Hero Motocorp management says festive season started well, momentum to continue; know how brokerages reacted
Management said that the Demand has recovered to pre-COVID levels and witnessing resumption of supply chain and logistics.
Motilal Oswal highlights that Hero Motocorp Q2 FY21 revenue / EBITDA / PAT grew 24% / 17%/ 3.3%. Q2 FY21 realizations grew 15.3% YoY (-2.1% QoQ) to Rs 51.6 k (v/s estimate of Rs52.2 k). Realization improvement was driven by BS-VI related price hike. Net sales grew 24% YoY (215% QoQ) to Rs 93.7 bn (in line with estimate). Gross margin declined 340 bps YoY (60 bps QoQ) to 28.9% (v/s estimate of 30%), impacted by high commodity costs and lack of loading of contribution margins on BS-VI costs. This translated to EBITDA margin contraction of 80 bps YoY to 13.7% (v/s estimate of 14.8%) as higher employee cost was offset by lower other expenses. EBITDA grew 16.8% YoY to Rs 12.9 bn (v/s estimate of Rs 14 bn). Adjusted PAT grew just 3% YoY to 9.5 bn (v/s estimate of Rs 10.4 bn). Capex in FY20 was higher due to BS-VI transition related expenses.
Valuation and view: The stock trades at 18.5x/14.4x FY21/FY22E EPS
Management said that “Demand recovery to pre-COVID levels is credible and the resumption of supply chain and logistics, cost and cash management, along with judicious price increase has helped deliver profitability. Based on early estimates, the company expects the momentum to continue into the festive season, which has started well for us.
Macquarie maintains our Neutral rating on Hero with a target price of Rs 3040. They say despite expectation of an auto recovery ahead due to our medium-term growth & market share concerns for the company given its weakness in higher growth segments like scooters, premium motorcycles and exports.
Macquarie says Hero recently announced a partnership with Harley Davidson through which it will sell & service Harley Davidson motorcycles & accessories in India through a network of Harley Davidson dealers as well as its own network and develop and sell a range of premium motorcycles under the Harley Davidson brand name.
While Macquarie does not see a material earnings impact in the near term, in the medium-term it can help Hero set up a separate premium channel akin to Big Wing for Honda or Nexa for Maruti. Tepid start to festive season for 2-wheelers a near term overhang, festive retails will be key to Hero’s stock price in the near term. The company indicated “festive season has started well” without quantifying YoY trends but channel checks and commentary from Bajaj Auto & FADA suggest a tepid start to festive season so far for 2-wheelers relative to last year.
Jefferies maintained a buy rating on Hero Motocorp with a price target of Rs 3300. They say that key takeaway from Hero's Q2 shows net profit at Rs 9.5 bn was up 3% YoY but 6% below Jefferies estimate (although in-line with consensus). Q2 volumes grew 7% YoY while the top line rose 24% YoY. Q2 EBITDA at Rs 12.9 bn was up 17% YoY but a 6% miss, mainly led by lower-than expected gross margin. EBITDA margin at 13.7% was down a slight 80 bps YoY. Hero has said in the release that festive season has started well for the company and it expects the momentum to continue.
Morgan Stanley maintains an overweight rating on Hero Motocorp with a target price of Rs 3454. Hero reported revenue of Rs 93.7 bn,up 23.7% YoY. EBITDA witnessed growth of 16.8% YoY to Rs 12.9 bn,higher than estimate of Rs 11.5 bn and Bloomberg consensus of Rs 12 bn. PAT came in at Rs 9.5 bn +15.8% YoY. Hero increased its stake in Ather Energy to 34.58% with an investment of U.S. $11 mn during the quarter.
30% bull case: GST tax cut of 10% leads to 25% volume growth in FY22.
20% bear case: Demand recovery is modest in FY22.
50% base case: One quarter COVID-19-led demand hit.. Recent market share gains and new models support valuations.
Risks to Upside:
Goods and Services tax rate for two-wheelers is cut and the Company may announce a share buy back.
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Risks to Downside:
Company ends up partly absorbing costs related to emission regime change and therefore margins contract sharply. Hero Motocorp loses market share in motorcycles.
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