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RESULT UPDATE MORNING INSIGHT October 25, 2012 Arun Agarwal arun.agarwal@kotak.com +91 22 6621 6143 Summary table (Rs mn) FY12 FY13E FY14E Sales 235,790 229,253 253,014 Growth (%) 21.5 (2.8) 10.4 EBITDA 36,188 34,142 37,859 EBITDA margin (%) 15.3 14.9 15.0 PBT 28,647 27,052 30,730 Net profit 23,781 22,751 23,816 EPS (Rs) 119.1 113.9 119.3 Growth (%) 23.4 (4.3) 4.7 CEPS (Rs) 132.7 129.3 136.7 BV (Rs/share) 214.8 237.3 298.1 Dividend / share (Rs) 45.0 50.0 50.0 ROE (%) 65.6 50.4 44.5 ROCE (%) 78.9 59.8 57.3 Net cash (debt) 35,263 44,749 57,583 NW Capital (Days) (14.7) (10.1) (11.3) P/E (x) 15.1 15.8 15.1 P/BV (x) 8.4 7.6 6.0 EV/Sales (x) 1.4 1.4 1.2 EV/EBITDA (x) 8.9 9.2 8.0 Source: Company, Kotak Securities - Private Client Research HERO MOTOCORP (HMC) PRICE: RS.1798 RECOMMENDATION: REDUCE TARGET PRICE: RS.1789 FY14E P/E: 15.1X Hero MotoCorp reported 2QFY13 numbers slightly ahead of our expectations. Revenues in 2QFY13 stood at Rs51,875, lower by 11% YoY due to 14% YoY dip in volumes. Decline in volumes impacted operating leverage leading to 110 bps dip in EBITDA margin. Net profit came in at Rs4,406mn, 27% lower than 2QFY12 net profit of Rs6,036mn. HMC's volumes in 2QFY13 were impacted on account of weak demand and inventory correction. While the company has indicated a good start to the festive season, we remain worried about demand sustainability post festive season as macro factors continue to remain weak. Further, HMC is also facing the heat of increase in competition. We continue with our cautious approach on the company over the medium term. We maintain our REDUCE rating with a revised price target of Rs1,789 based on FY14 estimates. Quarterly performance (Rsmn) 2QFY13 2QFY12 YoY (%) 1QFY13 QoQ (%) Revenues 51,875 58,262 (11.0) 62,473 (17.0) Total expenditure 44,683 49,091 (9.0) 53,104 (15.9) RM consumed 37,702 42,237 (10.7) 46,026 (18.1) Employee cost 1,922 1,794 7.1 2,046 (6.1) Other expenses 5,059 5,060 (0.0) 5,032 0.5 EBITDA 7,192 9,171 (21.6) 9,369 (23.2) EBITDA margin (%) 13.9 15.7 - 15.0 - Depreciation 2,895 2,785 4.0 3,035 (4.6) Interest cost 30 29 1.4 29 0.7 Other Income 993 888 11.9 1,044 (4.9) PBT 5,261 7,245 (27.4) 7,349 (28.4) PBT margins (%) 10.1 12.4 11.8 Tax 855 1,208 (29.3) 1,194 (28.4) Tax rate (%) 16.3 16.7 - 16.3 - Reported PAT 4,406 6,036 (27.0) 6,155 (28.4) PAT margins (%) 8.5 10.4 - 9.9 - Reported EPS (Rs) 22.1 30.2 (27.0) 30.8 (28.4) Volumes (nos) 1,332,805 1,544,315 (13.7) 1,642,292 (18.8) Net Realization (Rs) 38,649 37,456 3.2 37,799 2.2 RM cost per vehicle (Rs) 28,288 27,350 3.4 28,025 0.9 Source: Company Result Highlight � Revenues during 2QFY13 came in at Rs51,875mn, a decline of 11% over 2QFY12 revenues of Rs58,262mn.Volumes during the same period were down by 14% on account of slowdown and inventory correction. � Blended realization increased in 2QFY13 by 3.2% YoY and 2.2% QoQ and was higher than our expectation. Sequential jump in realization came on account of 1.Increased share of 125cc motorcycles 2.Increased share of scooter sales in the overall mix and 3.Spare parts revenue getting allocated over lower volume base. � In 1HFY13 gross revenues from spare parts segment stood at ~Rs8bn representing 15% YoY growth. � Due to lower 2W volumes, share of high margin spare part business increased during the quarter leading to 100bps improvement in gross margins. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
MORNING INSIGHT October 25, 2012 � Employee cost increased 7% YoY but declined 6% QoQ. Other expenses remained flat QoQ despite 19% lower volumes. � Depreciation charge declined 5% QoQ due to lower royalty amortization expense during the quarter. In 2QFY13 the company benefitted to the tune of Rs140mn in royalty amortization over 1QFY13 on account of currency fluctuation. � HMC reported net profit of Rs4,406mn which was higher than our expectation of Rs4,087mn. However YoY net profits were down by 27% and QoQ was lower by 28%. Conference Call Highlights � HMC expects the domestic 2W industry in FY13 to grow by ~5% and HMC's volumes to also grow in similar range. � During the 1st 15 days of October 2012 (Shradh period) the company was selling close to ~10,000 units per day which increased to 26,000 units per day during Navratra period, which is similar to volumes clocked during last year's Navrtra period. � Inventory level for the company is around 6 weeks (4weeks with dealer and 2weeks in transit). In absolute terms the inventory is close to 600,000 units. � Currently the company is not offering any discounts. HMC has tied up with HDFC Bank where the bank is offering loan at 6.99%. Company has stated that they are not incurring any cost on the scheme. � HMC took a small price increase of Rs300 across models effective 1st October 2012. � Company has incurred capex of Rs2.5bn in 1HFY13 and expects to incur Rs3- 3.5bn in 2HFY13. � Company currently derives 46% of its sales from the rural areas. Outlook � Given the current macro factors, 2W demand is expected to remain subdued in the near term. While volumes could pick up during the festive season, we remain concerned over demand post festive season.Overall we expect the demand for 2W's to largely remain under pressure in 2HFY13. � HMC's domestic volumes in FY13 YTD have de-grown by 3% as against domestic industry volume growth of 3%. Accordingly the company's market share has dropped by 260bps from 45.3% in 1HFY12 to 42.7% in 1HFY13. � Scooter segment continues to grow at a healthy pace but HMC derives only 7% of sales from the scooter segment and thereby the positive impact of strong scooter demand will be limited. � HMC's market share in the domestic motorcycle segment has slipped from 55.6% in 1HFY12 to 53.5% in 1HFY13 and that is major concern for the company.We note that the motorcycle demand growth is largely coming from >110cc to 125cc segment which is not favorable for HMC.Competition in the 100-125cc segment is on the rise for HMC and we expectthat will continue to put pressure on the market share, going ahead. � We expect export volumes for the company to grow in coming years (on lower base). However meaningful contribution to the overall volumes will happen over the longer run as volume ramp-up in different geographies will take some time. So in the near to medium term, we do not expect any major contribution from exports flowing to HMC. � HMC's EBITDA margin has been under pressure over the past few quarters and we expect the trend to continue over the near to medium term as we do not see any positive trigger. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
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