CRISIL maintains fundamental grade of 5/5 to Hero MotoCorp

Hero MotoCorp’s Q4FY12 earnings were largely in line with CRISIL Research’s expectations. As expected, revenues remained flat q-o-q primarily on account of muted volume growth in two-wheelers despite a marginal price hike. Adjusted PAT fell marginally q-o-q driven by tepid revenue growth, higher raw material costs and tax outgo. CRISIL Research expects growth in the domestic two-wheeler industry to moderate and competition to intensify in FY13. However, we remain positive on Hero MotorCorp’s long term growth due its strong presence in the rural markets and maintain our fundamental grade of 5/5.

Q4FY12 result analysis
• Revenues were flat q-o-q at Rs 59.6 bn driven by muted sales volume of 1.5 mn twowheelers despite an increase in realisations. Realisation per vehicle marginally increased q-o-q to Rs 37,929 to offset the excise duty hike. Volumes remained muted on account of seasonality - typically Q4 is a sluggish quarter compared to Q3 (festive season). The company surpassed its sales volume guidance (6mn two-wheelers) and sold 6.2 mn two-wheelers in FY12. However, its market share in the two-wheeler segment dropped to 40.4% (down 60bps) in Q4FY12 due to stiff competition from Honda.

• Raw material cost as a percentage of sales grew 65 bps q-o-q (up ~72 bps y-o-y) to 74% on account of increase in the price of its key raw material - steel. Employee cost declined 4% q-o-q while depreciation & amortisation was down ~6% q-o-q. EBIT margin remained flat q-o-q at 10.8%.

• On account of muted revenues, higher raw material costs and tax outgo, adjusted PAT declined 1.5% q-o-q to Rs 6.0 bn with EPS of Rs 30.2. The company announced a dividend of Rs 45 per share in FY12, which translates into a dividend payout of ~44%.

Key takeaways from the conference call
The company expects to sell more than 6.8 mn two wheelers in FY13 and launch seven to eight new models/variants. It is set to announce capex plans in the coming weeks. Plans to exports to Africa and Latin America are on track. It initially plans to launch 100cc125cc bikes in the export market by H1FY13. It expects to export 1 mn two-wheelers by FY16-17. Alongside, it is investing in R&D and has ramped research workforce from 170 to 290 employees q-o-q. It has also signed international tie-ups with Erik Buell Racing (EBR) of USA and AVL of Austria to develop higher cc bikes and engines.

Valuation: Current market price has downside
Our fair value of Rs 1,890 based on the discounted cash flow method translates into an implied PE of 13.8x FY13 earnings estimate. We will roll forward our valuations to FY14, post which our fair value will get revised.

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