit (LHS) Net profit margin (RHS) (%)
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
5
Conference call ¡V Key highlights
ƒÞ The Management has indicated that retail sales for the company have grown
by ~7% in 1HFY2014 as against 0.1% growth witnessed in wholesale
volumes. Further, the company expects to exceed last year's festival season
(October-November) sales of 1.1m during the ongoing festival season. The
five year warranty scheme announced by the company has been received well
by the market and is enabling the company to clock good retail sales.
ƒÞ According to the Management, the rural sector continues to perform well and
accounts for ~47% of total sales. Retail sales grew by ~9% in rural markets
and ~5% in urban markets in 1HFY2014.
ƒÞ Imports constitute ~15% of net sales, of which direct imports (USD
denominated) form 5.5%, while indirect imports (50% Yen denominated) form
9.5%. HMCL compensates its vendors with a lag of one quarter. Around 70%
of the royalty payments (Yen denominated) due to Honda for FY2014 have
been hedged. The USD-INR leg of the transaction however, remains
unhedged.
ƒÞ HMCL currently pays royalty on Ignitor, Impulse, Passion XPro, and Maestro
and it does not exceed 5% of net sales. Royalty amortization for 2QFY2014
stood at `212cr (`860cr in FY2013).
ƒÞ HMCL has undertaken an extensive cost reduction initiative, the benefits of
which would be gradually visible over the next few years. The exercise includes
product re-engineering, alternate vendor sourcing, localization and savings on
logistics costs which is expected to result in savings of `1,500cr by FY2017.
The company expects savings of `60cr-`80cr in 2HFY2014.
ƒÞ The company expanded its reach in FY2013 by adding 500 touch points to
increase its tally to 5,500 touch points at the end of FY2013. The company
expects to add about 500 more touch points in FY2014.
ƒÞ Capital expenditure plans for the next three years stands at `2,600cr of which
`1,100cr would be incurred in FY2014. The new plant at Rajasthan with an
installed capacity of 0.75mn will be operational by 4QFY2014. HMCL expects
to increase the Scooter capacity by 15,000 units/ month from the current
levels of 60,000 units/ month.
ƒÞ The Management expects R&D expenses to be ~0.75% of net sales in
FY2014. And going ahead, R&D cost is expected to be ~1.25% of net sales.
ƒÞ Exports remained muted in 1HFY2014 due to the poor demand environment
across key markets of South Asia. Currently, the company has presence in ten
markets and plans to venture into eight new markets across Latin America and
Africa in 2HFY2014. The Management re-iterated its long term target of
clocking 1mn units of export sales by FY2017.
ƒÞ HMCL has increased prices by `500-`1,500/ vehicle (average hike of `1,000)
across all models in October to offset the increase in the commodity prices.
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
6
Investment arguments
ƒÞ Expect the demand scenario to remain moderate; however profitability to
improve gradually: We expect the demand environment to remain sluggish in
FY2014 as the consumer sentiments remain weak due to macro-economic
concerns and rising fuel and product prices. Nonetheless, better monsoons
and festival demand are expected to revive demand in FY2015. We expect the
company to register a ~5% volume CAGR over FY2013-15E. Additionally, the
profitability is set to improve sharply once the royalty costs are paid out
completely in 1QFY2015. Consequently, we expect the bottom-line to register
a strong CAGR of 17.1% over FY2013-15E.
ƒÞ Capacity expansion to meet future increase in demand:
HMCL has a current installed capacity of 7mn units across its three plants in
Haridwar, Dharuhera and Gurgaon. The company is setting up two new
plants in Rajasthan (0.75mn units) and Gujarat (1.5mn units) which will come
on stream in FY2014 and FY2015 respectively, thus taking the overall capacity
to 9.25mn units. As a result of capacity expansion, HMCL remains well-poised
to meet increasing demand going ahead.
Outlook and valuation
The company registered a healthy growth of ~7% in retail volumes in 1HFY2014
driven by a ~9% growth in rural sales. However, wholesale volumes remained flat
in 1HFY2014. According to the Management, while the festival season sales are
expected to witness a flat growth for the industry; the company expects to post a
marginal growth in festival sales which would lead to a low single digit volume
growth for HMCL in FY2014. The company expects margins to remain under
pressure in 2HFY2014 despite the price hike in October, on account of the rawmaterial
cost pressures and also due to the unfavorable currency movement. The
company also indicated that it expects savings to the tune of `60-`80cr in
2HFY2014 led by cost control initiatives. While we are not factoring any cost
savings currently, we would keenly watch the progress on this front. We maintain
our cautious stance on volume growth going ahead and expect HMCL to clock a
modest volume CAGR of ~5% over FY2013-15; however, profitability is set to
improve going ahead primarily driven by phasing out of royalty payments from
1QFY2015.
