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VISITNOTE

HEROMOTOCORP
CenterofInnovation:Stepinrightdirection
IndiaEquityResearch|Automobiles

We visited Hero MotoCorps (HMCL) new Centre of Innovation and


Technology (CIT) at Jaipur and met the MD/CEO. Key takeaways of our
interaction are: 1) main objective of setting up CIT is to be No. 1 on all
aspects of business (and not just sales), bring in culture of strategic
innovationandhaveinternationalbenchmarking;2)integratedinhouse
R&Dfacilityisalsoanecessitygivenfastchangingcustomerpreferences
andcompetition;3)overlongterm,CITwillensureshorterdevelopment
cycles,improvedqualityandcontroloncosts.Inthenearterm,priorityis
timelydevelopmentandquality(5yearwarrantyschemeisbenchmark);
and4)effortswillbededicatedtopremiummotorcyclesandscootersin
initialphasegivenrisingdemandinthesecategories.Weraiseourtarget
FY18PE to 15x (from 14x) given the strategic approach to product
development.MaintainHOLDwithTPofINR2,810(INR2,585earlier).

BigleaptowardsstrengtheninginhouseR&Dcapabilities

Demandtrend:Tiltedtowardsscootersandpremiummotorcycles
HMCLestimatesscooterstooutstripmotorcyclesanditssharetosettleat~40%versus
~30%inFY16.Similarly,demandinpremiummotorcyclesisshiftingto200ccbikes.

Outlookandvaluations:Executionkey;maintainHOLD
WhileHMCLhasmanagedthetransition(postsplitwithHonda)well,wecontinueto
have doubts regarding its ability to participate in changing demand trends, as
enumeratedinournote,Premiumisation:Thetrumpcard,datedNovember26,2015.
WhileCITisastepintherightdirection,executionremainskeygivenrisingcompetitive
intensityinscootersandpremiummotorcycles.AtCMP,thestocktradesatFY18EPER
of15x.WemaintainHOLD/SUwithtargetpriceofINR2,810(15xFY18EEPS)

YeartoMarch
Revenues(INRmn)
Rev.growth(%)
EBITDA(INRmn)
AdjustedProfit(INRmn)
No.ofSharesoutstanding(mn)
AdjustedDilutedEPS(INR)
EPSgrowth(%)
DilutedP/E(x)

EV/EBITDA(x)
ROACE(%)

FY15
275,853
9.1
35,422
22,037
200
110.4
4.5
25.5
14.9
36.3

FY16E
281,650
2.1
44,033
31,370
200
157.1
42.4
17.9
11.6
43.1

FY17E
306,384
8.8
48,638
35,211
200
176.3
12.2
15.9
10.2
40.4

EdelweissResearchisalsoavailableonwww.edelresearch.com,
BloombergEDEL<GO>,ThomsonFirstCall,ReutersandFactset.

AbsoluteRating

HOLD

RatingRelativetoSector

Underperformer

RiskRatingRelativetoSector

High

SectorRelativetoMarket

Overweight

MARKETDATA(R:HROM.BO,B:HMCLIN)
CMP

:INR2,812

TargetPrice

:INR2,810

52weekrange(INR)

:2,859/2,251

Shareinissue(mn)

:199.7

Mcap(INRbn/USDmn)

:562/8,358

Avg.DailyVol.BSE/NSE(000) :497.8
SHAREHOLDINGPATTERN(%)

CIT,anintegratedR&Dcentrespreadover~250acres(3.5acresearlier),isabigleapby
HMCL. It has hired a team of over 500 engineers/domain experts with average team
ageof30years.WhilethetopR&Dteamof1215hasvastexperience,thecompany
hasgivenprioritytotalentandskillsoverexperienceforrestoftheteam.

