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Hero Moto Corp Result Updated

Hero Moto Corp Result Updated

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Published by Angel Broking

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Published by: Angel Broking on Jan 23, 2012
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01/23/2012

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Please refer to important disclosures at the end of this report
 1 
Y/E March (
`
cr) 3QFY12 3QFY11
% chg (yoy)
Angel est.
% diff
Net sales 6,031 5,162
16.9
6,057
(0.4)
 Adj. EBITDA 715 577
 24.0
753
(5.0)
 Adj. EBITDA margin (%) 11.9 11.2
68bp
12.4
(57)bp
Adjusted PAT 613 509
20.5
629
(2.5)
 Source: Company, Angel Research
Hero MotoCorp’s (HMCL) 3QFY2012 results were slightly lower than ourexpectations on the operating front as EBITDA margin contracted (sequentially)due to adverse product mix and higher royalty expenses, led by unfavorable forexmovement. Going ahead, we expect slight moderation in the domestic industry demand and increase in competitive intensity, thereby pressurizing HMCL’smarket share.
We believe the stock is fairly valued at current levels and maintainour Neutral rating on the stock.Adverse forex movement impacts overall performance:
HMCL registered in-linenet sales growth of 16.9% yoy (3.5% qoq) to
 ` 
6,031cr, driven by volume growthof 11.3% yoy (2.9% qoq) and a 5% yoy (0.5% qoq) improvement in average netrealization. Volume performance was driven by 10.6% (2.6% qoq) and 20.4% yoy (6.4% qoq) growth in motorcycle and scooter sales, respectively. Adjusted EBITDA margin (adjusted for royalty payments) came in lower than expected at 11.9%(down 30bp qoq) due to adverse product mix and higher royalty outgo, led by unfavorable forex movement. Other expenses to net sales declined by 50bp qoqdue to lower advertisement and rebranding expenses. Net profit, however,registered strong growth of 20.5% yoy (1.6% qoq) to
 ` 
613cr aided by lower taxrate and increased other income.
Outlook and valuation:
We broadly maintain our volume estimates for HMCL andmodel 10.4% volume growth in FY2013. We believe the benefits of lowerraw-material costs will be negated due to higher advertising and R&D expensesthat HMCL intends to incur going ahead. Further, due to increased competitiveactivity in the two-wheeler segment, HMCL’s market share will also remain underpressure. At
 ` 
1,951, HMCL’s stock is fairly valued at 14.4x FY2013E earnings(historical multiple – 15x). We maintain our Neutral rating on the stock.
 
Key financials
Y/E March (
`
cr) FY2010 FY2011 FY2012E FY2013ENet sales 15,758 19,245 23,276 26,345
% chg 27.9 22.1 20.9 13.2
Adj. profit 2,082 1,842 2,346 2,696
% chg 76.3 (11.5) 27.4 14.9
 Adj. OPM (%) 16.9 12.4 14.7* 14.6*
EPS (
`
) 104.2 92.2 117.5 135.0
P/E (x) 18.7 21.1 16.6 14.4P/BV (x) 11.2 13.2 8.9 6.4RoE (%) 57.3 57.4 64.1 51.4RoCE (%) 64.1 47.2 42.8 39.6EV/Sales (x) 2.0 1.7 1.3 1.1EV/EBITDA (x) 12.5 14.8 9.6 7.9
 Source: Company, Angel Research; Note: * OPM adjusted for change in treatment of royalty costs
 
NEUTRAL
CMP
 ` 
1,951Target Price -
Investment Period -
Stock InfoSectorBloomberg CodeHMCL@INShareholding Pattern (%)Promoters52.2MF / Banks / Indian Fls6.9FII / NRIs / OCBs33.9Indian Public / Others7.0 Abs. (%)3m1yr3yrSensex(2.6)(12.3)83.9Hero MotoCorp(3.9)10.1133.9Face Value (
 ` 
) AutomobileMarket Cap (
 ` 
cr)Beta52 Week High / Low38,9550.52,248/1,37866,8952 Avg. Daily Volume16,7395,049HROM.BOBSE SensexNifty Reuters Code
 
