LKP Research is bullish on Hero MotoCorp has recommended buy rating on the stock with a target price of Rs 2975 in its research report dated October 24, 2019.
LKP Research's research report on Hero MotoCorp
Total net revenues in the quarter went down by 16.7% yoy and 5.7% qoq as volumes were down by 20% yoy and 8.3% qoq in the quarter. Net realizations were up by 4.9% yoy on price hike taken in July and new launches launched recently. RM costs to sales came down to 67.7% as against 69.3% yoy as the impact of softening RM prices was felt in the quarter. Employee costs moved up to 6.2% of sales v/s 4.8% yoy, as company introduced VRS scheme for employees and has considered a provision of ₹0.61 bn during the quarter. Other expenses to sales inched up to 11.6% v/s 10.8% on higher discounts and advertising expenses. Margins came in at 14.5% which were better than street expectations on cost optimization, softer commodity costs and LEAP program. Corporate tax cuts by GOI led to a 14.8% tax rate which according to the management; will normalize to 25% for full year. Reported PAT was down by 10.3% yoy at ₹8.7 bn. Adjusted for one off items, PAT came in at ₹9.34 bn, down 4% yoy.
We expect an improvement in margins in FY21 as pent up demand will have result in operating leverage. Reduction in corporate tax along with improved outlook on volumes leads us to raise our estimates and target price. Maintain BUY with a target of ₹2,975.
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