16 October 2014

2QFY15 Results Update | Sector: Automobiles

Hero MotoCorp
BSE SENSEX
25,999
Bloomberg

S&P CNX
7,748
HMCL IN

Equity Shares (m)

199.7

CMP: INR2,792

2/11/10

Financials & Valuation (INR Million)

Y/E Mar 2015E 2016E 2017E
Net Sales 287,756 328,910 378,433
EBITDA

38,660 47,194 55,259

Adj PAT

28,866 37,057 43,906

Buy

Operationally in line, higher other income drives beat

M.Cap. (INR b) / (USD b) 557.5/9.0

3,080/1,9
52-Week Range (INR)
1, 6, 12 Rel. Per (%)

TP: INR2,969

Net sales grew 20.5% YoY to INR68.63b (est. INR69.3b) on volume growth of
19.5% YoY (-1.3% QoQ), while realizations grew 0.8% YoY (-0.6% QoQ). Scooter
sales were robust with 13% growth, while motorcycle grew 20%.
Adj. EBITDA margin at 12.9% (est. 13.2%) declined 40bp YoY (down 10bp QoQ).
RM cost savings of 60bp QoQ was offset by higher fixed cost.
PAT grew significantly by 58.6% YoY to INR7.6b (est. INR7.2b), led by expiry of
fixed royalty amortization and higher other income (69% YoY growth).

Other highlights: a) HMCL has lined up 10 new launches, including refreshes and
variants for the festive season, b) recently-launched Splendor iSmart, upgraded
EPS (INR) 144.5 185.6 219.9 Pleasure and Karizma R & ZMR variants have received encouraging response, c)
Gr. (%)
54.3
28.4
18.5 company expects strong retails during the current festive season, d) HMCL increased
BV/Sh.(INR 341.9 431.1 542.5 product prices by 0.5% effective October 2014 as industry growth recovers and
RoE (%)
46.5
48.0
45.2 competitive intensity moderates, e) appointed Mr Markus Braunsperger (ex BMW
RoCE (%)
53.4
57.3
53.4 executive) as Chief Technology Officer.
P/E (x)

20.0

15.6

13.2

P/BV (X)

8.5

6.7

5.3

Valuation and view: well positioned for upcyle

HMCL is embarking on a favorable product lifecycle, with two promising new
launches in FY15 (110cc Scooter, 250cc premium motorcycle). Expect 12.6%
volume CAGR over FY14-17E (v/s FY12-14 flat volumes).
We shall review the estimates post tomorrows earnings call at 11:00 am IST (dial
in details: +91-22-3960-0782/6746-8382).
Based on our current estimates, the stock trades at 19.3x/15x FY15E/16E EPS.
Maintain Buy with a target price of INR2,969 (14.8x FY16E).

Quarterly Performance

(INR Million)

Y/E March
Total Volumes ('000 nos)
Growth YoY (%)
Net Realization
Growth YoY (%)
Net Sales
Change (%)
RM Cost (% sales)
Staff Cost (% sales)
Other Exp (% sales)
EBITDA
EBITDA Margins (%)
Other Income
Interest
Depreciation
PBT
Tax
Effective Tax Rate (%)
Adj. PAT
Growth (%)
E: MOSL Es ti ma tes

1Q
1,559
-5.1
39,293
4.0
61,268
-1.3
72.7
3.6
9.3
8,825
14.4
1,449
30
2,744
7,502
2,016
26.9
5,486
-10.9

FY14
2Q
3Q
1,416
1,681
6.3
6.9
40,223
40,727
4.1
4.2
56,965
68,459
10.6
11.3
71.9
73.0
4.0
3.6
10.0
10.8
8,029
8,671
14.1
12.7
1,452
1,266
30
30
2,869
2,732
6,583
7,174
1,769
1,928
26.9
26.9
4,814
5,247
9.3
7.5

