Hero MotoCorp
BSE SENSEX
24,623
S&P CNX
7,486
11 March 2016
Update
| Sector:
Automobiles
CMP: INR2,812
TP: INR3,050(+8%)
Bridges gap on R&D
Buy
Jaipur R&D centre one of its kind fully integrated R&D set-up in India
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)/Vol m
Free float (%)
HMCL IN
199.7
2,857/2,252
8/24/22
561.5
8.4
1,478.6 / 0.6
65.4
We visited HMCL's state of the art R&D centre at Kukas, near Jaipur in Rajasthan, and
came back impressed with level of integration and deployment of latest cutting edge
technologies. Centre of Innovation and Technology (CIT) is one of its kind fully integrated
single location R&D centre in India. It’s an impressive big bang entry into full scale
product development activity by HMCL, and bridges the gap vis-a-vis peers wrt
infrastructure and helping to reduce product development timeline and cost. Key
highlights:
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Net Sales
283.8 317.4 360.6
EBITDA
44.3
50.2
57.6
PAT
31.4
36.7
43.5
EPS (INR)
157.1 183.6 218.0
Gr. (%)
25.6
16.9
18.7
BV/Sh (INR)
400.3 487.5 597.1
RoE (%)
43.2
41.4
40.2
RoCE (%)
60.2
56.9
54.4
P/E (x)
17.9
15.3
12.9
P/BV (x)
7.0
5.8
4.7
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Sep-15 Jun-15 Sep-14
34.6
13.8
38.2
13.4
34.6
13.4
38.5
13.5
39.9
8.4
34.3
17.3
FII Includes depository receipts
Stock Performance (1-year)
3,000
2,750
2,500
2,250
2,000
Hero Motocorp
Sensex - Rebased
CIT is built over 247 acres of land (vs 3 acres existing R&D unit at Dharuhera),
with investment of INR8.5b (vs planned investments of INR4.5b at inception in
Sep-13).
CIT is headed by Dr Markus Braunsperger, Chief Technology Officer at Hero
MotoCorp. CIT has a dedicated team, with large part of senior management of
CIT comprising of expats (including dedicated Head HR) from global players.
Designing is headed Mr Miyo, who had worked with Honda for 37 years before
joining HMCL two years ago.
CIT would carry out entire product development activities starting from market
study and ends at prototype testing. It is one of its kind facility housing entire
of R&D process under one roof, including self-sufficient facilities for new
product design, prototype manufacturing, testing and validation.
Fully integrated CIT will save time, ensure better quality (considering its unique
5 years warranty) and result in cost savings.
Entire existing small R&D operations of HMCL would be shifted from
Dharuhera plant. Unlike in the past, HMCL is now self sufficient in R&D wrt
infrastructure, equipment and senior experienced R&D team for entire product
development cycle.
While CIT marks HMCL's big bang entry into fully integrated research activity, it
is also a big step up over existing R&D activity of its 2W peers in India. Its has
already successfully developed and launched two new scooters in CY15, and
has developed Splendor iSmart 110 grounds up with help of its engineering
partners.
CIT’s focus is on four areas – 1) setting up of systems and processes for R&D, 2)
strengthening the talent pipeline, 3) strengthening the product portfolio and 4)
fulfilling global standards when it comes to product development.
It is deploying several cutting edge latest technology for R&D [like 3D printers
for plastic and metal parts prototyping, EMC labs (only ARAI has EMC lab in
India) etc] to reduce development time and costs.
CIT will play big part in achieving HMCL's aspirations to ‘Innovate in India' from
Make in India.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Jinesh Gandhi
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Aditya Vora
(Aditya.Vora@MotilalOswal.com); +91 22 3078 4701

