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RESULT UPDATE

HERO MOTOCORP

Disappointment continues

India Equity Research| Automobiles

Hero MotoCorp’s (HMCL) Q3FY15 EBITDA at INR8.2bn was ~11% below our/consensus estimates, due to lumpy brand promotions (Tiger Woods/Sardar Singh) and staff costs (Neemrana plant). PAT at INR5.8bn was further hit by lower other income and higher tax rate. We expect margins to recover from Q4FY15 on lower brand related spend and reversal in excise duty anomaly. Similarly, domestic scooter volumes will see an uptick with increase in capacity and expiry of the one-time order from Sri Lanka. However, owing to weak traction in volumes, we prune our FY15/FY16 volume estimates by 4% and EPS by 8%/2%. We introduce FY17 numbers with volume growth of 12% and EPS of INR199. Maintain ‘HOLD’ with TP of INR2,990 (15x FY17E EPS). Intensifying competition in the executive motorcycle segment and weak brand franchise in the premium segment are key headwinds to our volume/margin estimates.

Operating performance fails yet again

While revenue at INR68.4bn was in line, EBITDA at INR8.2bn was ~11% below our/consensus expectations, primarily owing to higher other expenses. While gross margin improved 20bps QoQ, higher staff costs (up 50bps QoQ to 4.6% of sales) and other expenses (up 110bps QoQ to 11.7% of sales) impacted overall margins (-150bps QoQ at 12%). Staff costs inched up as Neemrana plant came on-stream, while promotion spends pertaining to Tiger Woods led to higher overheads. Lower other income of INR936mn (INR1.9bn QoQ) led to PAT of INR5.8bn.

Competitive intensity increases volume/margin headwinds

With higher capacity (26% jump to 5.8mn units) from Honda coming onstream by FY16, competitive intensity is set to increase sharply for key segments of HMCL – executive motorcycles and scooters. Moreover, absence of a good premium portfolio could pose a key long-term

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