Hero MotoCorp Rating “Neutral”; Third quarter results beat expectations

Performance on electric vehicles is key; EPS for FY22/23/24e down 14/9/7%; TP revised to Rs 2,854; valuations are fair; “Neutral” maintained

Hero MotoCorp’s (HMCL) Q3FY22 EBITDA margin of 12.2% was above our estimates (11.3%) and consensus (11.6%). HMCL’s ASP rose 4% qq to Rs 61k, driven by higher spare parts sales (~Rs 11.9bn, +15% yy) and price increases. Raw Materials/Sales at 71% was lower than our estimate of 72.5%, and drove the pace that was partially affected by the increase in Other Expenses/Sales at 10.3%.

Management commentary: HMCL expects a recovery in FY23, supported by the likely continuation of the economic recovery in India. Footfall in rural areas has improved and inventory is currently 7-8 weeks away from forward sales (normal: 5-6 weeks). Margins: spare parts, cost savings and premium mix contribute to margins; raw materials stabilized. A price hike of Rs 500 per bike was made on January 22. Electric Vehicles: Plans are launched by March 22. The Gogoro joint venture will have exclusivity, but may later decide to serve other players. HMCL ensures cost competitiveness and positive unit economics for a sustainable business model. HMCL would use the existing dealer network for electric vehicles and invest Rs 7 billion in Hero Fincorp for development and Rs 4.2 billion in Ather in FY22.

Our point of view: Given rising vehicle prices and the likely continuation of rising fuel costs, we expect demand for consumer bikes (in 2W) to continue to be pressured unless the government takes action. change its policy. Some cyclical recovery from a low base in FY23F is likely, but we maintain our view that ICE 2W scooter sales (and possibly the ICE industry) likely peaked in during FY19. So EV execution is a potential key enabler. HMCL has a multi-pronged approach when it comes to its own electric vehicles, its tie-up with Gogoro and its investment in Ather. However, we believe it will not be easy for HMCL’s EVs to achieve a similar market share to ICE’s (~37%), given that several new players have entered the market. Key downside risks: Aggressively priced EV products may drive customers away from its profitable ICE vehicles. Main upside risks: sharp decline in commodity prices and cyclical recovery of rural demand from a weak base.

Estimates: We have reduced our volume estimates by 9-10% (-13% / +11% / +8% in FY22/23/24F). We estimate FY22/23/24F Ebitda margins at 11.9%/13.6%/13.9% (vs. 12.3%/13.6%/13.6% previously). Overall, we are reducing FY22/23/24F EPS by 14%/9%/7%.

Evaluation: TP based on 13x FY24F EPS of Rs 193 at fair value; maintain neutral
Our TP of Rs 2,854 is based on 13x P/E (unchanged), but we are advancing to March 24 (from December 23). We add Rs 164 for Hero Fincorp (unlisted) and Rs 183 for the investment in Ather (unlisted). HMCL is trading at ~12.3x FY24F EPS (adjusted for subs), which we believe is fair. We prefer MM (MM IN, Buy) and TTMT (TTMT IN, Buy) among OEs.

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Wiley C. Thompson