Financials

EDELWEISS4DRATINGS

(INRMn)
FY18E
333,462
8.8
51,942
37,411
200
187.3
6.2
15.0
9.5
37.5

Current

Q2FY16 Q1FY16

Promoters*

34.6

35.0

34.6

MF's,FI's&BKs

17.4

13.8

13.4

FII's

39.1

38.2

38.5

Others

8.9

13.4

13.5

*Promoterspledgedshares
(%ofshareinissue)

NIL

PRICEPERFORMANCE(%)
Stock

Nifty EWAutoIndex

1month

10.0

3.7

6.2

3months

10.4

(2.6)

(5.3)

12months

7.4

(14.1)

(12.2)

ChiragShah
+912266233367
chirag.shah@edelweissfin.com

KarthikSubramaniam
+912266203156
karthik.subramaniam@edelweissfin.com

March10,2016
EdelweissSecuritiesLimited

Automobiles

CompanyDescription
HMC is the worlds largest twowheeler company (in volume terms). It has a production
capacity of 7.65 mn two wheelers at its three manufacturing facilities at Gurgaon and
DharuherainHaryana,oneatUttaranchalandthelatestoneatNeemranainGujarat.The
company offers motorcycles in all the three major segmentsHF Dawn and HF Deluxe in
entry;Splendour,Passion,andGlamourinexecutive;andHunk,Achiever,CBZandKarizma
inpremium.ItalsosellsPleasureandMaeastrointheungearedscootersegment.

InvestmentTheme
HMCLisyettodemonstrateitsstrengthinthepowerful/premiummotorcyclesegment.Also,
its dominance in executive segment is under threat on rising competitive intensity from
Honda(plansofexpandingintoruralareasandlaunchmoreproductsin110ccspace).Lack
ofpricingdisciplineisanotherdarkspotandwouldrestrictanysubstantialimprovementin
margins

KeyRisks
Lowerthananticipatedcompetitiveintensity
Abenigncompetitiveenviornmentandbetterthananticipatedsuccessofnewlaunchescan
poseupsiderisktoourestimates

Stronggrowthinexports
CompanyhasbeentargetingkeymarketsinAfrica/LatinAmericatodriveexportvolumes.
Reasonablesuccesscanbeakeydriverofvolumes

EdelweissSecuritiesLimited

HeroMotoCorp

FinancialStatements
KeyAssumptions

YeartoMarch

FY15

FY16

GDP(YoY%)
Inflation(Avg)

7.2
5.9

7.4
4.8

7.9
5.0

8.3
5.2

Reporate(exitrate)

7.5

6.8

6.0

6.0

61.1

65.0

67.5

67.0

Macro

USD/INR(Avg)
Sector
Motorcycledom.vol.(%YoY)

FY17E

FY18E

Incomestatement

YeartoMarch

FY15

FY16

Totalvolume(nos)
%Growthinvolume

275,853 281,650

306,384

333,462

Materialscosts

197,539 190,961

207,906

226,739

Manufacturingexpenses

2.5

3.0

Company

EBITDA

Revenueassumptions

Depreciation

Volumegrowth(%YoY)

EBIT

MotorcycleDomestic

4.6

(2.6)

6.1

9.8

MotorcycleExports

6.1

3.0

8.0

15.0

18

15

40,728

41,745

42,192

42,683

1.6

2.5

1.1

1.2

ReportedProfit

Splendor

2,517,639 2,517,639 2,618,345 2,801,629

AdjustedProfit

Passion

1,341,424 1,140,210 1,185,819 1,280,684

Shareso/s(mn)

CDDelux

1,081,761 1,073,107 1,126,762 1,205,636

AdjustedBasicEPS

Scootertotalvol
Avgrealisation(INR)
Avgrealisation(%YoY)
Top5models(bysales)

Glamour
CBZ
Costassumptions
RMcost/vehicle
Employeecost/vehicle
Averagesalary
Promotioncost(%revenue)

551,486

672,813

63,848

57,463

10.0

807,376 1,009,219
57,463

66,083

Totaloperatingexpenses

Add:Otherincome

14,741

16,337

240,431 237,617

257,745

281,520

35,422

44,033

48,638

51,942

7,220

4,394

5,001

5,406

28,203

39,639

43,637

46,536

4,927

4,042

5,379

5,534
111

111

ProfitBeforeTax

31,469

43,570

48,904

51,959

9,432

12,200

13,693

14,549

22,037

31,370

35,211

37,411

22,037

31,370

35,211

37,411

200

200

200

200

110.4

157.1

176.3

187.3

Less:ProvisionforTax

Dilutedshareso/s(mn)

