Buy Hero MotoCorp; target of Rs 3360: ICICI Direct

Hero MotoCorp (HMCL) reported Q1FY17 numbers that were higher than our estimates on the operational front. Revenues at Rs 7399 crore, up 7.2% YoY, down 1.4% QoQ, came in below our estimates of Rs 7639 crore, mainly on account of lower than estimated ASP due to lower spare part revenues Total volumes in the quarter were 1745389 units, up 6% YoY, 1.4% QoQ. Motorcycle volumes (1526565 units) increased 3.4% YoY, 6% QoQ while scooter volumes (218824 units) grew 29.6% YoY, down 22% QoQ. Net blended ASPs were Rs 42391 (our estimate- Rs 43768) EBITDA increased 18%YoY, 3.2%QoQ to Rs 1230 crore (our estimate Rs 1144). EBITDA margins came in higher at 16.6% (up 153 bps YoY, 74 bps QoQ) vs. expectations of 15%. The beat on the margins was on account of 205 bps YoY gross margin expansion, which came as a surprise PAT came in at Rs 883 crore (up 18% YoY, 6% QoQ) vs. our estimate of Rs 774 crore. PAT came in higher than our estimates on account of higher than estimated margin expansion & higher other income.

We have increased our earnings estimates by 11% for both FY17E & FY18E, on the back of an improving demand scenario, strong margins owing to LEAP & operating leverage benefits and potential benefit of lower tax on 2-Ws under GST. We value HMCL at 18x FY18E EPS to arrive at a target price of Rs 3820. We have a BUY recommendation on the stock.  For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.