20 July 2012
1QFY13 Results Update | Sector: Automobiles
Hero MotoCorp
BSE SENSEX
S&P CNX
17,279
Bloomberg
Equity Shares (m)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,243
HMCL IN
199.7
2/6/24
416.9
7.6
CMP: INR2,088
TP: INR2,340
Buy
52-Week Range (INR) 2,279/1,703
Hero MotoCorp's 1QFY13 operating performance is in-line, with adj EBITDA margin at 10.8% (v/s est 10.7%) and
adj PAT of INR6.15b (v/s est INR6.13b). While lower than estimated volumes & realizations resulted in marginally
below estimated EBITDA, impact of which was offset by higher other income. Highlights:
Volumes grew 7.4% YoY (+4.5% QoQ) to 1.64m units (v/s est 1.67m). Realization were flat QoQ (+ 2.6% YoY) to
INR37,799 (v/s est INR38,284) impacted by adverse market mix, despite price increases in April & May and
higher excise benefit at Haridwar plant (due to excise increase). As a result, net sales grew by 10% YoY (+4%
QoQ) to INR62.1b (v/s est INR63.9b).
Adj EBITDA margin at 10.8% were flat QoQ/YoY as benefit of operating leverage as offset by part impact of
weaker INR on RM and royalty. EBITDA grew 14.5% YoY (+5% QoQ) to INR9b (v/s est INR9.2b). Higher other
income and lower tax boosted reported PAT to INR6.15b (v/s est INR6.13b).
The management has maintained its industry growth guidance at 9-10%. Its inventory levels have now
increased to ~4 weeks (v/s 3 weeks earlier). It expects short-run margins to remain under-pressure due to
weaker INR (70-80bp impact in 2QFY13) and increase in advertising spend (v/s lower spend in 1QFY13).
We maintain our EPS estimates for FY13/FY14 at INR132/INR146. We model in for volume growth of 9%/12.5%
for FY13/FY14, and EBITDA margins of 14.4%/14.7% respectively. The stock trades at 15.8x FY13E and 14.3x
FY14E EPS. Maintain
Buy
with target price of INR2,340 (16x FY14E EPS).
Jinesh Gandhi
(Jinesh@MotilalOswal.com) + 91 22 3982 5416
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Hero MotoCorp
Revenue growth moderating in-line with volumes
Volumes grew 7.4% YoY (+4.5% QoQ) to 1.64m units (v/s est 1.67m).
HMCL market share in domestic 2-wheeler industry improved by 120bp QoQ (-100
YoY) to 45.7%.
Realization were flat QoQ (+ 2.6% YoY) to INR37,799 (v/s est INR38,284) impacted
by adverse market mix, despite price increases in April & May and higher excise
benefit at Haridwar plant (due to excise increase).
Haridwar's contribution to volumes was at ~38% (v/s 34% in 1QFY12 v/s 40% in
4QFY12).
As a result, net sales grew by 10% YoY (+4% QoQ) to INR62.1b (v/s est INR63.9b).
Trend in Segment Mix (units)
< 125cc
% of total
> 125cc
% of total
Total Motorcycles
% of total
Scooters
% of total
Total 2Ws
Of which exports
% of total
1QFY13
1,457,741
88.9
63,213
3.9
1,520,954
92.7
119,336
7.3
1,640,290
31,920
1.9
1QFY12
1,339,190
87.6
84,603
5.5
1,423,793
93.1
105,784
6.9
1,529,577
43,192
2.8
YoY (%)
8.9
-25.3
6.8
12.8
7.2
(26)
4QFY12
QoQ (%)
1,358,187
7.3
86.4
86,057
-26.5
5.5
1,444,244
5.3
91.9
127,783
-6.6
8.1
1,572,027
4.3
41,591
-23.3
2.6
Source: Company, MOSL
Trend in Market Share (incl exports, %)
Total Motorcycles
Scooters
Total 2W
Total 2W (Domestic)
1QFY13
48.6
16.8
40.6
45.7
1QFY12
48.3
19.1
41.4
46.7
YoY (BP)
40
-230
-80
-100
4QFY12
QoQ (BP)
49.1
-50
17.2
-50
40.4
10
44.5
120
Source: SIAM, MOSL
Trend in realizations (INR/unit)
Source: Company, MOSL
20 July 2012
2

