Hero MotoCorp's Q1FY15 earnings were broadly in line with CRISIL Research's
expectations. Revenues increased 8.4% q-o-q driven by 7.9% rise in volumes. EBIT margin contracted by 22 bps q-o-q to 9.3% due to higher raw material and employee costs. PAT grew 1.5% q-o-q to Rs 5,628 mn. We maintain Hero MotoCorp's volume growth estimate of 8% each for FY15 and FY16 but monsoon is a key monitorable as the company derives ~46% sales from rural areas. Based on its leadership position, large distribution network, rural reach and strong brand recall, we remain positive on Hero MotoCorp. We maintain our earnings estimates and the fundamental grade of 5/5.
Healthy volume growth driven by scooters and motorcycles
Owing to healthy rural demand, sales of Hero MotoCorp's two-wheelers increased 7.9% q-o-q to 1.7 mn units, higher than the industry's 3.6% q-o-q growth to 4.6 mn units. The company's share in the two-wheeler market increased by 148 bps q-o-q to 37.6% in Q1FY15. Its market share in the domestic motorcycles segment rose by 242 bps q-o-q to 53.8%. The management expects double-digit y-o-y volume growth in Q2FY15 driven by early start of the festive season, good replacement demand and comfortable channel inventory of four weeks. Going forward, new launches — Dash 110cc scooter, Leap 125cc scooter, RNT 150cc concept diesel bike, HX250R 250cc and Xtreme 150cc motorcycles — should add traction to an aging product portfolio and lead to better positioning of the company.
Margin impacted due to excise duty cut and high other expenditure
EBITDA margin contracted by 27 bps q-o-q due to excise duty cut and high other expenditure. Reduction in excise duty post budget in Q4FY14 has lowered the excise benefit enjoyed by the company on its production from excise-exempt Haridwar plant (~40% of total production), while its raw material cost remained more or less unchanged for that plant. The excise duty cut has reduced the benefit for the company by ~Rs 940 mn compared with ~Rs 320 mn in Q4FY14. Raw material cost as a percentage of sales increased by 53 bps q-o-q to 73%. Employee cost was up 13.6% q-o-q as the variable part of salary is being paid in Q1 of each year. Other expenses increased by 90 bps y-o-y to 10.2% due to high freight rates (~Rs 200 mn), high royalty (~Rs 130 mn) and high ad spend (~Rs 250 mn) on account of new launches. The management guided that ad spend for FY15 is expected to normalise to 2-2.15% of sales. We expect that operating leverage and cost-saving exercise would compensate for the lower excise duty benefit going ahead.
Cost-saving exercise showing results; to yield greater returns going ahead
On account of the cost-cutting initiatives, the company saved Rs 320 mn monthly in Q1FY15 compared with Rs 250 mn saved monthly in Q4FY14. It expects to save Rs 500 mn/month by FY15-end. However, cost saving of Rs 970 mn was offset by Rs 660 mn cost inflation. In FY14, gross benefit from the cost-reduction program was Rs 1.7 bn; it is expected to be Rs 4-4.5 bn in FY15.
Earnings estimates maintained; fair value revised to Rs 2,433
We maintain our earnings estimates for FY15-16. Following a change in our cost of equity methodology, we have lowered the cost of equity by 140 bps to 12.6%. Hence, our discounted cash flow-based fair value is raised to Rs 2,433 per share. At the current market price of Rs 2,592, our valuation grade is 3/5.
Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.
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