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Hero Motocorp rating – Reduce: A weak final quarter for company

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Profitability to be under pressure in near term; EPS for FY23/24e changed by 3/-3%; ‘Reduce’ retained

Hero Motocorp reported Ebitda of Rs 8.3 bn (-32% y-o-y), 7% below our estimates due to bundling up of other expenses, partly offset by better-than-expected gross margins because of a richer product mix and price hikes. We expect gradual recovery in domestic 2W volumes given steep increase in cost of ownership and RM pressures continuing to weigh on profitability. Also, the company’s inability to gain traction in scooter and premium motorcycle segments remains a concern. REDUCE.

Ebitda was 7% below our estimates
Hero Motocorp reported Q4FY22 Ebitda of Rs 8.3 bn, led by a sharp jump in other expenses, partly offset by better-than-expected gross margins. Revenues declined by 6% q-o-q led by (i) 8% q-o-q decline in volumes mainly on account of weak rural demand and (ii) 2% q-o-q increase in ASPs mainly due to price hikes and a richer product mix (higher mix of spares segment). Ebitda margin came in at 11.2% (-100 bps q-o-q), 90 bps above our estimates due to bundling up of other expenses in Q4FY22 mainly related to CSR activities and newer launches. Gross profit per vehicle was Rs 19,172 (+8% q-o-q) on account of (1) LEAP II savings, (2) price hikes and (3) a richer product mix (higher mix of spares segment). EBITDA per vehicle came in at Rs 6,961, down 6% on a q-o-q basis. Net profit was at Rs 6.3 bn, 1% below our estimates in Q4FY22.

Expect gradual recovery in domestic 2W segment over near term
We expect HMCL’s volumes to increase by 12% CAGR over FY2023-24E led by (1) reopening of colleges (students form 8-10% of the mix) and wedding season demand, (2) gradual recovery in replacement demand (replacement buyers form 20% of the mix) and (3) a lower base effect. Also, we expect near-term profitability to remain under pressure due to increase in the RM basket.

Cut our FY2024 EPS estimates by 3%
We have cut our FY2024 EPS estimates by 3% on lower Ebitda margin assumptions. However, we have increased our FY2023 EPS estimates by 3% given recent correction in aluminum and precious metal prices. The company has done well to maintain its profitability despite challenging demand conditions led by (1) cost-saving programmes, (2) improvement in mix (higher mix of spares segment) and (3) calibrated prices hikes. However, the company lost market share in the domestic scooter segment and it is not able to make inroads into high-growth segments, which is a cause for concern. Maintain Reduce with a revised FV of Rs 2,450 (from Rs 2,500 earlier).

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