Yaresh Kothari
022-39357800 Ext: 6844yareshb.kothari@angelbroking.com
Hero MotoCorp
Performance Highlights
3QFY2012 Result Update | Automobile
January 20, 2012
 
 
Hero MotoCorp | 3QFY2012 Result Update
2
January 20, 2012
 
Exhibit 1:
 
Quarterly performance
Y/E March (
`
cr) 3QFY12 3QFY11
yoy chg (%)
2QFY12
qoq chg (%)
9MFY12 9MFY11
% chg
Net Sales 6,031 5,162
16.9
5,829
3.5
17,544 14,010
25.2
Consumption of RM 4,395 3,815
15.2
4,224
 4.0
12,863 10,184
 26.3(% of Sales) 72.9 73.9 72.5 73.3 72.7
Staff Costs 199 156
 27.7
179
11.1
543 451
 20.5(% of Sales) 3.3 3.0 3.1 3.1 3.2
Other Expenses 494 614
(19.5)
508
(2.6)
1,458 1,588
(8.2)(% of Sales) 8.2 11.9 8.7 8.3 11.3
Total Expenditure 5,088 4,585
11.0
4,911
3.6
14,865 12,223
21.6
Operating Profit 943 577
63.5
919
2.6
2,679 1,787
49.9
OPM 15.6 11.2 15.8 15.3 12.8
Interest (3.2) (5.2)
(39.1)
(4.5)
(29.2)
(10.9) (10.0)
9.1
Depreciation 299 56
 433.7
278
7.2
817 165
395.1
Other Income 76 62
 23.0
80
(4.4)
244 194
 26.1
PBT (excl. Extr. Items) 724 588
23.1
724
(0.1)
2,118 1,826
16.0
Extr. Income/(Expense) - (80) - - (80)
-
PBT (incl. Extr. Items) 724 508
42.5
724
(0.1)
2,118 1,746
21.3
(% of Sales) 12.0 9.8 12.4 12.1 12.5
Provision for Taxation 111 79
 40.2
121
(8.3)
343 320
7.4(% of PBT) 15.3 15.6 16.7 16.2 18.3
Reported PAT 613 429
42.9
604
1.6
1,775 1,426
24.4
Adjusted PAT 613 509
20.5
604
1.6
1,775 1,506
17.8
PATM 10.2 8.3 10.4 10.1 10.2
Equity capital (cr) 39.9 39.9 39.9 39.9 39.9
EPS (
`
) 30.7 25.5
20.5
30.2
1.6
88.9 75.4
17.8
 Source: Company, Angel Research
Exhibit 2:
 
Quarterly volume performance
Volume (units) 3QFY12 3QFY11
yoy chg (%)
2QFY12
qoq chg (%)
9MFY12 9MFY11
% chg
Total two-wheelers 1,589,276 1,428,030
11.3
1,544,315
2.9
4,663,168 3,948,013
18.1
Domestic 1,543,212 1,389,551
11.1
1,504,470
 2.6
4,538,844 3,844,614
18.1
Exports 46,064 38,479
19.7
39,845
15.6
124,324 103,399
 20.2
Motorcycles 1,474,815 1,332,941
10.6
1,436,759
2.6
4,335,367 3,695,779
17.3
Domestic 1,438,160 1,299,110
10.7
1,407,172
 2.2
4,238,702 3,604,308
17.6
Exports 36,655 33,831
8.3
29,587
 23.9
96,665 91,471
5.7
Scooters 114,461 95,089
20.4
107,556
6.4
327,801 252,234
30.0
Domestic 105,052 90,441
16.2
97,298
8.0
300,142 240,306
 24.9
Exports 9,409 4,648
102.4
10,258
(8.3)
27,659 11,928
131.9
 Source: Company, Angel Research
 
