Given demand weakness, FY23e EPS down 8%; ‘Hold’ retained as positives are priced in
Hero MotoCorp (HMCL) posted Q2FY22 EBITDA of Rs 10.7 bn, 10% above our estimate due to higher spares’ contribution (13% of sales, up ~500bps QoQ on higher revenue base). With spares revenue normalising, volume ramp-up will be the key margin driver. HMCL would launch an EV in Mar-22, and plans to launch variants/upgrade at regular intervals. Inventory at 5-6 weeks appears on the higher side.
Given demand weakness, we are cutting FY23E EPS by 8%. Retain ‘Hold’ with a TP of Rs 3,019 (from Rs 3,096) as we roll over the valuation to Mar-23E. A rising share of exports and potential filling out of white spaces (premium bikes, scooters, EV) are the key triggers.
Spares contribution bounces back
HMCL’s revenue of Rs 84 bn came in 4% above estimate. Spares’ contribution was the key driver. As a result, spare contribution for H1FY22 has normalised to 11-12% range. EBITDA at 10.7 bn was 12% above estimate (as compared to an 18% miss in Q1) due to higher spares, price hike in Q1 and cost control. Festive demand has declined due to base effect as well as postponement of demand due to delayed monsoon. Demand outlook appears mixed due to higher impact of Covid/20-25% price increase over the last 2 years in the commuter segment.
Expansion beyond core: On right track
The firm’s efforts to expand its footprint in exports, premium bikes, scooters and EV augur well. The pact with Harley Davidson for entry into middleweight segment (>250cc) is another effort in this direction. Similarly, HMCL’s three-pronged strategy on EVs – in-house (launch in Mar-22), Ather and Gogoro – also shows its focus on the segment. However, execution of the strategy is key to its re-rating.
Outlook: Positives priced in
We continue to like the effort that HMCL is putting in to diversify its portfolio. At the current juncture, we believe risk-reward is balanced. Maintain ‘HOLD/SN’, valuing the stock at 18x Mar-23E core EPS plus cash/share of `524. The stock is trading at FY22/23E PE of 17.6x/15.7x.