Hero MotoCorp
We aim to introduce cost-
efficient and game-
changing solutions for India
and the world. My dream is
to make Hero MotoCorp
the world’s No. 1 two-
wheeler company in every
sense and dimension” Mr
Pawan Munjal, MD & CEO,
HMCL
R&D will focus on a) defending and expanding its market share in 100-125cc, b)
building on recent success in scooters, c) increase presence in its weak area of
premium segment (150cc & above) and d) motorcycles in over 250cc segment
for the global markets. Also, its platform strategy would be have multiple
variants on the same platform.
CIT has 14 test tracks spread over 100 acres, covering 16kms and has 45
different surfaces for testing.
CIT has ~500 engineers (to be ramped up to 600 shortly), with average age at
~30 years.
CIT is self-sustained facility and has a platinum rating by the Indian green
building council, with over 15,000 trees and 22 ponds for rain water harvesting.
It uses solar power across the entire facility.
“The CIT is the new home of our R&D team and the commencement of operations
here is a major milestone in our endeavour to ramp-up the product development
competency to global standards at Hero. Within this facility we are establishing new
work processes and enhancing our technical skills to global benchmarks. We will
compete globally, attracting the best talent from India and across the world. The CIT
will become a unique workplace for engineering talent in India, bringing our R&D
vision to life – energising smart mobility. The Hero CIT will be a unique workplace for
engineering talent in India. We are bringing our R&D vision to life through this
facility. Within this facility, we are establishing new work processes and enhancing
our technical skills to global benchmarks. The future roadmap for Hero CIT has four
main objectives -- setting up systems, strengthening our talent pipeline,
strengthening our product portfolio and fulfilling global standards. Dr Markus
Braunsperger, Chief Technology Officer, HMCL.
Exhibit 1: HMCL's Centre of Innovation and Technology (CIT), Jaipur
Source: Internet
11 March 2016
2

Hero MotoCorp
Exhibit 2: HMCL's Centre of Innovation and Technology (CIT), Exhibit 3: CIT has 14 test tracks spread over 100 acres
Jaipur
covering 16Kms
Source: Internet
Source: Internet
Exhibit 4: Central watchtower at CIT
Source: Internet
11 March 2016
3

Hero MotoCorp
Exhibit 5: Model Layout of CIT
Source: Internet
11 March 2016
4

Hero MotoCorp
Valuation and view
Industry growth to remain sub-dued, competitive pressure to remain high:
Domestic 2W industry growth is expected to remain subdued at 6-8%, impacted
by weak Kharif and rabi crop in FY15, and back-to-back weak monsoon in FY16.
This coupled with several new launches by competition in 100cc Executive
segment would curtail pricing power and put pressure on margins.
Product lifecycle turning positive; 2 launches in FY16:
HMCL has launched just 1
new product over the last 2 years. HMSI, over the same period, launched
around six new products. HMCL is embarking on a favorable product lifecycle,
with recent launches of scooter Maestro Edge and Duet, together with major
refreshes to existing products such as recently-launched Splendor iSmart (with
start-stop technology) and new Splendor Pro. It is targeting ~35 launches over
next 3 years, including 250cc motorcycle (in 1HFY17).
Export market to offer huge headroom for growth, but scale-up would be
challenge:
HMCL plans to double its target export markets from currently 20 to
40 countries over next few years. While motorcycle exports to emerging market
is a huge opportunity (~2x of India market), HMCL being one of the last entrant
could find it difficult to compete against incumbents (especially Bajaj Auto) due
to limited scope to differently position its product. This coupled with turmoil in
currencies of these markets would make entry and ramp-up even more difficult.
Cost cutting potential high, deliverance starting now:
HMCL’s cost cutting
initiative under project ‘Leap 20’ is focused at driving significant improvements
in cost structure, with simultaneous improvement in product quality and
reliability. The management is targeting ~100bp savings in FY16, with further
scope to save cost.
Valuation and view:
After 3 years of muted earnings growth, we estimate
HMCL’s EPS to grow at 18% CAGR, based on 11% volume CAGR. Our estimates
could see upside driven by sustained response for its recent scooter launches
and potential benefit of normal monsoon. The stock trades at 15.3x/12.9x
FY17E/18E EPS. Maintain
Buy
with a target price of INR3,050 (13x FY18E EPS—in
line with LPA less PV of impact of excise duty exemption going away in FY19).
11 March 2016
5

