2QFY2017 Result Update | Automobile
October 28, 2016
Hero MotoCorp
ACCUMULATE
CMP
`3,314
Performance Highlights
Target Price
`3,541
Y/E March (` cr)
2QFY17 2QFY16
% chg (yoy) 1QFY17
% chg (qoq)
Investment Period
12 Months
Net Sales
7,796
6,809
14.5
7,399
5.4
EBITDA
1,369
1,096
24.9
1,230
11.3
Stock Info
EBITDA margin (%)
17.56
16.09
146bp
16.63
93bp
Sector
Automobile
Adj PAT
1,004
786
27.7
883
13.7
Market Cap (` cr)
66,193
Source: Company, Angel Research
Net Debt (` cr)
(103)
Hero Motocorp (HMCL) reported strong 2QFY2017 numbers with 14.7% yoy
Beta
0.9
growth in its gross revenues to `8,322cr and 27.7% yoy growth in its net profit to
52 Week High / Low
3,739/2,375
`1,004cr in Q2FY17. Net sales increased by 14.5% yoy to `7,796cr in this
Avg. Daily Volume
17,212
quarter. With the strong recovery in consumer sentiment and revival in the auto
Face Value (`)
2
industry, HMCL reported 15.8% growth in its total 2W units sold in this quarter.
BSE Sensex
27,916
EBITDA came in at `1,369cr vs. `1,096cr a year ago. EBITDA margins improved
Nifty
8,615
to 17.6% vs. 16.1% in Q2FY16 and 16.7% in Q1FY17. Overall improvement in
Reuters Code
HROM.BO
its margins came due to the 1) lower input costs (4.1% yoy decline in RM cost per
Bloomberg Code
[email protected]
unit)
2)
1% QoQ increase in net realizations per unit (`42,059 per unit in
Q2FY17 vs. 41,765 per unit in Q2FY17)
Shareholding Pattern (%)
Outlook and valuation: We believe that HMCL volumes are expected to see
Promoters
34.6
further growth this year owing to the improved consumer sentiment. HMCL is
MF / Banks / Indian Fls
12.6
expected to emerge as a strong beneficiary of the recovery in the rural economy
FII / NRIs / OCBs
43.8
as it has a strong presence in the rural region. Company holds more than 50%
Indian Public / Others
9.0
market share in the overall 2W industry which will also benefit the company
further. Company indicated some cost pressure going ahead as commodity prices
have started to move up. However, overall profitability is expected to increase
Abs. (%)
3m 1yr 3yr
over higher sales volumes. We have estimated double digit volume growth
Sensex
(0.5)
1.7
13.9
(~10%) in remainder of FY2017E and in FY2018E. We also forecast slightly
Hero MotoCorp
6.8
30.6
71.3
higher RM costs in our model to accommodate higher input costs. The stock is
currently valued at15.9x of FY2018E EPS. We value stock at 17.0x of its FY2018E
EPS considering current momentum of growth and earnings. We rate HMCL as
3-year price chart
“Accumulate” with a price target of `3,541 implying 7% upside.
