Two-wheeler major Hero Motocorp's second quarter profit beat Street expectations, but rest of the numbers were in line. The company’s net profit shot up 58.5 percent year-on-year to Rs 763 crore led by other income of Rs 193.5 crore (as against Rs 115.5 crore Y-o-Y). A CNBC-TV18 poll had estimated the profit at Rs 689 crore on revenue of Rs 6,960 crore for the quarter.
According to Hitesh Goel of Kotak Institutional Equities, Hero Moto has done well in maintaining strong market share and feels the next one to one-and-a-half years look very good for the company.
He expects Hero MotoCorp to report 15-15.5 percent margins in FY16 and is positive on the stock in the long-term.
Below is the transcript of Hitesh Goel's interview with Sonia Shenoy and Ekta Batra on CNBC-TV18.Sonia: We just heard from the management of Hero Motocorp where they indicated that their margins are expected to go up to 17 percent from 14 percent currently in the next three years, how would you view the stock now and what would your recommendation be?A: I like the stock from Rs 2,000 levels when we have upgraded the stock the key reason being that they had protected their market share on the domestic motorcycle segment. On the scooter side, we have seen industry growing at a faster pace but in first half they have lost some market share and the way the capacity is coming through, they will get back some market share. Also another factor which is important to note is that Honda doesn’t have capacity in FY16, the major capacity in Gujarat will only come in by FY16 end. So from one to one and a half year perspective, it looks very good period for Hero Motocorp.In my view, the festive season has gone well for two-wheeler industry but post that festive season you will see some drop in growth rates. First half growth rate has been around 16 percent, it will be close to 8-10 percent in the second half because economic growth is not that buoyant as of now but still Hero Motocorp story remains a better story in the sector because the two-wheeler industry will keep on growing at 8-10 percent rate and Hero Motocorp gaining from the margin benefit.In the margins if you look at, Hero Motocorp is benefitting from the cost savings that they are doing and also the competition to some extent has reduced because most of the model launches have occurred already in the first half. So you are not going to see major model launches for one and a half years and there will be refreshers but nothing major to upset the industry in terms of pricing.So I am pretty positive that they can report around 15-15.5 percent margins in FY16 but to call for a 17 percent margin, I think it is a difficult call to make at this juncture because pricing will not be very buoyant as to get to 17 percent kind of margins but 15-15.5 percent is possible.
Sonia: On the conference call the management indicated that they are targeting 17 percent by the end of the next three years. So if that is a possibility in your mind then what could the view be on the stock, what could the trajectory be on the stock now and what is your own recommendation?A: We have a positive rating on the stock. We like the story. If you see what the management is talking about, they are banking a lot on their cost cutting programme. So they are banking that the margins will move by 3 percent largely because of cost cutting that they are doing. But if you look at FY17, you have goods and services tax (GST), which may come through. So if GST comes through, most of the exemptions will go off like in many states exemptions have been given like Hero Motocorp has exemptions on excise front in the Haridwar plant. So those exemptions will go away. So we have to see how the post GST structure also evolves because it is a major impact on Hero Motocorp because 30 percent of the production is coming from Haridwar. So we have to see all those factors to take a call on FY17-FY18 margins for Hero Motocorp but at least from FY16 basis, 15-15.5 percent is quite safe assumption to take at this moment.Ekta: If you have to choose between Bajaj Auto as well as Hero Motocorp to give you incremental gains into maybe going in to next year or the first six months of next year, which one do you think would possibly deliver more stable, steady earnings or has more potential to outperform from current levels?A: We like Hero Motocorp over Bajaj largely because the domestic business is much more stable for Hero Motocorp versus Bajaj. Bajaj is doing well in exports but it continues to remain lumpy. So major market being Africa, it is again a very difficult market to predict basically. So in that market, we are already assuming a 15 percent kind of trade growth in exports business for Bajaj. I don’t think they can surprise beyond that. It will be difficult for them to surprise beyond that and it is a very difficult call to make on the domestic business because given that Discover 100 and 125 had not done very well although they are saying that 150 is going to do well, it is a very difficult call to make at this juncture whether that will do well going forward. So I think it is better to play Hero Motocorp than Bajaj at this juncture.
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