Exhibit 10: Change in estimates
Y/E March Earlier Estimates Revised Estimates % chg
FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E
Net Sales (` cr) 25,543 28,228 25,059 28,156 (1.9) (0.3)
OPM (%) 14.5 14.5 14.2 14.5 (27)bp (6)bp
EPS (`) 110.5 148.1 104.7 145.5 (5.2) (1.7)
Source: Company, Angel Research
At `2,088, the stock is trading at 14.3x FY2015E earnings. We believe that the
stock is trading at fair valuations currently and offers limited upside from current
levels. We therefore maintain our Neutral rating on HMCL.
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
7
Exhibit 11: Key assumptions - Volumes
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Total motorcycles 4,385,858 5,040,971 5,779,621 5,499,245 5,406,365 5,857,790
Domestic 4,293,991 4,926,390 5,628,513 5,362,730 5,273,401 5,661,998
< 125cc 4,055,304 4,589,003 5,303,622 5,165,222 5,087,744 5,454,061
>125cc 238,687 337,387 324,891 197,508 185,658 207,936
Exports 91,867 114,581 151,108 136,515 132,964 195,792
< 125cc 82,824 102,524 131,026 122,015 114,694 172,041
>125cc 9,043 12,057 20,082 14,500 18,270 23,751
Total scooters 214,272 361,473 455,584 574,336 735,558 845,205
Domestic 208,440 342,991 414,389 549,808 725,747 834,609
Exports 5,832 18,482 41,195 24,528 9,811 10,596
Total two-wheelers 4,600,130 5,402,444 6,235,205 6,073,581 6,141,923 6,702,994
Source: Company, Angel Research
Exhibit 12: Angel vs consensus forecast
Y/E March (` cr) Angel estimates Consensus Variation (%)
FY14E FY15E FY14E FY15E FY14E FY15E
Total op. income 25,059 28,156 25,262 28,099 (0.8) 0.2
Net profit 2,091 2,906 2,177 2,818 (3.9) 3.1
Source: Bloomberg, Angel Research
Exhibit 13: One-year forward P/E band
Source: Company, Angel Research
Exhibit 14: HMCL ¡V Premium/Discount to Sensex P/E
Source: Company, Angel Research
0
500
1,000
1,500
2,000
2,500
3,000
Apr-03
Mar-04
Mar-05
Feb-06
Jan-07
Jan-08
Dec-08
Dec-09
Nov-10
Nov-11
Oct-12
Oct-13
(`) CMP (`) 8x 12x 16x 20x
(80)
(60)
(40)
(20)
0
20
40
60
80
Apr-02
Mar-03
Mar-04
Feb-05
Feb-06
Jan-07
Jan-08
Dec-08
Dec-09
Nov-10
Nov-11
Oct-12
Oct-13
(%) Absolute premium Five-yr average premium
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
8
Exhibit 15: Automobile - Recommendation summary
Company Reco. CMP
(`)
Tgt. price
(`)
Upside
(%)
P/E (x) EV/EBITDA (x) RoE (%) FY13-15E EPS
FY14E FY15E FY14E FY15E FY14E FY15E CAGR (%)
Ashok Leyland Accumulate 17 18 6.5 97.2 11.2 7.2 4.6 1.1 9.1 56.7
Bajaj Auto Accumulate 2,097 2,345 11.8 16.9 14.3 11.6 9.5 40.2 37.4 18.0
Hero MotoCorp Neutral 2,088 - - 19.9 14.3 10.1 8.8 39.1 45.1 17.1
Maruti Suzuki Neutral 1,528 - - 16.3 14.6 7.4 6.1 14.3 14.0 14.9
Mahindra &
Mahindra Accumulate 867 996 14.8 15.0 13.2 8.0 6.7 21.3 20.7 9.5
Tata Motors Neutral 375 - - 9.7 8.6 4.3 3.9 28.6 24.9 15.3
TVS Motor Neutral 50 - - 10.0 8.3 3.9 2.9 18.1 18.9 17.1
Source: Company, Angel Research
Company background
Hero MotoCorp (HMCL) is a leading 2W manufacturer globally and the market
leader in the domestic motorcycle segment with a ~54% market share. HMCL has
three manufacturing facilities in India, located at Gurgaon, Dharuhera and
Haridwar, with a total capacity of ~7mn units/year as of FY2013.
