Accumulate Hero MotoCorp; target of Rs 2640: Angel Broking

Angel Broking's report on Hero MotoCorp (HMCL)

"Hero MotoCorp (HMCL)'s 4QFY2014 net profit, at Rs 554cr, surpassed our expectations of Rs 501cr, driven partly by a better-than-expected EBITDA margin. The improvement in EBITDA margin was on account of cost cutting initiatives. Additionally, substantial increase in other income and lower-than-expected tax rate also boosted the bottom-line. The Management expects EBITDA margin to improve going ahead (targeting an improvement of ~300bp by FY2017) led by an extensive cost rationalization program that it has undertaken. The company expects ~100bp impact to be visible in FY2015. Meanwhile, the company’s product pipeline remains strong and it intends to launch four new products in FY2015, including an electric hybrid scooter - Leap, 110cc scooter - Dash and two motorcycles in the greater than 150cc segment. Led by the upcoming launches and new variants / refreshes launched around the festival season, we expect HMCL to clock a ~7% volume CAGR over FY2014-16E. We broadly maintain our volume, revenue and earnings estimates for FY2015/16."

"HMCL’s top-line recorded a growth of 6% yoy to Rs 6,513cr, in-line with our estimate of Rs 6,451cr, led by a 4.1% yoy growth in volumes and 2.2% yoy growth in net average realization. The volume performance was driven primarily by a strong growth in the scooter segment (15.5% yoy) even as the motorcycle segment registered only a modest growth of 2.7% yoy. The EBITDA margin expanded 67bp qoq to 13.7%, which is marginally higher than our expectation of 13.4%. The margin expansion was led by growth in net average realization which led to gross margin expansion of 80bp sequentially. Additionally, cost control initiatives too led to savings to the tune of Rs 60cr during the quarter. The net profit for the quarter stood at Rs 554cr, ahead of our estimate of Rs 501cr, led by slightly better-than-expected operating performance and benefitting further due to a 17.7% yoy increase in other income and on account of a lower tax rate (at 25.2% as against 26.9% in 3QFY2014). At Rs 2,344, the stock is trading at 14.2x FY2016E earnings. We maintain our Accumulate rating on the stock with a target price of Rs 2,640", says Angel Broking research report.

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