200

200

200

200

AdjustedDilutedEPS

110.4

157.1

176.3

187.3

AdjustedCashEPS

146.5

179.1

201.4

214.4

29,808

29,164

29,500

29,071

Dividendpershare(DPS)

60.0

70.0

90.0

110.0

1,770

1,961

2,092

2,095

DividendPayoutRatio(%)

64.5

52.9

60.6

69.7

1,599,223 1,727,161 1,930,966 2,085,443

Commonsizemetrics

YeartoMarch

FY15

FY16

FY17E

FY18E

Operatingexpenses
Materialscosts

87.2
71.6

84.4
67.8

84.1
67.9

84.4
68.0

2.2

2.2
6,660

6.7

4.5

4.5

4.5

Taxrate(%)

30.0

28.0

28.0

28.0

Staffcosts

Dividendpayout(%)

64.5

52.9

60.6

69.7

SG&Aexpenses

9,136

16,500

13,500

9,000

Debtordays

15

18

16

15

EBITDAmargins

Inventorydays

14

15

14

13

NetProfitmargins

Payabledays

47

55

51

47

(19)

(22)

(21)

(18)

Cashconversioncycle

12,840

111

6,901

Capex(INRmn)

3,303

11,729

111

2.2

B/Sassumptions

2,963

(1,550)

6,725

Depreciationrate(%)

2,716

Add:Exceptionalitems

2.4

Financialassumptions

2,654

Less:InterestExpense

5,345

EBITDA/vehicle

FY18E

6,627,028 6,547,948 7,047,613 7,799,584


6.1
(1.2)
7.6
10.7

Incomefromoperations

Employeecosts
8.0

(INRmn)
FY17E

Depreciation
InterestExpense

4.3

4.6

4.8

4.9

10.3

11.0

10.5

10.5

2.6

1.6

1.6

1.6

12.8

15.6

15.9

15.6

8.0

11.1

11.5

11.2

Growthratios(%)

YeartoMarch

FY15

FY16

FY17E

FY18E

Revenues
EBITDA

9.1
0.1

2.1
24.3

8.8
10.5

8.8
6.8

PBT

9.8

38.5

12.2

6.2

AdjustedProfit

4.5

42.4

12.2

6.2

EPS

4.5

42.4

12.2

6.2

EdelweissSecuritiesLimited

Automobiles
Balancesheet

Ason31stMarch

FY15

FY16

FY17E

FY18E

Sharecapital
Reserves&Surplus

399
65,014

399
79,794

399
93,676

399
105,017

Operatingcashflow
Investingcashflow

Shareholders'funds

65,413

80,194

94,075

105,416

Financingcashflow

(22,305) (16,701)

(422)

(735)

(735)

(735)

Sourcesoffunds

64,991

79,458

93,340

104,681

Capex

GrossBlock
NetBlock

81,140
29,127

97,640 111,140
40,920 49,418

120,140
53,012

Dividendpaid

Def.TaxLiability(net)

(INRmn)

Cashflowmetrics

YeartoMarch

FY15

FY16

FY17E

FY18E

22,500 45,135
121 (24,458)

46,133
(23,121)

31,680
(7,466)

(21,441)

(26,180)

3,976

1,571

(1,967)

(9,136) (16,500)

(13,500)

(9,000)

(14,219) (16,590)

(21,330)

(26,070)

NetcashFlow

316

7,126

7,126

7,126

7,126

Profitabilityandefficiencyratios

TotalFixedAssets

36,252

48,045

56,544

60,138

YeartoMarch

FY15

FY16

FY17E

FY18E

CashandEquivalents

33,134

49,109

65,681

67,714

8,155

8,223

8,050

8,906

ROAE(%)
ROACE(%)

36.3
54.6

43.1
60.0

40.4
56.3

37.5
52.2

SundryDebtors

13,896

13,157

13,417

14,844

InventoryDays

14

15

14

13

Loans&Advances

11,845

12,005

11,427

12,642

DebtorsDays

15

18

16

15

1,200

1,200

1,200

1,200

PayableDays

47

55

51

47

CurrentAssets(excash)