Over 2008-13, HMCL recorded a strong volume CAGR of ~13%, backed by its
strong brands (Passion and Splendor) and a well-entrenched dealership
network, which has a good presence across rural areas (account for ~47% of total
volumes) as well.
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
9
Profit and loss statement (Standalone)
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Total operating income 15,861 19,398 23,579 23,768 25,059 28,156
% chg 28.1 22.3 21.6 0.8 5.4 12.4
Total expenditure 13,096 16,785 19,960 20,484 21,490 24,085
Net raw material costs 10,736 14,111 17,282 17,398 18,107 20,403
Other mfg costs 225 265 300 343 386 433
Employee expenses 438 619 736 821 945 1,048
Other 1,697 1,790 1,643 1,922 2,053 2,200
EBITDA 2,764 2,613 3,619 3,284 3,569 4,071
% chg 58.2 (5.5) 38.5 (9.2) 8.7 14.1
EBITDA margin 17.4 13.5 15.3 13.8 14.2 14.5
Adj. EBITDA margin* 17.4 12.1 11.9 10.4 10.9 13.7
Depreciation & amortization 191 402 1,097 1,142 1,139 606
EBIT 2,573 2,210 2,521 2,143 2,430 3,464
% chg 64.2 (14.1) 14.1 (15.0) 13.4 42.6
(% of total op. income) 16.2 11.4 10.7 9.0 9.7 12.3
Interest and other charges 2 15 21 12 13 14
Other income 261 290 365 398 428 503
Recurring PBT 2,832 2,485 2,865 2,529 2,845 3,953
% chg 59.0 (12.3) 15.3 (11.7) 12.5 38.9
Extraordinary income/(exp.) 0 (80) - - - -
PBT 2,832 2,405 2,865 2,529 2,845 3,953
Tax 600 477 487 411 754 1,048
(% of PBT) 21.2 19.8 17.0 16.3 26.5 26.5
PAT (reported) 2,232 1,928 2,378 2,118 2,091 2,906
ADJ. PAT 2,232 2,008 2,378 2,118 2,091 2,906
% chg 74.1 (10.0) 18.4 (10.9) (1.3) 38.9
(% of total op. income) 14.1 10.4 10.1 8.9 8.3 10.3
Basic EPS (`) 111.8 100.5 119.1 106.1 104.7 145.5
Adj. EPS (`) 111.8 100.5 119.1 106.1 104.7 145.5
% chg 74.1 (10.0) 18.4 (10.9) (1.3) 38.9
Note: Adj. EBITDA margins are calculated after accounting for royalty costs as a part of operating
expense instead of depreciation expense
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
10
Balance sheet statement (Standalone)
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
SOURCES OF FUNDS
Equity share capital 40 40 40 40 40 40
Reserves & surplus 3,425 2,916 4,250 4,966 5,656 7,160
Shareholders¡¦ Funds 3,465 2,956 4,290 5,006 5,696 7,200
Total loans 66 - - - - -
Deferred tax liability 153 247 208 132 132 132
Other long term liabilities 1,471 1,011 302 302 302
Long term provisions 36 38 30 30 30
Total Liabilities 3,684 4,710 5,547 5,471 6,160 7,664
APPLICATION OF FUNDS
Gross block 2,751 5,538 6,308 6,685 7,769 8,952
Less: Acc. depreciation 1,092 1,458 2,523 3,614 4,753 5,359
Net Block 1,659 4,080 3,786 3,071 3,016 3,593
Capital work-in-progress 48 50 39 62 179 195
Investments 3,926 5,129 3,964 3,624 4,189 5,212
Long term loans and advances 342 534 780 780 780
Other noncurrent assets 16 26 36 36 36
Current assets 2,883 1,109 1,541 2,068 2,854 2,901
Cash 1,907 72 77 181 1,301 743
Loans & advances 431 345 476 554 476 681
Other 545 692 988 1,334 1,077 1,477
Current liabilities 4,831 6,017 4,341 4,171 4,893 5,053
Net current assets (1,949) (4,908) (2,801) (2,102) (2,039) (2,152)
Misc. exp. not written off - - - - - -
