PL Stock Report: Hero Motocorp (HMCL IN) - Q2FY24 Result Update – In-line results; launch pipeline remains strong - ACCUMULATE

Hero Motocorp (HMCL IN) - Himanshu Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs3,052 | TP: Rs3,575

Q2FY24 Result Update – In-line results; launch pipeline remains strong

Quick Pointers:

• Festive demand strong; post festive performance is key monitorable.
• Premium products delivery to ramp-up in Q3FY24.

Hero Motocorp (HMCL) EBITDA margin increased by ~40bps QoQ, led by lower RM (-80bp) and employee expenses (-50bps) which was partially offset by higher other expenses (-90bps). HMCL is seeing recovery in the rural market and is aiming to grow ahead of the industry on back of aggressive model launch and good start to festive season. The company is confident of continuing the growth momentum post festive season and we concur given low base. The EV 2W “Vida” is on track to reach to 100 cities by CY23, followed by capacity expansion and product portfolio in FY25. Moreover, good demand is expected in premium bikes, Karizma and X440 with 10k monthly production capacity.

We expect margins to improve in the near term from operating leverage, premiumisation, cost controls and stable commodity costs (we build in ~210bps increase over FY23-26E). Key monitorables will be 1) performance of new launches, 2) uptick in EV volumes, 3) competition in core segments and 4) recovery in rural markets. Maintain ‘Accumulate’ at TP of Rs 3,575 (at 16x on Sep-25E standalone EPS, Rs 83 for Fincorp and Rs 78 for Ather).

• In line revenue and margins: Revenue grew by c4% YoY to Rs. 94.5bn and came in line with PLe at Rs. 93.2bn and Bloomberg consensus estimates (BBGe) at Rs. 93.4bn. EBITDA margins at 14.1% (+262bps YoY and +c30bps QoQ) were exactly in line of PLe and slightly higher than BBGe (13.9%). Margin were helped by lower commodity cost, leap savings and better product mix. Higher other income aided the beat on adj PAT versus PLe and BBGe by c10%.
  
• Key takeaways: (1) HMCL noted demand recovery across all regions and rural areas as well, while urban segment continued to grow. HMCL’s festive season volume has grown by 15% so far, with double digit expectation for entire season. (2) HMCL has maintained its double-digit revenue growth guidance for FY24E, with focus market share improvement. (3) New launches are performing well with Passion family retail volumes growing 2.5x YoY, new HF deluxe growing in double-digit and Glamour gaining traction in entry level segment owing to rural recovery. “Xtec” products contributed 1/3rd to overall volumes. (4) The new Karizma has received 14k bookings and along with HD X440’s >25k bookings will likely be fulfilled in next four months with combined production capacity to ramp up to ~10k units per month. HMCL will launch another premium bike in 2H. (5) HMCL has ramped up its EV production to 1k units per week and plans to expand EV portfolio to cater to various price points in FY25. HMCL is on track to expand EV reach to 100 cities in CY23. (6) HMCL sees export volume to improve sequentially in 2HFY24. (7) In Q2FY24, ICE margins were at 15% with 90bps impact from EVs. HMCL sees this impact remaining near ~100bps going ahead. (8) Strong growth in spares helped margins, with Oct-23 spares revenue reaching Rs50bn. (9) HMCL noted that end of festival season inventory will be back to 4-6 weeks. (10) HMCL outlined Rs. 10bn capex with primary focus on premium and EV segment in FY24.