Hero MotoCorp
Financials and Valuations
Income Statement
Y/E March
Volumes ('000)
Volume Growth (%)
Net Revenues
Change (%)
EBITDA
Adj EBITDA Margin (%)
Depreciation
EBIT
Interest cost
Other Income
Non-recurring Expense
PBT
Tax
Effective Tax Rate (%)
PAT
Change (%)
% of Net Sales
Adj. PAT
Change (%)
Balance Sheet
Y/E March
Sources of Funds
Share Capital
Reserves
Net Worth
Deferred Tax
Loans
Capital Employed
Application of Funds
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr.Assets, L & Adv.
Inventory
Sundry Debtors
Cash & Bank Balances
Loans & Advances
Others
Current Liab. & Prov.
Sundry Creditors
Other Liabilities
Provisions
Net Current Assets
Miscellaneous Expenditures
Application of Funds
E: MOSL Estimates
2011
5,402
17.4
193,979
23.1
26,125
12.6
4,024
22,102
152
2,896
798
24,048
4,769
19.8
19,279
-13.6
9.9
19,919
-10.8
2011
399
29,161
29,561
2,468
21,518
53,546
55,385
14,582
40,803
500
51,288
14,673
5,249
1,306
715
6,870
532
53,716
20,733
22,173
10,811
-39,044
0
53,546
2012
6,235
15.4
235,790
21.6
36,188
11.9
10,973
25,214
213
3,646
0
28,647
4,866
17.0
23,781
23.4
10.1
23,781
19.4
2012
399
42,499
42,898
2,083
17,143
62,124
63,083
25,228
37,855
388
39,643
21,003
6,756
2,723
768
10,092
664
36,765
22,932
2,933
10,901
-15,762
0
62,124
2013
6,076
-2.6
237,681
0.8
32,845
10.3
11,418
21,427
119
3,984
0
25,292
4,110
16.3
21,182
-10.9
8.9
21,182
-10.9
2013
399
49,663
50,062
1,324
3,022
54,408
67,355
36,645
30,710
621
36,238
28,848
6,368
6,650
1,810
13,336
683
42,008
18,733
8,876
14,399
-13,161
0
54,408
2014
6,246
2.8
252,755
6.3
35,401
10.7
11,074
24,327
118
4,464
0
28,673
7,582
26.4
21,091
-0.4
8.3
21,091
-0.4
2014
399
55,599
55,999
0
245
56,243
69,089
46,657
22,433
8,541
40,888
28,052
6,696
9,206
1,175
10,277
699
44,730
22,906
5,881
15,943
-16,678
1,060
56,243
2015
6,632
6.2
275,853
9.1
35,422
12.2
5,400
30,022
111
4,927
1,550
33,288
9,432
28.3
23,856
13.1
8.6
24,968
18.4
2015
399
65,014
65,413
0
313
65,727
81,140
52,013
29,127
7,126
31,541
36,688
8,155
13,896
1,593
11,845
1,200
39,490
28,419
3,075
7,997
-2,802
735
65,727
2016E
6,592
-0.6
283,828
2.9
44,312
15.8
4,371
39,941
125
4,031
0
43,847
12,481
28.5
31,366
31.5
11.1
31,366
25.6
2016E
399
79,535
79,935
0
313
80,248
97,266
56,384
40,881
7,500
31,541
55,737
8,338
14,207
19,856
12,110
1,227
56,148
29,055
9,577
17,516
-410
735
80,248
(INR Million)
2017E
2018E
7,266
8,172
10.2
12.5
317,402
360,589
11.8
13.6
50,220
57,622
16.0
16.2
5,097
5,611
45,123
52,011
125
125
5,513
7,088
0
0
50,510
58,973
13,840
15,438
27.4
26.2
36,671
43,536
16.9
18.7
11.6
12.1
36,671
43,536
16.9
18.7
(INR Million)
2017E
2018E
399
96,955
97,354
0
313
97,668
110,766
61,481
49,285
7,500
31,541
71,918
9,347
15,927
31,693
13,576
1,375
63,312
32,573
10,736
20,003
8,606
735
97,668
399
118,833
119,233
0
313
119,546
118,266
67,092
51,173
7,500
31,541
100,334
10,624
18,103
54,612
15,431
1,563
71,738
37,023
12,203
22,512
28,596
735
119,546
11 March 2016
6