4Q
1,589
4.2
40,616
2.0
64,557
6.3
72.5
3.7
10.9
8,369
13.0
1,802
29
2,728
7,414
1,870
25.2
5,544
-3.4

1Q
1,715
10.0
40,810
3.9
69,994
14.2
73.0
3.8
10.2
9,098
13.0
1,502
30
2,915
7,655
2,027
26.5
5,628
2.6

FY15
2Q
1,693
19.5
40,552
0.8
68,635
20.5
72.4
4.2
10.6
8,830
12.9
2,454
49
750
10,484
2,851
27.2
7,634
58.6

Jinesh Gandhi (Jinesh@MotilalOswal.com); +91 22 3982 5416

Chirag Jain (Chirag.Jain@MotilalOswal.com); +91 22 3982 5418
Investors are advised to refer through disclosures made at the end of the Research Report.

FY14

3QE
1,813
7.9
41,260
1.3
74,821
9.3
72.5
3.8
10.0
10,226
13.7
1,700
35
1,000
10,891
2,886
26.5
8,005
52.6

FY15E
4QE
1,773
6,246
6,994
11.5
2.8
12.0
41,919 40,226 41,145
3.2
3.6
2.3
74,306 251,249 287,756
15.1
6.5
14.5
72.7
72.6
72.7
3.5
3.7
3.8
9.7
10.3
10.1
10,507 33,895 38,660
14.1
13.5
13.4
1,000
5,969
6,655
11
118
125
1,249 11,074
5,914
10,248 28,673 39,277
2,647
9,966 10,411
25.8
34.8
26.5
7,600 18,707 28,866
37.1
-11.7
54.3

Est
2QE
1,693
19.5
40,953
1.8
69,313
21.7
73.0
3.9
9.9
9,174
13.2
1,650
35
975
9,814
2,601
26.5
7,213
49.8

Var.
(%)
0.0
-1.0
-1.0
-60bp
30bp
70bp
-3.7
-40bp
48.7
41.1
-23.1
6.8
9.6
70bp
5.8
870bp

Hero MotoCorp

Volume growth of 19.5% driven both by scooters and motorcycles

Volumes grew by 19.5% YoY driven by 13.1% growth in scooter, while

motorcycle sales grew at much faster pace of 20.4% on account of festive
season.
After witnessing deferred of replacement cycle over last 2 years, it is now seeing
good replacement demand. This has been reflected in stronger growth of 21.1%
YoY in the less then 125cc motorcycle category.
Sequentially, HMCL lost significant market share by 290bp to 39.6% in 2QFY15 in
the domestic 2W segment, due to loss in market share in both Motorcycle and
Scooters.

Exhibit 1: Trend in Segment Mix ('000 units)

< 125cc
% of total
> 125cc
% of total
Total Motorcycles
% of total
Scooters
% of total
Total 2Ws
Of which exports
% of total

2QFY15 2QFY14
1,453
1,201
85.9
84.8
44
43
2.6
3.1
1,498
1,244
88.5
87.8
195
172
11.5
12.2
1,693
1,416
31
1.8

34
2.4

YoY % 1QFY15
21.1
1,465
85.4
2.1
58
3.4
20.4
1,523
88.8
13.1
192
11.2
19.5
1,715
(9)

30
1.8

FY14
5,378
86.1
160
2.6
5,538
88.7
708
11.3

FY13
5,287
87.1
212
3.5
5,499
90.5
574
9.5

YoY %
1.7

-1.3

6,246
148
2.4

6,074
161
2.7

2.8

3.9

QoQ %
-0.8
-23.8
-1.6
1.3

-24.6
0.7
23.2

(8)

Source: Company, MOSL

Exhibit 2: Trend in Market Share

Total Motorcycles
Scooters
Total 2W
Total 2W (Domestic)

