Hold Hero MotoCorp; target of Rs 3036: Nalanda Securities

Nalanda Securities' research report on Hero MotoCorp

The company reported a 5.5% YoY volume growth to 21.3L units for the quarter aided by its popular motorcycles, while the scooters de-grew during the quarter. The realization growth of 2.9% YoY to Rs. 42,599 was supported by increase in the vehicle prices. The net revenue growth of 8.6% YoY to Rs. 9K crores came in-line with our estimates, but, the sharp lower margin profile for the quarter was came in as a surprise. The EBITDA Margin decelerated by 220bps YoY to 15.2% in Q2FY19. The other income was higher majorly due to one-off income from IT deposit refund. On the other side, the tax rate was higher by 300bps YoY to 32.6% due to expiry of incentives of Haridwar plant. Overall, Hero MotoCorp reported a decline in its bottom-line by 3.4% YoY to Rs. 976 crores in Q2FY19.

Outlook

We see certain uncertainties with respect to the weaker macro-economic factors & cut-throat competition and prefer to observe the performance of Hero’s upcoming new launches in the scooters and premium motorcycles. We have valued the company based on an average of PE and EV/EBITDA of FY20E. Hero MotoCorp in the past five years has traded on an average 14.3x of its forward EPS and we have assigned the similar earning multiple to its FY20E EPS of Rs. 197. Similarly, we have assigned 9.7x to its FY20E EBITDA. Hence, based on the average, we have come across the fair value of Hero MotoCorp at Rs. 3,036 per share, maintained our hold rating.

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