Execution on premium, scooters and exports — key deliverables for upside.
Action: Maintain ‘neutral’; raise target price to Rs3,561, implying ~4% upside. Hero MotoCorp’s (HMCL’s) 3QFY21 ebitda margin at (14.5%) was ahead (Nom: 13.2%, cons: 13.2%). ASPs moved up by 2.6% QoQ (1% ahead), which was helped by higher spares sales. RM/sales at 70.5% -60bp q-q (Nom: 71.8%) surprised positively. We believe that cost pressures would largely reflect in Q4FY21.
Management commentary. Demand outlook is strong, thanks to a positive Budget. As schools / colleges open, demand will pick up. Shift in marriage dates from Q4FY21F to Q1FY22F may be impacting near-term sales. HMCL will launch 10 new models every year with focus on premium segment. Export focus will increase. EV launch may take place by early CY22. Ebitda margin guidance remains 14-16%, supported by cost saving (100bps+ in Q3FY21) and price hikes. Also, there is strong focus to increase spares sales (+29% in Q3FY21F). Inventory remains in targeted range of four-six weeks. Financing penetration was ~50% (40% of this from Hero Fincorp).
We largely maintain our volume growth forecasts for FY21/FY22/FY23F at -11% / +17% / +11%, respectively. We revise up the ASPs by 2% to factor in slightly better ASPs. Our ebitda margin forecasts over FY21-23F at 12.3%/13.4%/13.8% are also largely un-changed. Overall, we revise FY21F-23F EPS forecasts by +1-6%, factoring in the slightly lower depreciation.
Our view. The industry base for FY22F/23F is ~14%/4% below FY19 levels and we expect a recovery as the economy improves, although we expect it to be slow due to ~20% price increase in the past 12 months. Near-term concerns are weak industry retail trends perhaps impacted by shift in marriage season and margin pressures due to ~300bp cost increases. Execution on market share gains in scooters/ premium and exports are key upsides to watch. We do not expect any significant contribution from the HD deal over the next three years (2.5K sales in FY20), until new products are developed.