Analysts cut Hero Moto estimates, say road ahead tough

Moneycontrol Bureau

Several brokerages on Friday cut their earnings estimates on Hero MotoCorp for FY13 and FY14 after the two-wheeler maker disappointed the street with much lower than expected earnings for the third quarter.

Hero Moto still remains India's largest selling two-wheeler company by a wide margin. But the environment is increasingly becoming tough with rising competition, especially in its bread-butter commuter motorcycle segment, at a time overall demand as such remains sluggish.

Its Splendor and Passion range of motorcycles have been a runaway success. But now its dominance is under attack from two sides -- Bajaj Auto with its Discover range and erstwhile partner Honda Motorcycle also getting aggressive.  

In the Oct-Dec quarter, although revenue was in-line with street expectations, it only managed a net profit of Rs 488 crore, much lower than the Rs 608 crore figure analysts had estimated, as its input costs increased and it had to spend more on advertising and promotions to drive sales in a sluggish market.

Currently all of Hero products use technology from Honda. It is investing on its own research and development, but the products are still 1-2 yrs away. The competition, meanwhile, is upping the ante with new products like the Discover 125 ST and 100 T by Bajaj Auto and the Dream Yuga by Honda.

Hero launched the Ignitor motorcycle and Maestro scooter in 2012, which have got good response, the company said. These launches boosted Hero's sales 18 percent to 15.73 lakh units in Q3, compared to Q2 (flat YoY). But it still needs to be seen how much and how long the speed will be maintained, given the competitive intensity and sluggish demand.

Hero itself expects the overall industry will grow at best 4-5 percent this year and next year too the growth will be in single digits.

"Hero reported a disappointing Q3. Most of the miss came at the operating level and was attributed to lower gross margins of new launches (Maestro and Ignitor) and increased sales promotion costs. We stay 'underweight' as we believe the margin decline is more structural than cyclical," Binay Singh of Morgan Stanley said.

He has cut his earnings forecast on Hero by 5 percent for FY13 and 3 percent for FY14.

IDBI Bank cut the stock to "sell" from "hold" saying the quarter was "dismal" and future was "gloomy."

"We continue to believe that Bajaj Auto is better placed than Hero to mitigate weak demand environment and increased aggression by Honda, led by its diversified geography and product mix, success of recent launch of Discover 125 ST and greater product pipeline visibility," said IDBI analyst Bhaumik Bhatia.

He has cut volume estimates on Hero to -2 percent from 3 percent for FY13 and to 9 percent from 12 percent for FY14. EBITDA margin expectation has been cut by 170 bps and 120 bps respectively to 10 percent and 10.7 percent for FY13 and FY14.

"Moving into FY14, we believe increased level of competition will keep the ante up for the need to spend more on brand related activities. Further, venture into new export markets will add to the cost. We thereby expect margins to largely stay under pressure over the near to medium term," said Arun Agarwal of Kotak Securities - Private Client Research.

Agarwal has a "reduce" rating on the stock, and has cut FY13 and FY14 earnings estimates by 8 percent and 3 percent.

Hero Moto shares fell over 4 percent on opening on Friday and hit a low of Rs 1,720.05. It finally closed down 3 percent at Rs 1,764.10 on NSE.

Nachiket Kelkar
nachiket.kelkar@network18online.com