Kotak Institutional Equities
We downgrade Hero Motocorp to reduce (from add earlier) on fair valuations. We expect Hero Motocorp to gain market share in the domestic two-wheeler industry due to strong rural demand and preference for entry-level motorcycles. However, the stock price has rallied sharply over the past three months and we believe valuations are fair at this juncture. We revise fair value (FV) to Rs 2,600 (from Rs 2,500 earlier). We believe Hero Motocorp will outperform the domestic two-wheeler industry in the near term as the company has relatively stronger presence in rural India (~50% of the company’s domestic volumes is derived from rural India). The rural economy remains resilient owing to the strong cash-flow situation and improving kharif crop prospects due to timely arrival of the South West monsoon. The company has >50% market share in UP, Bihar and Rajasthan, which augurs well for the company. Despite increase in competitive intensity by Bajaj Auto, Hero Motocorp has maintained its market share in the motorcycle segment.
We reckon the company will gain market share in domestic economy and executive bike segment (higher rural mix). However, we believe the company will continue to face headwinds in the scooter and premium motorcycle segments. We would like to note that the company has <2% market share in the domestic premium motorcycle segment and <8% market in the domestic scooter segment. We have increased our FY2021-23E EPS estimates by 4-8% led by 2-6% increase in our volume estimates and 30-60 bps increase in our ebitda margin assumptions. Given strong pent-up demand in rural areas and gradual improvement in capacity utilisation, we expect the company’s total volumes to decline by ~15% y-o-y in FY2021E (from 20% y-o-y decline earlier).
We expect demand to recover in FY2022E with 16% y-o-y increase in volumes. We also expect operating margins to remain firm, led by further savings from LEAP programme — target to save 100 bps in FY2021E (50 bps cost savings already achieved in FY2020), softer RM prices and control on overhead costs. However, we downgrade HMCL to reduce (from add earlier) with a revised FV of Rs 2,600 (from Rs 2,500 earlier) on fair valuations. We believe the current valuation completely captures the tailwinds surrounding the domestic two-wheeler industry and possible outperformance of HMCL due to its strong rural franchise. We value the stock at 14X June 2022E core EPS + Rs 511 of cash/cash equivalent (includes investment of Rs 68 per share in Ather Energy and Hero Fincorp).
Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.