Buy Hero Motocorp; target Rs 1800: Dolat Capital

Dolat Capital is bullish on Hero Motocorp and has recommended buy rating on the stock with a target price of Rs 1800 in its April 26, 2013 research report.

"Hero Motocorp reported top-line revenue at Rs 61.4bn, up 2 percent YoY despite volume decline of 3 percent YoY. The company sold 1.53mn two wheelers. It had sold 1.57mn two wheelers in 4QFY12.

Operating margins up 120bps QoQ to 13.8 percent: The company’s operating margins improved 120bps QoQ to 13.8 percent led by lower raw material costs. Post the labour agreement, its staff cost is up 14 percent QoQ and as a percentage of sales it is up by 50bps QoQ. Other expenses included higher ad spend for product launches and brand building. As mentioned in our previous report, it did get some breather due to weakening yen in this quarter.

EBIDTA for the quarter was Rs 8.5bn, down 8 percent YoY: Market share down 270bps in motorcycles, up 260bps in scooter segment HMCL lost its market share by 270bps to Honda Motorcycles. Its market share stood at 53.2 percent in 4QFY13. However, during the same period, it gained market share in the fast growing scooter segment. Its market share stood at 18.8 percent in March 2013.

PAT reported at Rs 5.7bn in 4QFY13: The company reported its PAT at Rs 5.7bn, down 5 percent YoY.

View and valuation: The company has re-launched all its premium segment bikes during this quarter. It has planned a capex of Rs 25bn over the next 18-24 months to add new capacity in its two plants at Rajasthan and Gujarat. The total capacity addition will be ~2.2mn and take its total capacity to 9mn by end of FY14.

Also, it has entered Africa and Latin America. The recent underperformance makes it the best bet in the two wheeler segment. It is currently trading at 12xFY15E. We recommend Buy," says Dolat Capital research report.

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