Hold Hero MotoCorp; target of Rs 3385: Centrum

Centrum's research report on Hero MotoCorp

HMCL reported another strong quarter, with 2QFY17 EBITDA margin at 17.6% (lifetime high, +170bps YoY/ +100bps QoQ), against our estimate of 16.4%. During the post results conference call management indicated that a) Initial demand during the festive period was weak (as highlighted in our dealer surveys), although it has picked up lately, and b) 2QFY17 margins are unlikely to be sustained going forward. While we acknowledge HMCL’s continued dominance in executive segment motorcycles and best in class network (thereby helping it leverage recovery in rural demand), we believe market share gains will be difficult to achieve given increasing competition. Further given the current valuations, we see limited upside from current levels and maintain our Hold rating on the stock with a revised TP of Rs 3,385 (16x FY18E EPS).

At the CMP, the stock currently trades at 18x/17x for FY17E/18E EPS. While the volume growth during the initial festive period has been subdued, we believe current valuations already factor in double digit volume growth with healthy margins. Consequently, we see limited upside in the near to medium term and maintain our Hold rating with a revised TP of Rs 3,385 (16x FY18E EPS).