35,096

34,585

34,095

37,593

CashConversionCycle

(19)

(22)

(21)

(18)

Tradepayable

28,419

29,295

28,952

29,309

CurrentRatio

OtherCurrentLiab

11,072

22,986

34,028

31,454

NetDebt/Equity

TotalCurrentLiab

39,490

52,281

62,980

60,763

InterestCoverageRatio

NetCurrAssetsexcash

(4,395) (17,696) (28,885)

(23,171)

Usesoffunds

64,991

79,458

93,340

104,681

BVPS(INR)

Freecashflow

327.6

401.6

471.1

527.9

Capitalworkinprogress

Inventories

OtherCurrentAssets

YeartoMarch

(INRmn)

FY15

FY16

FY17E

FY18E

22,037
7,220

31,370
4,394

35,211
5,001

37,411
5,406

78

80

80

80

Others

(21,791)

22,592

17,029

(16,931)

Less:ChangesinWC

(14,957)

13,301

11,188

Operatingcashflow

22,500

45,135

9,136

16,500

13,364

28,635

ReportedProfit
Add:Depreciation
Interest(NetofTax)

Less:Capex
FreeCashFlow

1.7

1.6

1.6

1.7

(0.5)

(0.6)

(0.7)

(0.6)

254.3

357.4

393.5

419.6

Operatingratios

YeartoMarch

FY15

FY16

FY17E

FY18E

TotalAssetTurnover
FixedAssetTurnover

4.6
10.7

3.9
8.0

3.5
6.8

3.4
6.5

4.5

3.9

3.5

3.3

EquityTurnover

Valuationparameters

YeartoMarch

FY15

FY16

FY17E

FY18E

(5,714)

Adj.DilutedEPS(INR)
YoYgrowth(%)

110.4
4.5

157.1
42.4

176.3
12.2

187.3
6.2

46,133

31,680

AdjustedCashEPS(INR)

146.5

179.1

201.4

214.4

13,500

9,000

25.5

17.9

16.0

15.0

32,633

22,680

P/B(x)

8.6

7.0

6.0

5.3

EV/Sales(x)

1.9

1.8

1.6

1.5

14.9
2.1

11.6
2.5

10.2
3.2

9.5
3.9

DilutedP/E(x)

EV/EBITDA(x)
DividendYield(%)

Peercomparisonvaluation

Marketcap

Name

DilutedP/E(X)

EV/EBITDA(X)

P/B(X)

(USDmn)

FY16E

FY17E

FY16E

FY17E

FY16E

FY17E

8,358

17.9

16.0

11.6

10.2

7.0

6.0

10,010

18.7

15.6

12.0

9.7

5.6

4.9

Median

18.3

15.8

11.8

10.0

6.3

5.4

AVERAGE

18.3

15.8

11.8

10.0

6.3

5.4

HeroMotoCorp
BajajAuto

Source:Edelweissresearch

EdelweissSecuritiesLimited

HeroMotoCorp

AdditionalData
DirectorsData
PradeepDinodia
VPMalik
Dr.AnandCBurman
AnaljitSingh
PaulEdgerley
ToshiyukiInuma
PawanMunjal

NonExecutiveIndependentDirectors
NonExecutiveIndependentDirectors
NonExecutiveIndependentDirectors
NonExecutiveIndependentDirectors
OtherNonExecutiveDirectors
OtherNonExecutiveDirectors
ExecutiveDirectors

Dr.PritamSingh
MDamodaran
RaviNath
SumanKantMunjal
TakashiNagai
BrijmohanLallMunjal
SunilKantMunjal

NonExecutiveIndependentDirectors
NonExecutiveIndependentDirectors
NonExecutiveIndependentDirectors
OtherNonExecutiveDirectors
OtherNonExecutiveDirectors
ExecutiveDirectors
ExecutiveDirectors

AuditorsAFFerguson&Co
*asperlastannualreport

HoldingTop10

Perc.Holding
8.67
6.26
6.24
4.93
2.78

Bahadurchandinvest
Munjalrenu
Munjalpawankant
Aberdeen
Latheinvestmentpte

Perc.Holding
6.98
6.26
6.21
2.86
2.78

Lifeinsurancecorp
Munjalsumankant
Munjalbrijmohanlal
Massachusettsmutual
Latheinvestment

