HOLD

Results Update Hero Motocorp Target Price

07th Nov 2022 Auto 2,700

Weak Numbers with EBITDA Miss; Downgrade to HOLD (CMP as of 4th Nov, 2022)
Hero Motocorp Ltd. (HMCL) reported a weak set of numbers with a marginal beat on the revenue CMP (Rs) 2,588
front while EBITDA/PAT stood below our estimates. Revenue (2% beat) grew by 7.4%/8% Upside /Downside (%) 4.3%
YoY/QoQ, led by higher Average Sales Price (ASP), beat by 2%, which increased by 8%/5%
YoY/QoQ, while sales volumes were almost flat YoY but were up 2.7% QoQ. ASP beat was on High/Low (Rs) 2,939/2,148
account of a richer product mix and a higher share of XTEC variants in the entry-level segment. Market cap (Cr) 51,718
EBITDA (miss 4.7%) declined by 2.6% YoY but jumped up 10.4% QoQ. The miss against our
Avg. daily vol. (6m) Shrs. 6,86,353
estimate and YoY drop is led by higher RM and other expenses which stood up 7% and 24% YoY
respectively. Other expenses were higher due to higher marketing expenses related to XTEC No. of shares (Cr) 19
launches. The company’s EBITDA Margins declined to 11.4% from 12.6% in Q2FY22 and our
estimates of 12.2%. On a QoQ basis, EBITDA margins improved only slightly by 23bps. PAT (9% Shareholding (%)
miss) de-grew by 10% YoY and grew by 15% QoQ mainly due to the movement in other income
which declined by 41% YoY but was up 74% QoQ. Mar-22 Jun-22 Sep-22
Promoter 34.75 34.78 34.78
HMCL has been witnessing weak demand trends for the last 2-3 years due to the Covid-19 led
headwinds in 2Ws, especially in the entry-level motorcycles segment. However, the 2W industry FIIs 29.22 28.84 27.78
volumes are likely to bottom out after 3 consecutive years of volume decline. Moving forward, we MFs / UTI 8.71 9.74 10.98
expect a gradual pick-up in volumes as the rural economy recovers. Strong retail sales (20%
growth YoY in the festive season) indicate consumer confidence moving towards pre-Covid Banks / FIs 0.48 0.4 0.42
levels. HMCL is a good proxy for a rural market recovery with its stronghold being the Others 26.84 26.24 26.04
100cc Motorcycle segment. While the management points towards a pickup in the rural
demand momentum, it remains a key monitorable. Maintaining a strong share in the entry- Financial & Valuations
level segment, recovering the lost market share, especially in the 125cc segment and
building a product portfolio in the premium segment will be the key challenges in our view Y/E Mar (Rs Cr) FY23E FY24E FY25E
for the company. Net Sales 35,139 39,437 44,643
EBITDA 4,087 4,956 5,787
Key Concall Takeaways
Net Profit 2,877 3,563 4,182
 Demand Outlook: During the festive season, rural consumption picked up as total retail sales EPS (Rs) 144.0 178.3 209.4
in the festive period grew by 20% YoY. The trend towards premiumisation was clearly visible PER (x) 18.0 14.5 12.4
as XTEC variants across key models comprised 20% of overall retail sales. The management EV/EBITDA (x) 12.6 10.1 8.4
is optimistic about rural demand going forward with winter crop harvesting, marriage season in
P/BV (x) 3.1 2.8 2.5
Feb/Mar’23 and consumer confidence reviving with festive retails standing at ~95% of the pre-
Covid levels. The company intends to build a strong pipeline of premium products to gain ROE (%) 16.7 19.2 20.4
market share in this segment with new launches expected every year.
 Margins: The company’s RM cost in the quarter has come down QoQ. Some benefit from the Change in Estimates (%)
fall in the metals prices is expected to flow in Q3FY23 moving forward. However, the tailwinds Y/E Mar FY23E FY24E FY25E
from the lower commodity costs could get offset by currency depreciation. The RM cost as %
Sales -2.1% -2.0% NA
of sales has come down from 72.8% in Q1FY23 to 72% in Q2FY23. In this 82bps drop in RM
costs, commodities contributed 30-40bps while the rest of the fall came from other mix. The EBITDA -5.4% -12.0% NA
management’s longer-term margin guidance of 14%-16% stands intact. PAT -6.7% -12.6% NA