Total Assets 3,684 4,710 5,547 5,471 6,160 7,664
Note: Cash includes cash with scheduled banks on dividend current accounts
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
11
Cash flow statement (Standalone)
Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Profit before tax 2,832 2,405 2,865 2,529 2,845 3,953
Depreciation 191 402 1,097 1,142 1,139 606
Change in working capital 484 185 (691) (787) 1,056 (445)
Direct taxes paid (575) (481) (583) (613) (754) (1,048)
Others (245) (257) (329) (380) - -
Cash Flow from Operations 2,687 2,254 2,360 1,890 4,287 3,067
(Inc.)/Dec. in fixed assets (210) (361) (503) (600) (1,200) (1,200)
(Inc.)/Dec. in investments (363) (999) 1,443 628 (565) (1,023)
Others 45 38 (847) (760) - -
Cash Flow from Investing (528) (1,322) 93 (733) (1,765) (2,223)
Issue of equity - - - - - -
Inc./(Dec.) in loans (12) - - - - -
Dividend paid (Incl. Tax) (1,997) (599) (2,097) (899) (1,402) (1,402)
Others (100) (356) (361) (158) - -
Cash Flow from Financing (2,109) (955) (2,458) (1,056) (1,402) (1,402)
Inc./(Dec.) in cash 49 (23) (6) 101 1,120 (557)
Opening Cash balances 13 63 39 34 181 1,301
Closing Cash balances 63 39 34 135 1,301 743
Note: Closing Cash balances excludes cash with scheduled banks on dividend current accounts
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
12
Key ratios
Y/E March FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Valuation Ratio (x)
P/E (on FDEPS) 18.7 20.8 17.5 19.7 19.9 14.3
P/CEPS 17.2 17.3 12.0 12.8 12.9 11.9
P/BV 12.0 14.1 9.7 8.3 7.3 5.8
Dividend yield (%) 5.3 5.0 2.2 2.9 2.9 2.9
EV/Sales 2.3 1.9 1.6 1.6 1.4 1.3
EV/EBITDA 13.0 14.0 10.4 11.5 10.1 8.8
EV / Total Assets 9.7 7.7 6.8 6.9 5.9 4.7
Per Share Data (`)
EPS (Basic) 111.8 100.5 119.1 106.1 104.7 145.5
EPS (fully diluted) 111.8 100.5 119.1 106.1 104.7 145.5
Cash EPS 121.3 120.7 174.0 163.2 161.8 175.9
DPS 110.0 105.0 45.0 60.0 60.0 60.0
Book Value 173.5 148.0 214.8 250.7 285.2 360.5
Dupont Analysis
EBIT margin 16.2 11.4 10.7 9.0 9.7 12.3
Tax retention ratio 78.8 80.2 83.0 83.7 73.5 73.5
Asset turnover (x) 5.7 6.0 4.7 4.4 4.9 4.8
ROIC (Post-tax) 72.7 55.2 41.4 33.4 35.2 43.2
Cost of Debt (Post Tax) 2.3 36.8 - - - -
Leverage (x) (1.7) (1.8) (0.9) (0.8) (1.0) (0.8)
Operating ROE (44.5) 22.9 - - - -
Returns (%)
ROCE (Pre-tax) 66.8 52.7 49.2 38.9 41.8 50.1
Angel ROIC (Pre-tax) 102.5 70.9 51.2 40.7 49.0 60.7
ROE 61.4 62.5 65.6 45.6 39.1 45.1
Turnover ratios (x)
Asset Turnover (Gross Block) 6.0 4.7 4.0 3.7 3.5 3.4
Inventory / Sales (days) 9 9 9 10 10 10
Receivables (days) 3 2 3 7 7 6
Payables (days) 25 35 40 37 37 37
WC cycle (ex-cash) (days) (59) (83) (61) (40) (41) (40)
Solvency ratios (x)
Net debt to equity (1.7) (1.8) (0.9) (0.8) (1.0) (0.8)
Net debt to EBITDA (2.1) (2.0) (1.1) (1.2) (1.5) (1.5)
Int. Coverage (EBIT / Int.) 1,225.2 145.7 118.4 179.9 193.5 245.6
Hero MotoCorp | 2QFY2014 Result Update
October 24, 2013
13
Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com
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Disclosure of Interest Statement Hero MotoCorp
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
