Recommendations » India

Hero MotoCorp 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Hero MotoCorp (HMCL) posted disappointing results for 3QFY2013 as an adverse product-mix and sharp increase in ad spends led to a 17.4% and 20.4% yoy decline in operating and net profit respectively. We lower our earnings estimates for FY2013/14 by 10.5%/7.5% mainly due to lowering of our volume expectations (we now expect the company to register a 1% decline in volumes in FY2013 as against a growth of 1.9% earlier) and EBITDA margin estimates (to factor in higher ad spends and raw-material cost pressures witnessed in 2QFY2013). While volume growth is expected to remain under pressure due to increasing competition; we expect profitability to improve gradually over the next few quarters and then improve sharply once the royalty costs are paid out completely in 1QFY2015. We maintain our Accumulate rating on the stock.

Disappointing operating performance: For 3QFY2013, HMCL’s top-line recorded an in-line growth of 2.6% yoy (19.3% qoq) to Rs.6,188cr driven primarily by 3.9% yoy (1.2% qoq) growth in net average realization. Volume performance however, was sluggish on a yoy basis (down 1% yoy) owing to slowdown in demand. On a sequential basis though, volume grew 18% led by the festival buying. The operating performance deteriorated sharply as margins contracted 305bp yoy (128bp qoq) to 12.6% as against our expectations of 15%. This was primarily on account of 120bp yoy (140bp qoq) increase in raw-material cost as a percentage of sales due to the higher proportion of new launches in the product-mix where contribution margins are initially lower. Further, other expenditure too surged 26.5% yoy (23.6% qoq) led by higher branding and promotional expenses. As a result, net profit registered a decline of 20.4% yoy to Rs.488cr.

Outlook and valuation: At Rs.1,767, the stock is trading at 14.7x FY2014E earnings. Going ahead, we expect the company’s profitability to improve gradually over the next few quarters and then improve sharply once the royalty costs are paid out completely in 1QFY2015. Therefore we maintain our Accumulate rating on the stock with a revised target price of Rs.1,923 (Rs.2,014 earlier).