Valuation & Outlook ESG Disclosure Score

Hero is well placed to benefit from the recovery in the 2W demand from the low base. The Environmental Disclosure Score 64.51
expected pick-up in rural demand sets the platform for volume growth for Hero. Its partnership Social Disclosure Score 33.74
with Ather Energy, GogoroInc, and Harley Davidson will help it increase its presence in the EV Governance Disclosure Score 84.86
and bikes in the premium segment. However, the demand sustenance post the strong festive Total ESG Disclosure Score 61.07
season will be the key watch point. Also, an actual pick-up in retail sales and a successful EV Source: Bloomberg, Scale 0.1-100
launch in the upcoming quarters will be crucial for regaining the market share and growth **Note: This score measures the amount of ESG data a company reports
publicly and does not measure the company's performance on any data point.
trajectory for the company. We will need to monitor the EV growth given the competitive space All scores are based on 2021 disclosures
and with Vida being priced at a premium to the existing peers. While the softening commodity Relative performance
prices could support margins in the coming quarters, the management has cautioned on currency
175
headwinds which could offset the benefits of lower commodity prices. We keep our volume
growth guidance largely unchanged and build in 17%/10% YoY volume growth and downgrade
EBITDA margins to 11.6%/12.6% (from 12%/14% earlier) in FY23/24E. We downgrade our 125
rating from BUY to HOLD as the company braces through the execution of its EV launch
and product premiumisations. Moreover, a slower pick-up in rural demand may further 75
delay the volume recovery. Keeping these factors in view, we revise our TP to Rs
2,700/share (Rs 3,060 earlier). We value the stock at 14x core Sep’24 EPS (from 15x FY24E)
25
and Ather Energy & Hero FinCorp at 1x Sep'22 P/B, implying a 4% upside from the CMP. Jan-20 Sep-20 Jun-21 Feb-22 Nov-22
Key Financials (Standalone) Hero Motocorp BSE Sensex
Y/E Mar (Rs Crs) FY22 FY23E FY24E FY25E
Net Sales 29,245 35,139 39,437 44,643 Source: Capitaline, Axis Securities
EBITDA 3,379 4,087 4,956 5,787
Net Profit 2,468 2,877 3,563 4,182
EPS (Rs.) 123.7 144.0 178.3 209.4
RoE (%) 15.0 16.7 19.2 20.4 Aditya Welekar
RoCE (%) 14.8 16.4 18.9 20.1 Research Analyst
Email: aditya.welekar@axissecurities.in
PER (x) 18.6 18.0 14.5 12.4
P/BV (x) 2.9 3.1 2.8 2.5
Shridhar Kallani
EV/ EBITDA 13.5 12.6 10.1 8.4 Research Associate
Source: Company, Axis Research Email: shridhar.kallani@axissecurities.in

1
Q2FY23 Financial Highlights (Standalone)
Axis
Axis Sec
YE March (Rs Crs) Q2FY23 Sec Var Q1FY23 QoQ (%) Q2FY22 YoY (%)
Estimates
(%)
Total Volumes (Units ) 14,28,168 14,28,168 13,90,192 2.73% 14,38,434 -0.71%
Total Revenue 9,075 8,895 2.03% 8,393 8.14% 8,453 7.36%
Less:
Net Raw Material consumed 6,530 6,315 3.40% 6,107 6.92% 6,110 6.87%
Other Exp. 958 934 2.56% 806 18.82% 771 24.20%
Personnel 549 556 -1.25% 538 2.01% 505 8.62%
Total Expenditure 8,037 7,805 2.97% 7,452 7.85% 7,387 8.80%
EBIDTA 1,038 1,090 -4.70% 941 10.37% 1,066 -2.63%
Less: Depreciation 163 172 -4.75% 163 0.25% 164 -0.29%
EBIT 875 918 -4.70% 778 12.49% 902 -3.05%
Less: Interest 3 7 -53.99% 7 -52.58% 7 -49.39%

Other Income 92 123 -25.41% 53 73.71% 157 -41.34%

Profit Before Extraordinary items and Tax 964 1,034 -6.82% 824 16.98% 1,053 -8.47%
Extraordinary Expense/(Income) - - - -
Profit Before Tax 964 1,034 -6.82% 824 16.98% 1,053 -8.47%
Less: Total Tax 248 250 -0.95% 199 24.24% 258 -4.21%
Profit After Tax 716 784 -8.70% 625 14.66% 794 -9.86%
Adj. Net Profit 716 784 -8.70% 625 14.66% 794 -9.86%
Shares Outstanding (mn) 20 20 - 20 20
Reported EPS (Rs.) 35.8 39.3 -8.70% 31.3 14.66% 39.8 -9.86%
Adj. EPS (Rs.) 35.8 39.3 -8.70% 31.3 14.66% 39.8 -9.86%

