Hero MotoCorp’s (HMCL’s) Q1FY21 Ebitda margin at 9.4% was below estimates. ASP at Rs 53.6k was down 3.3% q-q, due to lower spares sales. RM/Sales at 72.5%, -210bp q-o-q, was impacted by higher costs and a weaker mix. Staff cost/sales was at 7.9% and Other Exp/Sales was at 10.2%.
Mgmt commentary: Pick-up in economic cycle, buoyant rural crop cycle and festive season should drive rural incomes. Tier-2-and-below demand came back faster. Exports are doing well at Rs 300k annualised run-rate and the company has been gaining share.
Our view: Demand recovery in the domestic 2W entry segment is likely to be slower in the near term due to sharp price increases and higher fuel prices. HMCL’s high exposure to domestic demand can lead to a slower recovery. While execution on exports seems to be improving, it is not meaningful enough (~6% of FY22F revenue). The company is working on multiple initiatives to address rising EV demand and, if successful, it could be a rerating catalyst for the stock, in our view.
We lower our volume estimates by 2-3% over FY22-23F. We cut FY22-23F Ebitda margin forecasts by 60/20bp to 12.6%/13.5%. Overall, we lower FY22F-23F EPS by -5%/-1%. We introduce FY24F estimates, with 7% volume growth and EPS of Rs 229.
Valuation: TP based on 14x average FY23F-24F EPS– We lower our target P/E multiple to 14x (15x earlier), at -1SD of the historical trading band, to factor in the subdued near-term growth outlook and rising threat from EV models. We roll forward our valuation to Sep-23F (March 23F earlier). We add Rs 113 for Hero Fincorp (unlisted). Current valuation at ~13x FY23F EPS (adjusted for subs) is in fair value zone, in our view. Hence, we maintain Neutral. We prefer MM (MM IN, Buy) in the sector.