Hold Hero Motocorp: Ventura

Ventura has recommended hold rating on Hero Motocorp, in its January 21, 2013 research report.
 
“Hero MotoCorp has managed to perk up its market share from the Q2FY13 at 39.8% to 42.5% on the account of improved scooter and executive motorcycle segment sales. The management expects to do even better in the Q4FY14, although the industry outlook remains subdued. Increasing competition from Honda coupled with rising inventory levels at the dealers end (indicated by rising receivables) indicates a competitive scenario making the environment difficult for the listed players. We believe the company’s target of 5-6% growth in volumes in FY13E looks extremely challenging unless the sales recover in a very big way in Q4FY13E. At a CMP of Rs. 1773 the stock is trading at 15.9x and 14.4x its estimated earnings for FY13 and FY14 and we recommend a HOLD on the stock.”
 
“Hero MotoCorp Ltd (HMCL) posted a 2.8% growth in total sales to Rs.6151.3 crore primarily on account of 18% growth in total volumes to 1,57,3135 units on qoq basis. While the operating profits declined by 17.4% yoy to Rs. 778.7 crore, PAT declined to Rs 487.9 crore at 20.4% on a YoY basis. In Q3FY13, HMCL’s operating margin declined by 130bps to 12.6% on a QoQ basis backed by the higher raw material costs and sharp increase in other expenses. Also, new product launches have entailed increased start-up costs in the absence of meaningful volumes. However, the management expects that the profitability from the new products will improve once the volumes of the newly launched product will increase (may be in 3-6 months). It has also indicated that the raw material should come down in the range of 72-73% of sales gradually over the next few quarters, as contribution margin from new products improve and benefits of a favorable currency creeps in.We believe the margin profile will remain sluggish in the near term as the transition phase remains challenging.”
 
“In scooter segment the market share of HMCL has improved by 190 bps YoY to 18% YTD for FY13. The company has re-launched all its premium segment bikes in Q3FY13. It has planned a capex of ~25bn over the next 18-24 months to add new capacity in its two plants at Rajasthan (expected to commence by Q2FY14) and Gujarat (land acquisition expected to be completed by FY15). The total capacity addition will be ~2.2mn and it is likely to take it to 9mn by end of FY14. Currently the inventory level at the dealers end is ~4 weeks (30 days) while ~2 weeks inventory is in transit. In Q3FY13 tax rate came in at 16.3% as this is the second last quarter of full benefit from Haridwar plant. Further, the management has also guided that the tax rate will be at 23-25% for the next fiscal year. HMCL has planned to enter Africa and Latin America by end of this fiscal year. The quantum of indirect imports for the company has grown ~9%,” says Ventura research report.

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