Hero Motocorp Rating ‘Hold’: Performance on expected lines; EPS down due to sluggish demand

By: |
Published: February 11, 2019 4:23:25 AM

FY20e EPS down 2% due to sluggish demand; TP cut to Rs 2,885; ‘Hold’ maintained

FY20e EPS down 2% due to sluggish demand; TP cut to Rs 2,885; ‘Hold’ maintained

Hero MotoCorp (HMCL) posted Q3FY19 Ebitda of Rs 11 billion (down 4.6% y-o-y), in line with estimates. Higher inventory (six–eight weeks) and sluggish demand are likely to keep near-term wholesales under check. Besides, down-trading is evident from sales of entry bikes racing ahead at 20% y-o-y. Hence, success of launches remains critical. While the recently launched Destini125 has gained a 14% market share in the 125cc scooter segment, Xtreme200R (premium motorcycle) received a modest response.

Also Read: Five important things for getting right life insurance cover: Read policy documents carefully

We are trimming FY20e Ebitda by 6% to factor in the muted demand environment. The EPS cut is only 2% due to higher treasury income. We are also lowering the target multiple to 15x June 2020 core EPS (from 16x), reflecting weaker FY18–21e EPS CAGR of 4%. Maintain Hold with a revised TP of Rs 2,885 (from `3,149).
Performance along expected lines: Revenue, up 7.5% y-o-y to Rs 78.7 bn, is 1% above our estimate. An adverse product mix and cost pressure dragged Ebitda by 4.6% y-o-y. Ebitda margin slid 180bps y-o-y and 112bps q-o-q to 14%. A sharp jump in other income drove PAT beat of 8.4% to Rs 7.7 bn (down 4.5% y-o-y). Going ahead, we expect margins to improve q-o-q driven by softer commodity prices and lower discounts (seasonality).

Outlook and valuation: Fairly valued— We estimate volume/EPS CAGR of 8/4% over FY18–21e. We maintain ‘HOLD/SU’, valuing the stock at 15x June 2020E core EPS + cash/share of Rs 446. While the valuation is attractive (dividend yield of ~4%), we prefer to wait for signs of its success in premium and scooter segments. The stock is trading at 13.9x FY20e PER.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.