Hero MotoCorp
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
EPS Growth (%)
Cash EPS
Book Value per Share
DPS
Payout (Incl. Div. Tax) %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price to Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors (Days)
Working Capital (Days)
Asset Turnover (x)
Fixed Asset Turnover
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E March
Profit before Tax
Depreciation & Amort.
Direct Taxes Paid
(Inc)/Dec in Working Capital
Interest/Div. Received
Other Items
CF from Oper. Activity
Extra-ordinary Items
CF after EO Items
(Inc)/Dec in FA+CWIP
Free Cash Flow
(Pur)/Sale of Invest.
CF from Inv. Activity
Interest Paid
Dividends Paid
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2011
99.7
-10.8
107.6
148.0
105.0
125.1
2012
119.1
19.4
132.0
214.8
45.0
43.5
23.6
21.3
14.9
2.3
13.1
1.6
65.6
49.9
178.5
4
11
35
-24
3.8
4.0
0.4
2012
28,647
10,973
-5,827
-6,906
-3,674
384
23,598
431
24,029
-5,034
18,564
5,962
928
-213
-24,369
-24,582
375
393
768
2013
106.1
-10.9
120.2
250.7
60.0
65.1
26.5
23.4
16.0
2.2
11.2
2.1
45.6
43.6
93.7
11
10
29
-20
4.4
3.6
0.1
2013
25,292
11,418
-6,133
-7,872
-4,002
202
18,904
-5,943
12,961
-6,004
12,900
5,079
-925
-119
-10,444
-10,563
1,473
337
1,810
2014
105.6
-0.4
118.1
280.4
65.0
70.8
26.6
23.8
14.7
2.1
10.0
2.3
39.8
52.0
116.6
14
10
33
-24
4.5
3.7
0.0
2014
28,673
11,074
-6,495
545
-4,446
284
29,634
511
30,145
-9,328
20,307
-6,866
-16,193
-118
-14,031
-14,149
-197
1,373
1,175
2015
125.0
18.4
146.5
327.6
60.0
57.8
22.5
19.2
14.9
1.9
8.6
2.1
41.1
57.3
91.7
19
11
38
-4
4.2
3.7
0.0
2015
33,288
5,400
-9,998
-3,359
-4737
356
20,950
2,163
23,113
-11,530
9,420
11,651
121
-111
-22,194
-22,305
928
664
1,592
2016E
157.1
25.6
179.0
400.3
70.0
51.3
17.9
15.7
11.5
1.8
7.0
2.5
43.2
60.2
92.7
19
11
37
-1
3.5
3.2
0.0
2016E
43,847
4,371
-12,481
15,871
125
51,733
0
51,733
-16,500
35,233
0
-16,500
-125
-16,845
-16,970
18,263
1,593
19,856
2017E
183.6
16.9
209.2
487.5
80.0
50.1
15.3
13.4
9.9
1.6
5.8
2.8
41.4
56.9
103.2
19
11
37
10
3.2
3.1
0.0
2018E
218.0
18.7
246.1
597.1
90.0
47.5
12.9
11.4
8.3
1.3
4.7
3.2
40.2
54.4
112.9
19
11
37
29
3.0
3.1
0.0
3.7
62.0
55.3
-177.1
3
10
39
-73
3.6
4.7
0.7
2011
24,048
4,024
-4,812
1,847
-2933
368
22,542
324
22,866
-3,229
19,313
-9,994
-13,223
-152
-9,401
-9,552
90
625
715
(INR Million)
2017E
2018E
50,510
58,973
5,097
5,611
-13,840
-15,438
2,820
2,930
125
44,713
0
44,713
-13,500
31,213
0
-13,500
-125
-19,251
-19,376
11,837
19,856
31,693
125
52,202
0
52,202
-7,500
44,702
0
-7,500
-125
-21,657
-21,782
22,920
31,693
54,612
11 March 2016
7

Disclosures
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Hero MotoCorp
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11 March 2016
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