*inlastoneyear

BulkDeals
Data

NoDataAvailable

Acquired/Seller

B/S

QtyTraded

Price

*inlastoneyear

InsiderTrades
ReportingData
16Apr2015

Acquired/Seller
LifeInsuranceCorporationofIndia

B/S
Buy

QtyTraded
508200.00

*inlastoneyear

EdelweissSecuritiesLimited

RATING&INTERPRETATION

Company
AmaraRajaBatteries
BajajAuto

Absolute

Relative

Relative

reco

reco

risk

BUY

None

None

HOLD

SU

Company

Absolute

Relative

Relative

reco

reco

Risk

AshokLeyland

REDUCE

SU

EicherMotors

BUY

SO

M
H

ExideIndustries

BUY

SP

HeroMotoCorp

HOLD

SU

Mahindra&MahindraLtd

BUY

SO

MarutiSuzukiIndiaLtd

HOLD

SO

MothersonSumiSystems

HOLD

SU

SuprajitEngineering

BUY

SO

BUY

SO

TataMotorsLtd

ABSOLUTERATING
Ratings

Expected absolute returns over 12 months

Buy

More than 15%

Hold

Between 15% and - 5%

Reduce

Less than -5%

RELATIVERETURNSRATING
Ratings

Criteria

Sector Outperformer (SO)

Stock return > 1.25 x Sector return

Sector Performer (SP)

Stock return > 0.75 x Sector return


Stock return < 1.25 x Sector return

Sector Underperformer (SU)

Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVERISKRATING
Ratings

Criteria

Low (L)

Bottom 1/3rd percentile in the sector

Medium (M)

Middle 1/3rd percentile in the sector

High (H)

Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTORRATING
Ratings

Criteria

Overweight (OW)

Sector return > 1.25 x Nifty return

Equalweight (EW)

Sector return > 0.75 x Nifty return

Underweight (UW)

Sector return < 0.75 x Nifty return

Sector return < 1.25 x Nifty return

EdelweissSecuritiesLimited

HeroMotoCorp

EdelweissSecuritiesLimited,EdelweissHouse,offC.S.T.Road,Kalina,Mumbai400098.
Board:(9122)40094400,Email:research@edelweissfin.com

NiravSheth
HeadResearch
nirav.sheth@edelweissfin.com

Coveragegroup(s)ofstocksbyprimaryanalyst(s):Automobiles
AshokLeyland,AmaraRajaBatteries,BajajAuto,EicherMotors,ExideIndustries,HeroMotoCorp,Mahindra&MahindraLtd,MarutiSuzukiIndiaLtd,
MothersonSumiSystems,SuprajitEngineering,TataMotorsLtd

RecentResearch

Date
Company
Title
Price(INR) Recos

1,268
Buy
01Mar16 Mahindra & Budget:Ruralfocustooffset

Mahindra highercess;
CompanyUpdate
12Feb16

Mahindra& Inlinequarter;
Mahindra ResultUpdate

1,165

Buy

12Feb16 AshokLeyland Disappointingquarter;Stable


outlook;
ResultUpdate

83

Reduce

DistributionofRatings/MarketCap
RatingInterpretation

EdelweissResearchCoverageUniverse

Buy

Hold

RatingDistribution*
*0stocksunderreview

151

58

Total

12

221

Between10bnand50bn

<10bn

67

145


Rating

Expectedto

Buy

appreciatemorethan15%overa12monthperiod

Hold

appreciateupto15%overa12monthperiod

Reduce

depreciatemorethan5%overa12monthperiod

Oneyearpricechart

3,000
2,800
2,600
2,400

Mar16

Feb16

Jan16

Nov15

Oct15

Sep15

Aug15

Jul15

Jun15

May15

Apr15

2,000

Dec15

2,200
Mar15

MarketCap(INR)

>50bn

(INR)

Reduce

HeroMotoCorp

EdelweissSecuritiesLimited

Automobiles
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