Buy Hero Motocorp; target of Rs 3135: Prabhudas Lilladher

Prabhudas Lilladher's research report on Hero Motocorp

HMCL’s employee cost over the years have risen sharply when compared with other 2W OEMs and there was a need to keep it in check. Fixed cost for HMCL increased substantially over the years while volumes did not pick-up which became a drag on the margins (increased by c270bps from 3.7% in FY14 to 6.4% in FY23E). We analyzed cost structure of all major 2W ICE OEMs (except EIM IN) to access the scope available for HMCL to reduce the cost and we arrived at an estimate of 80bps to 120bps as percentage of revenue, which could be derived in cost savings through the VRS. We expect HMCL to show double-digit revenue growth in FY24 benefiting from a low base, improving consumer sentiment, stable pricing environment (as commodity prices stabilise) and helped by internal factors like (1) product launches in premium/scooter segment, and (2) higher exports. HMCL has fallen c11% YTD 2023, currently trading at 13.6x (-1SD 1yr fwd PE) and offers a dividend yield of 4.3%.

Outlook

We have a ‘BUY’ rating with a target price of Rs 3,135 (at 15x on Dec-24E standalone EPS, Rs 86 for Fincorp and Rs 78 for Ather).