The near-term outlook is challenging amid economic stress across sectors due to the lockdown, which has added pain to the already weak demand environment and anomalies due to the BS VI transition.
BS IV inventory liquidation plan in place: We attended Hero MotoCorp’s (HMCL) conference call on its strategy on handling inventory post the March 27 Supreme Court judgment and business continuity. Key takeaways: Unsold BS IV inventory, HMCL had ~150k as of the lockdown date. According to the SC order, vehicles sold till March 31 can be registered till April 30 (vs March 31 earlier). Of the unsold BS IV inventory as of March 31, only 10% can be sold beyond the deadline.
Dealers are now selling online based on the earlier inquiries or purchasing on their firm’s name to resell in the secondhand market later. The company is providing incentive of Rs 10,000 per motorcycle and Rs 15,000 per scooter to support dealers for online sales (ex-Delhi-NCR).
It will take back the Delhi-NCR stock of ~12,000 units as it has decided not to sell online as well. The company will ascertain how much can be exported and the remaining will be converted in parts. Business continuity plan (BCP): HMCL setup a BCP task force earlier in January 2020 (when Covid-19 was identified as a threat in China). Task force is meeting every day since February. Earlier, the focus was on supply chain continuity, which then shifted to lockdown preparation and now it is on restart plans. First priority is to safeguard health of all employees and business partners. Currently, it is not thinking of growth and profits, but health of its ecosystem is important including liquidity within its ecosystem.
All eight manufacturing facilities (including Bangladesh and Columbia) and two R&D centres (India and Germany) have been on work from home/shutdown much before the lockdown was announced. Salaries and vendor payments: It has paid all its contractual workers well in advance without retrenching any people. It is prioritising payment to its vendors, with full and advance payment to SME/MSME vendors. Vendor notice was precautionary to prioritise resources. It would pay in a graded manner to all vendors. It has earmarked Rs 100 crore for relief efforts, of which Rs 50 crore will be toward the PM CARES fund and the balance Rs 50 crore will be directly spent by the group. It has fixed monthly operating cost of Rs 200 crore. It has over Rs 4,000 crore in liquid funds to sustain expenses, payment obligations, etc. It is not going slow on new product development. Investment in R&D will continue (in premium motorcycle and scooter). It would prioritise capex as the business normalises.
Readiness when lockdown is lifted: HMCL is well prepared for restart as and when it happens, as dealers have around one month of BS6 inventory. Pent-up demand will be there and be realised at some point in time, which is difficult to predict as of now. Risk of downgrading not necessarily a threat to the executive segment but could be across segments. It is too early to comment on that.
Buyback of shares: The focus is to conserve liquidity and ensure business continuity from shareholder value creation perspective. However, promoters have increased some stake through the open market (2,76,000 shares equivalent to 0.14% of capital of the company). The promoter’s shareholding in the company has increased from 34.63% to 34.77%. The company is working on e-carburettor technology. Though FI systems have better efficiency, e-carburettor is cheaper. The company might introduce them in lower cc segment in future.
The near-term outlook is challenging amid economic stress across sectors due to the lockdown, which has added pain to the already weak demand environment and anomalies due to the BS VI transition. This is largely discounted in the price with the recent fall in the stock price. We believe that clarity on the demand scenario will emerge post the lockdown is lifted as there will be pent-up retail demand and refilling of inventory with BS VI models. Barring near-term volatility, we see limited downside risk from current levels (due to cheap valuations).
Also, valuations at 10.4x/9.8x FY21/22E EPS and ~5.6% dividend yield provide protection from any material downside. We have lowered our target multiple to factor in the risk of demand shock due to the impact from coronavirus. Maintain ‘neutral’ with a TP of ~`2,000 (~12x December 2021 EPS + ~`98/share of Hero FinCorp) due to no significant catalyst in the foreseeable future.