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Hero MotoCorp 3QFY2014 performance highlights and results update

February 3, 2014, Monday, 06:31 GMT | 01:31 EST | 11:01 IST | 13:31 SGT
Contributed by Angel Broking


For 3QFY2014, Hero MotoCorp (HMCL) reported lower-than-expected results on the bottom-line front led by EBITDA margin pressures. The unfavorable currency impact on indirect imports (which comes with a quarter’s lag) and increase in advertisement and promotional expenses owing to the festival season negated the benefits of ~ Rs.45cr which were accrued due to cost saving efforts during the quarter. Nevertheless, the Management expects EBITDA margins to improve gradually (targeting improvement of ~300bp by FY2017) led by the cost rationalization program that it has undertaken. Meanwhile, the company’s product pipeline remains strong and it intends to launch four new products in FY2015, including an electric hybrid scooter - Leap, 110cc scooter - Dash and two motorcycles in the greater than 150cc segment. Led by the upcoming launches and new variants / refreshes launched around the festival season, we expect HMCL to clock an ~5% volume CAGR over FY2013-15E. However, profitability is set to improve sharply, primarily driven by phasing out of royalty payments from 1QFY2015. We marginally revise downwards our earnings estimates for FY2014E/15E to factor in the weak 3QFY2014 operating performance. Nevertheless, we maintain our Accumulate rating on the stock.
 
EBITDA margin pressures impact bottom-line: HMCL’s top-line recorded a strong growth of 11.1% yoy to Rs.6,877cr, in-line with our estimates of Rs.6,869cr, led by 6.9% yoy growth in volumes and 4.2% yoy growth in net average realization. The EBITDA margin contracted sharply by 148bp qoq and stood at 13.1% as against our expectations of 13.9%, led by increase in raw-material costs and significantly higher other expenditure. While unfavorable currency movement impacted the raw-material cost, which as a percentage of sales increased 120bp qoq; other expenditure increased by 29.4% qoq due to increase in royalty payment on newer models, increase in advertising due to the festival season and increase in competition and increase in freight costs. Due to a lower-than-expected operating performance, the net profit came in lower than expected at Rs.525cr; however, it registered a healthy growth of 7.5% yoy (9% qoq).
 
Outlook and valuation: At Rs.2,000, the stock is trading at 13.8x FY2015E earnings. We maintain our Accumulate rating on the stock with a target price of Rs.2,180.