Hero’s Q3 revenue and earnings were in line with our (and consensus) estimate. The company also announced an interim dividend of Rs 55/share similar to last year.
Hero’s Q3 revenue and earnings were in line with our (and consensus) estimate. The company also announced an interim dividend of Rs 55/share similar to last year. Management expects continued growth momentum in FY19, helped by macro tailwinds. However, we remain concerned about continued under-performance in scooters, premium motorcycles and exports, the three high-growth opportunities. In-line quarter, interim dividend of Rs 55/share: Hero’s Q3 revenue and Ebitda margin were in line with our estimate — better gross margin was offset by higher other expenses which management attributed to higher selling & marketing expenses. Other income was lower, as has been the case with most companies this quarter, due to MTM losses on bond holdings. Hero also announced an interim dividend of Rs 55/share similar to last year.
Key takeaways from earnings call: (i) Management confirmed that while it has hiked prices of motorcycles in Jan-18, it has cut prices of scooters in select markets; (ii) Guided for continued momentum in FY19; growth has been particularly strong in North and East India, while it has been weak in Maharashtra, Karnataka and Tamil Nadu due to overall economic conditions and agrarian issues; (iii) Capex guidance was maintained at Rs 25 bn over FY18-19e.
Xtreme200R unlikely to change Hero’s prospects in premium: Hero recently launched a 200cc version of its Xtreme motorcycle in a bid to gain share in the premium segment, where it currently has single-digit market share. However, beyond a near-term uptick related to channel filling, we remain cautious on its prospects given Hero’s historical weakness in the segment as well as low success rate of new launches in the two-wheeler sector in India .
Medium-term growth concerns remain — maintain Hold: We believe near-term growth recovery is already factored into earnings expectations for Hero, given limited upside to margins from current cyclical highs. We remain concerned about medium-term growth prospects given continued under-performance in scooters, premium motorcycles and exports.
Valuation/Risks: Our DCF-based fair value of Rs 3,874 (prev. Rs 4,158) implies FY19/20 P/E of 19/18x, which we believe is fair given its weaker long-term growth prospects relative to peers. Key risks: (i) Stronger/weaker rural outlook; (ii) beat/miss in margins; (iii) better traction in scooters/premium motorcycles/ exports.