2QFY15
43.5
15.7
34.7
39.6

2QFY14
41.4
19.2
34.8
39.2

Chg YoY
(BP)
200
-350
-20
40

1QFY15
45.7
18.5
37.6
42.5

Chg QoQ
(BP)
-230
-280
-300
-290

Source: Company, MOSL

EBITDA margins broadly stable sequentially

16 October 2014

Net sales grew 20.5% YoY to INR68.63b (est INR69.3b) on volume growth of
19.5% YoY (-1.3% QoQ), while realizations grew 0.8% YoY (-0.6% QoQ). Scooter
sales were robust with 13% growth, while motorcycle grew 20%.
Adj. EBITDA margins at 12.9% (est 13.2%) declined 40bp YoY (down 10bp QoQ).
RM cost savings of 60bp QoQ was offset by higher fixed cost.
PAT grew significantly by 58.6% YoY to INR7.6b (est INR7.2b), led by expiry of
fixed royalty and higher other income (69% YoY growth).

Hero MotoCorp
Exhibit 4: Volume growth recovers to 19.5% in 2QFY15
Volumes ('000 units)

FY14

FY15

FY12

FY13

FY14

Source: Company, MOSL

Exhibit 5: Margin rise QoQ on fixed royalty expiry

Exhibit 6: EBITDA/unit improves QoQ on higher margins

FY13

FY14

FY15

Source: Company, MOSL

4,032

4,364

3,832

3,384

3,466

4,039

4,102

4,170

4,308

3,936

8,830

7,088

6,256

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
FY12

4,132

12.9

5,217

EBITDA (INR/unit)

9.6 9.7 10.1

6,541

11.1 10.0
5,709

5,845

5,323

9.0 8.7 9.6

4,619

6,634

6,449

6,628

11.5 11.1 10.8 10.7

6,653

6,020

10.7

FY15

Source: Company, MOSL

EBITDA Margins (%)

6,805

EBITDA (INR m)

1,715

1,416

1,559

1,525

1,573

1,333

1,642

1,572

1,589

1,544

-13.7
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

3,936

FY13

1.9

-10.0

3,891

FY12

10.0

10.2
-1.0 -3.0

1,530

40,552

40,810

40,616

40,727

40,223

39,293

39,810

39,102

38,649

37,799

37,929

37,649

37,456

36,858

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

19.5

17.0

11.3 8.1
7.4

1,693

20.1

Growth (%)

1,681

23.9

1,589

Exhibit 3: Realization declines QoQ marginally

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
FY12

FY13

FY14

FY15

Source: Company, MOSL

Other highlights
Company has lined up 10 new product launches including refreshes and
variants for the upcoming festival season.
Recently launched Splendor iSmart, upgraded Pleasure and Karizma R & ZMR
variant have received encouraging response.
Expect strong retails during the current festive season.
HMCL increased product prices by 0.5% effective Oct-14 as industry growth
recovers and competitive intensity moderates.
Appointed Mr. Markus Braunsperger as Chief Technology Officer from BMW.
Valuation & view
HMCL is embarking on a favorable product life cycle, with two promising new
launches in FY15 (110cc Scooter, 250cc premium motorcycle).
Expect 12.6% volume CAGR over FY14-17E on industry recovery and new
launches (v/s FY12-14 flat volumes).
The stock currently trades at 19.3x/15.0x FY15E/16E EPS. Maintain Buy with a
TP of INR2,969 (14.8x FY16E).
We shall review our estimates after tomorrows earnings call at 11:00 AM IST
(Dial in details: +91-22-3960-0782/6746-8382).