Hero MotoCorp
Adverse forex impact offset by operating leverage, resulting in stable EBITDA
margins
Adj EBITDA margin at 10.8% were flat QoQ/YoY as benefit of operating leverage as
offset by part impact of weaker INR on RM and royalty. RM cost was stable QoQ at
~74.1% (v/s est 74.3%).
Impact of weaker INR was only realized on part of vendor imports. Also, its
advertising spend was relatively lower in 1QFY13.
EBITDA grew 14.5% YoY (+5% QoQ) to INR9b (v/s est INR9.2b). Higher other income
and lower tax (due to higher contribution of Haridwar plant) boosted reported
PAT to INR6.15b (v/s est INR6.13b).
1QFY13 profitability is near trough margins in many years (bottom margins of
10.4% in 3QFY11).
Trend in EBITDA (INR/unit)
Trend in EBITDA (INR/unit)
Source: Company, MOSL
Expects industry to grow 9-10% in FY13; short-run EBITDA margins to remain
under-pressure
The management has maintained its industry growth guidance at 9-10%, as it is
witnessing slowdown in demand in both urban and rural markets. Recovery in
volumes would be contingent on good harvest, as current slowdown in retail
sales is also reflection of patchy monsoon.
Its inventory levels have now increased to ~4 weeks (v/s 3 weeks earlier).
It expects short-run margins to remain under-pressure due to weaker INR (70-
80bp impact in 2QFY13) and increase in advertising spend (v/s lower spend in
1QFY13).
It intends to continue with its strategy to launch every year 7-8 products (including
refreshed). In FY13, the company will launch the 125cc Ignitor and 110cc Passion
XPro (both showcased at Auto Expo 2012) along with 5-6 other models.
Its new 110cc scooter Maestro has received good response. It does not expect
meaningful cannibalization between Pleasure and Maestro with the former
targeted at females and the latter at males. However, it has capacity constraints in
scooters with maximum capacity of ~50,000/month.
20 July 2012
3

Hero MotoCorp
Export plans on-track; expects to start with Africa and Latin America from
2QFY13
HMCL indicated that export plans are moving ahead as per the roadmap. Initially,
it plans to start exports to Africa and Latin America, which are predominantly 100-
125cc market from 2QFY13. It has finalized specific countries in these regions to
start with.
Further, it is making necessary modifications to its products to suit target markets.
While it would be looking at having assembly operations in key export markets at
appropriate time, it would be leaving distribution to the local partners.
It expects export volumes to reach 1m by FY16-17. However, ramp-up in exports
would result in loss in the initial few quarters as the company will be making
investments to enter and expand various markets.
Focused on continuity of product flow by scaling up R&D through tie-ups
and in-house initiatives
HMCL is focussed on scaling-up its R&D with objective of maintaining continuous
flow of products and improvement in technology, and would be looking to launch
self-developed product in next 2-3 years.
It has already tied-up with Erik Buell Racing and AVL (Austria). While EBR brings
technology for premium motorcycles and development of new models, AVL gives
access to knowhow on engine technologies and would be focussed on modifying
existing engines.
It would continue to look out for further tie-ups in R&D. These tie-ups will enable
it to shorten its R&D learning curve.
Further, post split-up with Honda, HMCL has increased its R&D team to over 300
engineers from 171 (in Dec-10). It has also recruited expert expats for working on
existing products.
Aggressive capex plans to expand capacity from current 7m to 9m by
Mar-14
HMCL announced capacity addition by 2m units by 2QFY14 with total investments
of INR25.75b, with two plants and a R&D centre. These investments would be
funded through internal accruals and cash of ~INR40b as on Mar-12.
Its first plant will be set-up at Neemrana, Rajasthan with initial capacity of 0.75m
units at capex of INR4b and commencing operations from 1QFY14. The second
plant will be set-up in Gujarat with initial capacity of 1.25m units at capex of
INR11b and commencing operations from 2QFY14.
It will be setting up a R&D centre with an investment of INR4b at a 250-acre location
near Jaipur in Rajasthan.
Further, it is looking to set-up assembly operations in overseas market. However,
it would finalize its strategy over next few quarters.
20 July 2012
4

