Company focus shifts to contingencies; likely to gain from possible rural recovery in H2FY21; ‘Buy’ retained.
Hero MotoCorp’s (HMCL’s) management hosted a conference call to update investors on business impact of COVID-19 outbreak and to allay fears on BS-VI transition. Key points from the concall: (i) BS-IV inventory liquidation largely to complete with stock (~12k units) in NCR region to be recalled; BS-VI dealer inventory is of one month (ii) HMCL to support dealers amidst COVID-19 lockdown with focus on easing liquidity concerns; (iii) current focus remains on maintaining health precautions and developing contingencies around possible supply chain issues; (iv) no liquidity concerns as company holds liquid funds worth ~Rs 40 bn.
We believe demand recovery could be led by rural markets, driven by possible improvement in cashflows and HMCL’s high rural exposure (>50% demand) tilts near term beneficiary scales in its favour. Maintain Buy.
Key highlights of the call
Before the nation-wide lockdown, business continuity taskforce was formed to monitor key business challenges and mitigate impact. Manufacturing at all the facilities in India, Bangladesh and Colombia halted currently due to COVID-19.
HMCL has taken steps to make payments to a large number of suppliers and MSMEs. HMCL is witnessing cash burn of ~Rs 2 bn month basis in the lockdown state. On outstanding BS-IV inventory, management indicated ~150k units of inventory prior to lockdown and was expected to liquidate all by 23rd March with retail sales growth clocking high double digits. Supreme Court order to extend registrations of BS-IV vehicles up till 30th Apr’20 has led to continued online sales of vehicles currently.
Now management expects to only recall ~12k units (NCR unsold BS-IV inventory) due to Supreme Court directive against BS-IV registrations in NCR region post 31st March. Company has already launched 95% of its portfolio on BS-VI platform. Benefits from lower commodity prices to accrue for crude, aluminium as well as precious metal in FY21 as production resumes.
Outlook and valuations
Post COVID-19 outbreak, revival could take longer for high-ticket discretionary purchases; we believe the need for safer/affordable non-public transport mobility could aid 2W’s demand revival in rural markets (better agricultural cashflow via better rabi/ kharif harvest). We believe HMCL will benefit from better rural recovery due to high motorcycle market share in key rural states; thus, volume growth momentum could improve from H2FY21. Meanwhile, the recent price correction provides a good entry opportunity to investors. We maintain our Buy rating at a target multiple of 14x FY22e EPS with a target price of Rs 2,501.