16 October 2014

Hero MotoCorp

Hero Motocorp| Story in Charts: Robust 33% EPS CAGR over FY14-17E
Exhibit 1: Volumes to register a CAGR of 12.6% over FY1417E
Volumes ('000 units)

Exhibit 2: EBITDA margin to expand on royalty expiry, cost

reduction

Volume growth (%)

Adj. EBITDA Margin (%)

13.4

15.4
12.3

12.0

12.7

FY15E

8,907

FY14

7,854

2.8

6,994

6,235

6,074

6,246

11.0

FY16E

FY17E

-2.6

FY12

FY13

FY12

9.5

10.1

FY13

FY14

FY15E

PAT (INR m)

14.6

FY16E

FY17E

Source: Company, MOSL

Source: Company, MOSL

Exhibit 3: Strong earnings growth of 33% over FY14-17E

14.3

Exhibit 4: Robust dividend payout

Growth (%)

Dividend payout (%)

DPS (INR)

54.3
80

28.4
18.4

18.5

FY14

43,906

FY13

37,057

18,707
-11.7

-10.9

28,866

FY12

21,182

23,781

45

43

FY15E

FY16E

FY17E

FY12

60

65

70

65

80

56

50

47

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

Exhibit 5: Return ratios to improve on better profitability

RoCE (%)

90

Source: Company, MOSL

Exhibit 6: Net cash surplus to rise further

Net Debt (INR mn)

RoE (%)

(23,268)
43.6
65.6
49.9

FY12

45.6

FY13

(35,027)
52.0
35.3
FY14

64.2
46.5

67.8
48.0

63.3
45.2

(52,919)
(68,252)

FY15E

FY16E

FY17E
FY12

Source: Company, MOSL

16 October 2014

(41,818)

FY13

FY14

FY15E

FY16E

(93,267)
FY17E

Source: Company, MOSL

Hero MotoCorp

Hero MotoCorp: an investment profile

Company description

Recent Developments

Hero MotoCorp (HMCL), erstwhile JV between Honda

Corporation Japan and the Munjal family, is the leader
in domestic motorcycle market with ~44% share,
benefiting from a strong dealership network and high
penetration in the rural areas (~45% of sales) as well.
Post split from Honda, Hero MotoCorp is free to tap
global opportunity in 2W.

Valuation and view

Key investment arguments

Strong franchise of Splendor & Passion, and wide

distribution reach makes it best placed to tap strong
demand growth, especially in rural markets.
Post split with Honda, Hero MotoCorp is free to
explore global markets; it is targeting exports of 1m
units over by FY17 (of total 10m units).
The company has announced plans to invest
INR25.75b in the coming years for setting up of new
capacities (by 2m units to 9m units), a part
distribution centre (Rajasthan) and R&D centre.

Maintaining market share in increasing competitive

pressure to test pricing power and margins.
Ensure continuous flow of new/refreshed products.
Scaling-up in nascent export business, where it is
late entrant.

Comparative valuations
P/E (x)

FY15E

EPS Gr (%)

FY16E
FY15E
FY16E
FY15E

15.0
54.3
28.4
46.5

16.2
10.9
18.0
34.3

14.5
70.4
68.2
28.0

FY16E

48.0

34.3

36.1

FY15E
FY16E

13.1
10.4

12.7
10.4

14.6
9.0

EV/EBITDA (x)

Demand drivers in place, driven by increasing

penetration in rural markets and replacement
demand from urban markets.
However, increasing competitive intensity could put
pressure on market share and margins.
2W exports provide huge opportunity, with ~2x
India opportunity in the markets similar to India.

EPS: MOSL forecast v/s consensus (INR)

Hero
19.3

RoE (%)

Expect 12.6% volume CAGR over FY14-17E on

industry recovery and new launches (v/s FY12-14
flat volumes).
The stock currently trades at 19.3x/15.0x FY15E/16E
EPS. Maintain Buy with a TP of INR2,969 (14.8x
FY16E).

Sector View

Key investments risks

Recently launched Splendor iSmart, upgraded

Pleasure and Karizma R & ZMR variant have
received encouraging response.
Appointed Mr. Markus Braunsperger as Chief
Technology Officer from BMW.

Bajaj
19.1

TVS
24.3

Shareholding pattern (%)

FY15
FY16

MOSL
Forecast

Consensus
Forecast

Variation
(%)

144.5
185.6

138.8
171.1

4.1
8.4

Target

Upside

Reco.