Hero MotoCorp
Valuation and view
We maintain our EPS estimates for FY13/FY14 at INR132/INR146. We model in for
volume growth of 9%/12.5% for FY13/FY14, and EBITDA margins of 14.4%/14.7%
respectively.
Hero MotoCorp has outperformed Sensex (by 10% in last 6 months and 24% in last
12 months) on the back of strong volume growth. However, volume momentum
in domestic 2W industry is expected to moderate in 1HFY13 to ~6%, but expected
to pick up in 2HFY13. Also, there are no near term catalysts, as margins remain
under pressure and profit growth below-normal.
However, long term potential remains intact, with significant volume growth and
margin expansion potential ahead.
The stock trades at 15.8x FY13 and 14.3x FY14 EPS. Maintain
Buy
with target price
of INR2,340 (16x FY14E EPS).
20 July 2012
5

Hero MotoCorp
Hero MotoCorp: an investment profile
Company description
Hero MotoCorp, erstwhile JV between Honda
Corporation Japan and the Munjal family, is the market
leader in domestic motorcycle market with ~47% market
share, benefiting by a strong dealership network with
good penetration in the rural areas as well. Post split
from Honda, Hero MotoCorp is free to tap global
opportunity in 2W.
Maintaining market share in increasing competitive
pressure (100cc segment), to restrict pricing power
and impact margins.
Honda's exit from Hero MotoCorp would result in
focused approach of HMSI in domestic market.
Recent developments
Key investment arguments
Volume growth is expected to remain stable, driven
by recovery in urban markets and increasing
penetration of its product in rural markets. We
estimate volume growth of 9% in FY13 to 6.8m units.
Margins to improve from historical low levels, driven
by vendor rationalization, operating leverage and
completion of fixed royalty payment by June 2014.
With exit of Honda, Hero MotoCorp is free to explore
global markets, which provides good long term
opportunity.
Announces capex plans of ~INR26b over FY13-14, to
add 2m unit capacity (at two new plants) and R&D
centre.
Valuation and view
The stock trades at 15.8x FY13 and 14.3x FY14 EPS.
Maintain
Buy
with target price of INR2,340 (16x FY14E
EPS).
Sector view
Demand drivers in place, driven by increasing
penetration in rural markets and replacement
demand from urban markets
Industry dynamics favorable, with focus on
profitability rather than market share.
Key investments risks
Weak INR to put pressure on margins.
EPS: MOSL forecast v/s consensus (INR)
Hero Honda
15.8
14.3
11.0
10.6
46.8
40.8
9.8
8.1
Bajaj Auto
14.1
11.9
2.2
18.9
46.8
44.5
9.3
7.5
MOSL
Forecast
132.2
146.2
Consensus
Forecast
137.6
147.2
Variation
(%)
-3.9
-0.7
Comparative valuations
P/E (x)
EPS Gr (%)
RoE (%)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13
FY14
Target price and recommendation
Current
Price (INR)
2088
Target
Price (INR)
2,340
Upside
(%)
12.1
Reco.
Buy
Stock performance (1 year)
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
Jun-12
52.2
5.9
33.3
8.5
Mar-12
52.2
5.6
33.5
8.7
Jun-11
52.2
4.6
33.8
9.5
20 July 2012
6

Hero MotoCorp
Financials and Valuation
20 July 2012
7

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Hero MotoCorp
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