We expect Hero Motocorp to gain market share in both domestic motorcycle and scooter segments in FY16E led by new launches. Cost-saving measures, lower freight costs and benefits from the yen’s depreciation are likely to help boost EBITDA margins in the coming quarters. We maintain our buy rating with a revised target price of R3,350 , as we have cut our EPS by 8-14% in FY2016/17E on lower volume/EBITDA margin assumptions.
We expect domestic two-wheeler industry volume growth to moderate to 8.5% yoy in FY2016E led by slowdown in the rural economy. We expect the rural volume growth to remain muted in 1HFY16E. We believe recovery in the rural economy will be contingent on the monsoon season in FY2016E. We expect scooter volume growth to remain strong at 20% yoy in FY2016E. We expect Hero Motocorp to increase its market share in both motorcycle and scooter segments. Hero Motocorp has increased its market share by 100 bps in FY2015 and we expect a 150 bps increase in the market share in the motorcycle segment over FY2015-17E.
We have cut our earning estimates by 8-14% over FY2016/17E led by cut in our volume and EBITDA margin estimates. We maintain our buy rating on the stock, as we believe near-term volume growth concerns are factored in the stock price and as we expect volume growth to be aided by market share gains.
By Kotak Institutional Equities