 
Hero MotoCorp | 3QFY2012 Result Update
3
January 20, 2012
 
Net sales up by healthy 16.9% yoy:
HMCL reported in-line net sales growth of16.9% yoy (3.5% qoq) to
 ` 
6,031cr, driven by volume growth of 11.3% yoy (2.9%qoq) and a 5% yoy (0.5% qoq) increase in average net realization. The company’svolume performance was driven by a 10.6% (2.6% qoq) and 20.4% yoy (6.4%qoq) increase in motorcycle and scooter sales, respectively. Net averagerealization, however, came in lower than expected at
 ` 
37,649/vehicle. Led by superior sales growth, HMCL increased its market share to 56.2% from 55% in thedomestic motor-cycle segment.
Exhibit 3:
 
Healthy volume growth of 11.3% yoy 
 Source: Company, Angel Research
Exhibit 4:
 
Net average realization remains flat qoq
 Source: Company, Angel Research
Exhibit 5:
 
In-line growth in net sales
 Source: Company, Angel Research
Exhibit 6:
 
Domestic market share trend
 Source: Company, Angel Research
Lower than expected adjusted EBITDA margin:
HMCL’s adjusted EBITDA margin(adjusted for royalty payments) came in lower than expected at 11.9% (down 30bpqoq) due to adverse product mix and higher royalty outgo, led by unfavorableforex movement. Royalty expense during 3QFY2012 stood at
 ` 
228cr (
 ` 
210cr in2QFY2012) against our expectation of
 ` 
200cr and normalized levels of
 ` 
177cr.Employee expenses as a percentage of sales also increased by 30bp yoy (20bpqoq) on account of wage increases taken in August 2011. Other expenses to netsales, however, declined by 50bp qoq due to lower advertisement and rebrandingexpenses, thereby supporting margins to some extent. As a result, adjustedoperating profit grew by 24% yoy (flat qoq) to
 ` 
715cr.
29.618.910.38.728.522.623.920.111.30.05.010.015.020.025.030.035.00200,000400,000600,000800,0001,000,0001,200,0001,400,0001,600,0001,800,000
     3     Q     F     Y     1     0     4     Q     F     Y     1     0     1     Q     F     Y     1     1     2     Q     F     Y     1     1     3     Q     F     Y     1     1     4     Q     F     Y     1     1     1     Q     F     Y     1     2     2     Q     F     Y     1     2     3     Q     F     Y     1     2
(%)(units)Total volumeyoy growth (RHS)2.40.91.52.74.46.76.76.85.00.01.02.03.04.05.06.07.08.032,00033,00034,00035,00036,00037,00038,000
     3     Q     F     Y     1     0     4     Q     F     Y     1     0     1     Q     F     Y     1     1     2     Q     F     Y     1     1     3     Q     F     Y     1     1     4     Q     F     Y     1     1     1     Q     F     Y     1     2     2     Q     F     Y     1     2     3     Q     F     Y     1     2
(%)(
 ` 
)Net average realisation/unityoy growth (RHS)32.820.412.412.134.930.832.328.116.90.05.010.015.020.025.030.035.040.001,0002,0003,0004,0005,0006,0007,000
     3     Q     F     Y     1     0     4     Q     F     Y     1     0     1     Q     F     Y     1     1     2     Q     F     Y     1     1     3     Q     F     Y     1     1     4     Q     F     Y     1     1     1     Q     F     Y     1     2     2     Q     F     Y     1     2     3     Q     F     Y     1     2
(%)(
 ` 
cr)Net sales (LHS)yoy change (RHS)12.814.615.315.816.718.018.415.015.957.354.853.953.055.655.856.555.056.247.044.844.143.445.445.746.844.245.3010203040506070
     3     Q     F     Y     1     0     4     Q     F     Y     1     0     1     Q     F     Y     1     1     2     Q     F     Y     1     1     3     Q     F     Y     1     1     4     Q     F     Y     1     1     1     Q     F     Y     1     2     2     Q     F     Y     1     2     3     Q     F     Y     1     2
(%)ScooterMotor-cycleTotal 2-wheeler

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