Hero MotoCorp (HMCL) posted Q1FY19 Ebitda of Rs13.8 bn (up 6% y-o-y), which came in 5% below our estimate due to lower-than-expected spare part sales and higher raw material costs. Net realisation dipped Rs 970/vehicle q-o-q, but underlying realisation rose by Rs 400/vehicle. Management commentary suggests pricing pressure is not as acute as perceived from Bajaj’s latest results.
HMCL’s strategy continues to be to offer feature-rich products at higher prices rather than offering discounts to gain market share. However, we fear rising competitive intensity might limit market share gains and force HMCL’s hand. Besides, the expiry of tax benefits for the Haridwar plant would weigh on margins till Halol and Andhra Pradesh (AP) plants fully ramp up (unlikely before FY20). We are thus cutting the FY20e earnings by 9% to factor in lower margins and a higher tax rate. We are also lowering the PER multiple to 16x (from 18x) to factor in the price-war risk; maintain Hold with target price of `3,330 (previously `4,051).
Commodity costs disrupt the ride: Revenue, up 11% y-o-y to `88.1 bn, came in 4% below our estimate due to lower after-market revenue (down 20% q-o-q to `6 bn). GM dipped 240bps q-o-q to 30% on tepid revenue and higher raw material costs.
Outlook and valuations: fairly valued — We estimate volume/EPS CAGR of 20/9% over FY18–20e. We maintain ‘HOLD/SU’ with target price of `3,330, valuing the stock at 16x FY20e core EPS + cash/share at `450. While valuations are attractive, we prefer to wait for signs of pricing stability. At CMP, the stock is trading at 15.5x FY20e PER.