Hero Q4 result was largely in line with Ebitda margin of 13.6%, marginally ahead of our estimate of 13.3% due to lower other expenses. Management expects flattish 1H as inventory correction continues in Q1 but better 2H helped by BS-6 pre-buying and revival in demand; margin is likely to remain rangebound. A third 125cc scooter is likely in FY20e. Our concerns on its mediumterm growth prospects keep us cautious despite sharp price correction.
Q4 results largely in line
Hero’s Q4 performance was largely in line with our estimate with Ebitda margin at 13.6% vs. our estimate of 13.3%, though still down 244bps y-o-y and 50bps q-o-q. The company also announced final dividend of `32/ share taking full year dividend to `87/share implying a pay-out of 51% and yield of 3.3%.
Q1 to remain weak
Hero expects Q1 growth to remain weak at least for wholesale as channel de-stocking is likely to continue. However, it is hopeful of 10% industry growth in 2H. Management expects margin to remain in a narrow range around current levels as cost pressures related to regulatory changes and weak economies of scale are offset by easing commodity prices and other cost levers.
(i) Sharp increase in receivables is due to higher credit to dealers which should normalise as inventory reduces;
(ii) Capex was `8 bn in FY19 but will increase to `15 bn in FY20e due to new plant at Andhra Pradesh and BS-6 related investments;
(iii) Maestro 125cc and Xpulse are planned to be launched in May; in addition a 3rd 125cc scooter is likely in FY20e.
Our concerns on Hero remain
We tweak our estimates slightly for FY20-21e; price target moves to `2,550 (previous `2,530) as we also roll forward.
Our cautious stance on Hero stays as we maintain that it faces medium-term growth & market share challenges due to weakness in high growth segments within 2-wheelers, viz. scooters, premium bikes and exports. This is unlikely to change easily given the low success rate of new launches historically in the 2w industry. Recent market share loss in
Maestro/scooters is a worry as initial traction in Destini 125 could fizzle out post initial 6-9 months, as is often the case with new launches.