Price (INR)
2,969

(%)
6.3

Buy

Target price and recommendation

Current
Price (INR)
2,792

Stock performance (1-year)

June-13

Mar-12

June-12

39.9

39.9

39.9

DII

8.4

7.7

8.8

FII

34.3

34.3

30.4

Others

17.3

18.1

20.9

Promoter

Hero MotoCorp

Sensex - Rebased

3,050

2,650

2,250

Note: FII Includes depository receipts

1,850
Oct-13

16 October 2014

Jan-14

Apr-14

Jul-14

Oct-14

Hero MotoCorp

Financials and valuation

Income statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT

(INR Million)
2014
2015E
2016E
2017E
251,249 287,756 328,910 378,433
6.5
14.5
14.3
15.1
33,895 38,660 47,194 55,259
13.5
13.4
14.3
14.6
11,074
5,914
3,979
4,298
22,821 32,747 43,215 50,961
118
125
125
125
5,969
6,655
7,940
9,489
0
0
0
0
28,673 39,277 51,030 60,325
9,966 10,411
13,973
16,419
34.8
26.5
27.4
27.2
18,707 28,866 37,057 43,906
18,707 28,866 37,057 43,906
-11.7
54.3
28.4
18.5
0
0
0
0
18,707 28,866 37,057 43,906

Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets

16 October 2014

(INR Million)
2014
399
55,599
55,999
245
0
56,243
69,089
46,657
22,433
8,541
40,888
28,052
6,696
9,206
1,175
10,976
44,730
28,787
15,943
-16,678
56,243

2015E
399
67,879
68,278
-1,766
0
66,512
88,631
52,570
36,060
1,000
40,888
41,048
7,668
10,543
10,266
12,570
53,543
36,089
17,455
-12,495
66,512

2016E
2017E
399
399
85,684 107,933
86,084 108,332
-1,766
-1,766
0
0
84,318 106,567
98,631 103,631
56,550
60,848
42,081 42,783
1,000
1,000
40,888
40,888
60,783 91,096
8,765
10,085
12,051
13,866
25,598
50,614
14,368
16,532
61,493 70,259
41,250
47,461
20,243
22,798
-710
20,837
84,318 106,567
E: MOSL Estimates

Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)

2014

2015E

2016E

2017E

93.7
149.1
280.4
65.0
81.2

144.5
174.2
341.9
70.0
57.5

185.6
205.5
431.1
80.0
51.9

219.9
241.4
542.5
90.0
49.3

30.9
19.4
10.3
2.1
15.8
2.2

20.0
16.6
8.5
1.8
13.6
2.4

15.6
14.1
6.7
1.6
10.8
2.8

13.2
12.0
5.3
1.3
8.8
3.1

35.3
41.2

46.5
53.4

48.0
57.3

45.2
53.4

4.5
13.4
9.7
38.5

4.7
13.4
9.7
38.4

4.4
13.4
9.7
38.9

4.0
13.4
9.7
39.0

0.0

0.0

0.0

0.0

2014
28,673
2,491
0
0
-9,966
105
21,421
-2,134
-4,649
0
-6,783
0
0
-118
-15,199
-15,317
-680
1,810
1,130

2015E
39,277
3,904
0
0
-10,411
2,898
35,793
-9,990
0
0
-9,990
0
0
-125
-16,587
-16,712
9,091
1,175
10,266

2016E
51,030
3,979
0
0
-13,973
3,547
44,708
-10,000
0
0
-10,000
0
0
-125
-19,251
-19,376
15,332
10,266
25,598

Cash flow statement

Y/E Mar
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance

(INR Million)
2017E
60,325
4,298
0
0
-16,419
3,469
51,798
-5,000
0
0
-5,000
0
0
-125
-21,657
-21,782
25,016
25,598
50,614

Hero MotoCorp

NOTES

16 October 2014

Disclosures
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Hero MotoCorp
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Motilal Oswal Securities Ltd

16 October 2014

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