Hero MotoCorp’s (HMCL’s) Q3FY22 Ebitda margin at 12.2% was ahead of our (11.3%) and consensus estimates (11.6%). HMCL’s ASP rose 4% q-q to Rs 61k, led by increased sales of spare parts (~Rs 11.9 bn, +15% y-y) and price hikes. Raw material/sales at 71% was lower than our estimate of 72.5%, and led to the beat which in part was affected by increased other expense/sales at 10.3%.
Mgmt commentary: HMCL expects a recovery in FY23, backed by India’s likely continued economic recovery. Footfalls in rural areas have seen improvements, and inventory is currently at 7-8 weeks of forward sales (normal: 5-6 weeks). Margins: Spares, cost savings and premium mix are helping margins; commodities have stabilised. Price hike of Rs 500 per bike was made in Jan-22. EVs: Plans launches by Mar-22. The Gogoro JV will have exclusivity, but may decide later to service other players. HMCL is ensuring cost competitiveness and positive unit economics for a sustainable business model. HMCL would use existing dealer network for EVs, and will invest Rs 7 bn in Hero Fincorp for development and Rs 4.2 bn in Ather in FY22.
Our view: Given rising vehicle prices and likely further rise in fuel costs, we expect demand for mass-market bikes (in 2Ws) to continue facing pressure, unless the government changes its policy. Some cyclical recovery from a low base in FY23F is likely, but we maintain our view that sales of ICE 2W scooters (and possibly the ICE industry) likely peaked in FY19. Thus, EV execution is a potential key catalyst. HMCL has a multi-pronged approach when dealing with own EVs, its tie-up with Gogoro and investment in Ather. However, we believe it will not be easy for HMCL’s EVs to achieve similar market share as ICE (~37%), given that several new players have entered the market. Key downside risk: Aggressively-priced EV products may push customers away from its profitable ICE vehicles. Key upside risk: Sharp drop in commodity prices and cyclical recovery in rural demand on a low base.
Estimates: We cut our volume estimates by 9-10% (-13% / +11% /+8% in FY22/23/24F). We estimate FY22/23 /24F Ebitda margins at 11.9%/13.6%/ 13.9% (vs 12.3%/13.6%/13.6% previously). Overall, we lower FY22/23/24F EPS by 14%/9%/7%.
Valuation: TP based on 13x FY24F EPS of Rs 193 fairly valued; maintain Neutral
Our TP of Rs 2,854 is based on 13x P/E (unchanged), but we roll forward to March-24 (from Dec-23F). We add Rs 164 for Hero Fincorp (unlisted) and Rs 183 for the investment in Ather (unlisted). HMCL trades at ~12.3x FY24F EPS (adjusted for subs), which we deem as fair. We prefer MM (MM IN, Buy) and TTMT (TTMT IN, Buy) among OEs.