Change Change Change

Cost & Margin Analysis
in bps in bps in bps
Net Raw Material/Net Sales (%) 72.0 71.0 95 72.8 (82) 72.3 (33)
Other Exp. /Net Sales (%) 10.6 10.5 5 9.6 95 9.1 143
Personnel/Net Sales (%) 6.0 6.3 (20) 6.4 (36) 6.0 7
EBIDTA Margin (%) 11.4 12.2 (81) 11.2 23 12.6 (117.4)
EBIT (%) 9.6 10.3 (68) 9.3 37 10.7 (104)
PBT Margin (%) 10.6 11.6 (101) 9.8 80 12.5 (184)
NPM (%) 7.9 8.8 (93) 7.4 45 9.4 (151)
Adj. NPM (%) 7.9 8.8 (93) 7.4 45 9.4 (151)
Effective Tax Rate (%) 25.7 24.2 152 24.2 150 24.5 114
Source: Company; Axis Securities

2
Other Key Concall Takeaways
1) EV: The company will be starting test rides soon. The EV launch will be expanded from initial three cities to 10 cities by Mar’23.
Vida offers many segment-first offerings. Management stated that the EV market is tripling up YoY, company’s Vida comes in the
premium segment which is 32% of the total addressable market. The 3 cities in which the EVs are launched take up about 26% of
the premium market and an additional 20% of the market will be addressed once the launch is extended to 10 more cities.
Management stated that they want to ensure the EV infra is set up before the launch.
2) ASP increase in Q2FY23: Company sold more volumes of Splendor and Passion than HF100 in the entry-level segment. Also,
XTEC versions of Splendor and Passion which come at a 5-7% premium to the core model have sold off well, which has got
reflected in higher ASP’s. Management also pointed out good demand for Destini XTEC and demand coming back for HF post rains
3) Impact of Price hike on demand going forward: Management stated that higher festive retails (up 20% for the company) indicate
the price absorption capacity of the consumers. Against CPI of 7%, hikes are usually at the 5-6% level. Moving forward, moderate
levels of price increases will continue but are likely to be below the CPI which will get absorbed into the economy. Rather than
taking the pricing down, the pricing action for the volume segment allows the company to recover margins in terms of % when
commodities fall and offer more headroom in terms of investments for providing value to consumers in terms of products and
features.
4) 125cc segment growth: Management foresees growth in the 125cc segments it sees growth from upgraders from100-110cc as
well as down graders from the 150-160cc segment. The Super Splendor has done well in the key markets, Glamour XTEC had
some shortages in the earlier part of the year and now they have been addressed. To gain market share in the 125cc segment
company plans more innovations in the segment going forward.
5) Drop in wholesales in Oct: Oct’22 wholesales are not entirely comparable YoY as last year the festival was in November so there
was stocking up till November last year. Also, the festive retail growth of 20% and resultant low inventory levels along with optimism
on rural demand momentum going forward will provide headroom for wholesales to stay strong in future months.
6) Ather Energy: The company’s effective stake in Ather Energy after accounting for dilution is 37% down from 39%. The company
reported a loss from other associates to the tune of Rs 24 Cr which is mainly because of Ather Energy (as EV is a cash burn
business for some time to come).
7) Financing: Hero Fincorp PAT has gone up from Rs 110Cr in Q1FY23 to Rs 160Cr in Q2FY23 (Hero’s share is 40%). GNPAs have
come down to 6.5% in Q2 and the target is to move it towards 5% over the next few quarters. AUM growth was close to double-
digits. The management informed that their financing as a % of retail sales is ~60% and Fincorp’s share in it is ~35%.
8) Inventory levels: For the post-festive season, inventory levels are at one of the lowest levels seen so far. The company normally
maintains 4-6 weeks of inventory and now it is at the lower range of that spectrum.
9) Spare Parts Revenue: The Company’s revenue from spare parts stood higher in Q2FY23 at Rs 1,244Cr vs Q1FY23 at Rs 1,061Cr
and Rs 1,141Cr in Q2FY22, at ~13.7% (12.6% in Q1FY23) of top line, the company aims to increase it to 15% in future. In H1FY23
the spare parts revenue registered a growth of 45% YoY at Rs 2,300Cr.

Change in Estimates (Rs Cr)

Revised Old % Change
FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Sales 35,139 39,437 44,643 35,905 40,232 NA -2.1% -2.0% NA
EBITDA 4,087 4,956 5,787 4,318 5,631 NA -5.4% -12.0% NA
PAT 2,877 3,563 4,182 3,083 4,076 NA -6.7% -12.6% NA
EPS 144.0 178.3 209.4 154.3 204.0 NA -6.7% -12.6% NA

