Hero Motocorp rating – Hold: A solid performance in the final quarter

Hero MotoCorp’s (HMCL’s) Q4FY21 Ebitda of Rs 12.1 bn surpassed estimate by ~8% on higher spare contribution (13% of sales, up 200bps q-o-q) and cost control. While the company continues to deliver on financials, we will keep an eye on its ability to widen product portfolio. Given the weakness in demand due to Covid wave 2 and sustained commodity inflation, we revise down FY22/23e EPS 7%/11% and also our Sept 2022e core PE multiple to 18x (from 20x).

Retain Hold with revised TP of Rs 3,224 (earlier Rs 3,812). Rising exports share and filling white spaces (premium bikes and scooters) as well as benefits of LEAP 2 programme are key triggers to watch for. Revenue mix and cost control drive Ebitda beat: HMCL’s revenue of Rs 86.7 bn came in line with estimate. However, gross margin surprised positively with 10bps q-o-q improvement to 70.4% against our expectation of a 60bps decline.

This was due to higher contribution by spares at 13% of vehicle revenue and cost control (LEA benefit of ~200bps). Hence, Ebitda at Rs 12.1 bn was 8% ahead of our estimate. Lower other income due to MTM loss (rising yields) led to in-line profit. Mgmt aims to sustain the spares contribution due to various efforts undertaken over the past few years. It expects commodity cost pressure to subside over time.

Premiumisation focus sustains; key for re-rating: The company’s sustained premiumisation focus and efforts augur well. This should help it improve market share in premium motorcycle and scooters and remains a key monitorable for us. The recent collaboration with Harley Davidson (HD) for entry into the middle-weight segment (>250cc) is another effort in this direction.

Similarly, its three-pronged strategy on EV–in-house, Ather and Gogoro–also reflects its focus on the segment. EVs is one area where there is no established player. Hence, this gives HMCL (like other players) a chance to create its brand equity, in our view.

Outlook: Positives priced in–We continue to like the effort that HMCL is putting in to diversify its portfolio. At the current juncture, we believe risk-reward is balanced. We maintain ‘HOLD/SN’, valuing the stock at 18x Sept 2022e core EPS + cash/share of Rs 562. The stock is trading at FY22/23e PE of 16.4x/14.9x.