Hero’s QvFY18 results were broadly in line with our and consensus estimates. Revenue, EBITDA, PAT were -1%/-2%/-3% vs. our forecasts. EBITDA margin at 16.3%, -30bps y-o-y, DBe at 16.5% remained resilient despite pressures from raw material and GST related one-time costs.
Hero’s QvFY18 results were broadly in line with our and consensus estimates. Revenue, EBITDA, PAT were -1%/-2%/-3% vs. our forecasts. EBITDA margin at 16.3%, -30bps y-o-y, DBe at 16.5% remained resilient despite pressures from raw material and GST related one-time costs. We note that Hero’s profitability in Q1 has outperformed Bajaj, EBITDA margin at 17.2%, -330bps y-o-y due to better than expected performance in domestic market-share. We maintain our Hold rating on the stock with a target price of Rs 3,500. Stock trades at 20xFY19E PE. We are building in a robust volume growth for Hero over the next two years (+10% p.a.). However, we are cautious on the overall profitability of the 2W industry. For the mass-market two-wheeler companies, we expect margin headwinds from competitive intensity, regulatory costs and raw materials.
In addition, Hero’s FY19 profitability would get impacted by the end of excise duty benefits at its Haridwar plant, c35% of production. Revenue – Rs 79.7 billion, +8% y-o-y, -1% vs. DBe, EBITDA – Rs 13.0 billion, +5% y-o-y, -2% vs. DBe, PAT – Rs 9.1 billion, +3.5% y-o-y , -3% vs. Dbe.
FY18 volume outlook: Management has guided for high single-digit volume growth for the industry and they expect Hero to marginally outperform. Inventory: Management indicated that industry retail volumes were lower than wholesales in Q1 especially in the scooter segment. For Hero, wholesales and retails were balanced and hence inventory is stable. Pricing: Hero had taken a price increase of 0.5-1.5% in May-2017. Subsequently, prices were reduced on July 1 to pass on the benefits from GST. Management indicated that the pricing actions have been able to largely offset the increase in commodities.
EBITDA margins guidance: The excise duty benefits in Haridwar, c35% of production, will expire in March-2018. Management indicated that this could impact EBITDA margins by 100 bps. This will be partially offset by the ramp-up in Gujarat plant. Management maintained its long term. EBITDA margin guidance at 14-15%, vs. 16.3% in FY17. GST compensation for dealers: A provision of Rs 500m has been made for the compensation. This has been adjusted in the revenue line. Capex: Company has guided for a capex of Rs 25 billion over FY18 and FY19.
This will include investments in Gujarat, first phase of Andhra Pradesh plant as well as investments in R&D. Spare parts: Revenue growth of 5% in Q1FY18.