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.
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.