Source: Axis Research

3
Financials (Standalone)
Profit & Loss (Rs Cr)
Y/E March (Rs Cr) FY22 FY23E FY24E FY25E
Net revenues 29,245 35,139 39,437 44,643
Operating expenses 25,866 31,053 34,481 38,857
EBIDTA 3,379 4,087 4,956 5,787
EBIDTA margin (%) 11.6 11.6 12.6 13.0
Other income 542 448 524 555
Interest 26 25 27 29
Depreciation 650 675 702 737
Profit Before Tax 3,245 3,835 4,751 5,575
Tax 777 959 1,188 1,394
Reported Net Profit 2,473 2,877 3,563 4,182
Net Margin (%) 8.5 8.2 9.0 9.4
Adjusted Net Profit 2,468 2,877 3,563 4,182
Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March (Rs Cr) FY22 FY23E FY24E FY25E
Equity capital 40 40 40 40
Reserves & surplus 15,743 16,721 18,387 20,670
Shareholders’ funds 15,783 16,761 18,427 20,710
Total Loans 0 0 0 0
Deferred tax liability 383 383 383 383
Total Liabilities and Equity 16,166 17,145 18,810 21,093
Gross block 11,069 11,802 12,302 12,827
Depreciation 5,262 5,937 6,639 7,375
Net block 5,806 5,865 5,663 5,452
Capital WIP 458 225 225 200
Investments 10,652 11,202 11,902 12,602
Inventory 1,123 1,444 1,621 1,835
Debtors 2,304 3,370 3,241 3,669
Cash & Bank Balance 175 246 1,439 3,174
Loans & Advances 1,195 1,252 1,381 1,537
Current Assets 4,797 6,311 7,682 10,215
Sundry Creditors 4,260 5,199 5,402 6,115
Other Current Liability 1,287 1,260 1,260 1,260
Current Liability& Provisions 5,548 6,459 6,663 7,376
Net current assets -751 -148 1,019 2,839
Total Assets 16,166 17,145 18,810 21,093
Source: Company, Axis Securities

4
Cash Flow (Rs Cr)
Y/E March (Rs Cr) FY22 FY23E FY24E FY25E
EBIT 2,729 3,412 4,254 5,050
Other Income 542 448 524 555
Depreciation & Amortization 650 675 702 737
Interest paid(-) -26 -25 -27 -29
Tax paid(-) -777 -959 -1,188 -1,394
Extra Ord Income 5 0 0 0
Operating Cash Flow 3,123 3,551 4,265 4,918
Change in Working Capital -653 -532 26 -85
Cash flow from Operations 2,469 3,019 4,291 4,833
Capex -489 -500 -500 -500
Strategic Investment 0 0 0 0
Non-Strategic Investment -153 -550 -700 -700
Cash flow from Investing -642 -1,050 -1,200 -1,200
Change in borrowing 0 0 0 0
Others -11 -0 -0 -0
Dividends paid(-) -1,898 -1,898 -1,898 -1,898
Cash flow from Financial Activities -1,909 -1,898 -1,898 -1,898
Change in Cash -82 71 1,193 1,735
Opening cash 257 175 246 1,439
Closing cash 175 246 1,439 3,174
Source: Company, Axis Securities

Ratio Analysis (%)

Y/E March (Rs Cr) FY22 FY23E FY24E FY25E
Revenue Growth -5.0 20.2 12.2 13.2
EBITDA Margin 11.6 11.6 12.6 13.0
Net Profit Margin 8.4 8.2 9.0 9.4
ROCE (%) 14.8 16.4 18.9 20.1
ROE (%) 15.0 16.7 19.2 20.4
EPS( Rs) 124 144 178 209
P/E (x) 18.6 18.0 14.5 12.4
P/ BV (x) 2.9 3.1 2.8 2.5
EV/ EBITDA (x) 13.5 12.6 10.1 8.4
Fixed Assets Turnover Ratio (x) 4.7 5.8 6.7 7.9
Debt / Equity (x) 0.0 0.0 0.0 0.0
EV/ Sales (x) 1.6 1.5 1.3 1.1
Source: Company, Axis Securities

5
 Hero Motocorp Price Chart and Recommendation History

(Rs)

Date Reco TP Research

28-Aug-20 BUY 3,450 Initiating Coverage
28-Sep-20 BUY 3,450 Auto Sector Update
30-Oct-20 BUY 3,450 Result Update
08-Feb-21 BUY 3,850 Result Update
10-May-21 BUY 3,300 Result Update
13-Aug-21 BUY 3,300 Result Update
17-Sep-21 BUY 3,400 AAA
24-Sep-21 BUY 3,400 Festival Unlock Picks
15-Nov-21 BUY 3,200 Result Update
14-Feb-22 BUY 3,150 Result Update
05-May-22 BUY 3,000 Result Update
16-Aug-22 BUY 3,060 Result Update
Source: Axis Securities

6
About the analyst

1. Research Analyst: Aditya Welekar is a PGDBM in Finance with 10 years of

experience in Equity Market/Research.

2. Research Associate: Shridhar Kallani is a Chartered Accountant and a graduate from

St. Xaviers College Kolkata.

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7
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

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NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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