CRISIL assigns valuation grade of 3/5 to Hero MotoCorp

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CRISIL assigns valuation grade of 3/5 to Hero MotoCorp

CRISIL Research has come out with its report on Hero MotoCorp. The research firm has maintained the fundamental grade of 5/5 to the company in its January 25, 2012 report.

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CRISIL Research has come out with its report on Hero MotoCorp . The research firm has maintained the fundamental grade of 5/5 to the company in its January 25, 2012 report.

Hero MotoCorp's Q3FY12 revenues outperformed CRISIL Research's expectations driven by higher than expected volume and realisation growth. EBIT margin was lower than expected on account of increase in raw material cost. PAT margin outperformed on the back of higher interest income and lower tax rate. In Q4FY12 and FY13, CRISIL Research expects growth in domestic two-wheeler industry to moderate and competition to intensify. However, we expect Hero Motocorp to maintain its market share on the back of its strong presence in the rural markets and slew of new product/variant launches. We have increased our FY12-FY13 revenue and earnings estimate and maintain the fundamental grade of 5/5.

Q3FY12 result analysis
• Hero MotoCorp gained ~160 bps market share in the domestic two-wheeler segment to reach 41% share in Q3FY12. Realisation per vehicle was up 5% y-o-y while it marginally increased q-o-q; volume growth was ~11% y-o-y and ~3% q-o-q. Revenues were up ~17% y-o-y (~3% q-o-q) to Rs 59.8 bn.

• EBIT margin was up by 60 bps y-o-y (declined by 34 bps q-o-q) to 10.8%. While raw material cost declined 109 bps y-o-y to 73.4% aided by price hikes, it increased by 43 bps q-o-q mainly due to depreciation of Indian rupee (~15% of raw materials are imported). The y-o-y benefit in raw material cost was partially offset by 28% increase in employee costs.

• PAT margin was up by 30 bps y-o-y on account of increase in EBIT margin, partially offset by higher taxes. Adjusted EPS of Rs 30.7 was up 20.5% y-o-y (1.6% q-o-q).

Slew of new model/variant launches to defend market share
Competition is expected to increase going forward on the back of new launches and capacity expansion by strong players like Honda Motorcycle and Scooter, India. We ,however, expect Hero Motocorp to maintain its strong market position on the back of its deep presence in rural markets, aggressive new model / variant launches combined with strong brand recall.

Valuations: Current market price is aligned
After factoring in a higher earnings estimate, we have raised our fair value to Rs 1,890 from Rs 1,797 based on the discounted cash flow method. At this fair value, the implied PER is 15.8x FY12 earnings estimate and 13.8x FY13 earnings estimate. We retain the valuation grade of 3/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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