4000
Key financials (Standalone)
3000
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
2000
Net Sales
27,351
28,001
31,021
34,133
% chg
8.9
2.4
10.8
10.0
1000
Net Profit
2,386
3,162
3,824
4,010
0
% chg
13.1
32.5
20.9
4.9
OPM (%)
12.4
15.9
17.1
16.8
EPS (`)
119.5
158.3
191.5
200.8
Source: Company, Angel Research
P/E (x)
27.7
20.9
17.1
15.9
P/BV (x)
10.1
8.3
6.6
5.4
RoE (%)
32.9
34.2
33.5
30.0
RoCE (%)
39.9
45.0
43.5
39.8
Amarjeet S Maurya
EV/Sales (x)
2.4
2.4
2.1
1.9
022-3935 7800 Ext: 6846
EV/EBITDA (x)
20.9
16.4
13.5
12.2
[email protected]
Source: Company, Angel Research; Note: CMP as of Oct 27, 2015
Please refer to important disclosures at the end of this report
1
Hero MotoCorp | 2QFY2017 Result Update
Exhibit 1: Quarterly financial performance (Standalone)
Y/E March (` cr)
Q2FY17
Q2FY16
% chg (yoy)
Q1FY17
% chg (qoq)
1HFY17
1HFY16
% chg (yoy)
Total units sold
1,823,498
1,574,861
15.8
1,745,389
4.5
3,568,887
3,220,728
10.8
Net sales
7,796
6,809
14.5
7,399
5.4
15,195
13,714
10.8
Consumption of RM
5,183
4,666
11.1
4,965
4.4
10,149
9,477
7.1
(% of Sales)
66.5
68.5
67.1
66.8
69.1
Staff costs
357
308
15.9
336
6.3
694
621
11.6
(% of Sales)
4.6
4.5
4.5
4.6
4.5
Other expenses
887
739
20.0
867
2.2
1,754
1,478
18.6
(% of Sales)
11.4
10.9
11.7
11.5
10.8
Total Expenditure
6,427
5,714
12.5
6,169
4.2
12,596
11,576
8.8
Operating Profit
1,369
1,096
24.9
1,230
11.3
2,599
2,138
21.6
OPM
17.6
16.1
146.8
16.6
93.3
17.1
15.6
Depreciation
119
109
9.4
115
3.5
234
212
10.6
Other income
152
112
36.6
120
26.6
273
216
26.3
Finance cost
2
1
26.0
2
3.3
3
2
25.0
PBT (excl. Extr. Items)
1,400
1,097
27.7
1,234
13.5
2,634
2,139
23.1
Extr. Income/(Expense)
-
-
-
-
-
-
-
-
PBT (incl. Extr. Items)
1,400
1,097
27.7
1,234
13.5
2,634
2,139
23.1
(% of Sales)
18.0
16.1
16.7
17.3
15.6
Tax
396
311
27.5
351
13.0
747
605
23.4
(% of PBT)
28.3
28.3
28.4
28.4
28.3
Reported PAT
1,004
786
27.7
883
13.7
1,887
1,534
23.1
Adj PAT
1,004
786
27.7
883
13.7
1,887
1,534
23.1
Adj. PATM
12.9
11.5
11.9
12.4
11.2
Equity capital (cr)
40
40
40
40
40
Adjusted EPS (`)
50.3
39.4
27.7
44.2
13.7
94.5
76.8
23.1
Source: Company, Angel Research
The 15.8% growth in its quarterly volumes is the highest growth seen in the
last 8 quarters.
Contribution per vehicle after decline in Q1FY17 has shown improvement in
this quarter indicating lower discounts in Q2FY17 vs. Q1FY17.
HMCL continues to maintain leading position in the domestic 2W market and
expects better performance of its 150cc segment going ahead due to more
launches in this category. In the 100cc market, company has achieved 68%
market share.
Gross margins improved to 33.5% in Q2FY17 vs. 32.9% in Q1FY17. This is
mainly due to the subdued commodity prices seen during this quarter.
This is first time in last 25 quarters HMCL has reported EBITDA margins in
excess of 17% and these are the highest margins in the last 27 quarters.
At `1,004cr, its highest ever net profit.
The company has grown faster than the industry in its scooters segment.
During the quarter its other income rose by 36.7% to `152cr. Company has
said that most of its investments are in debt instruments which did well during
the quarter.
October 28, 2016
2
Hero MotoCorp | 2QFY2017 Result Update
Exhibit 2: Volume growth at 8 quarter high
Exhibit 3: Realisations & contribution/vehicle improve
2,000,000
25
44,000
16,000
20
1,800,000
42,000
15
14,000
1,600,000
10
40,000
5
1,400,000
12,000
0
38,000
1,200,000
-5
1,000,000
-10
36,000
10,000
Volumes
yoy growth (%)
Net realization (`)
Contribution / Vehicle (`)
Source: Company, Angel Research
Source: Company, Angel Research
Exhibit 4: Consistent rise in EBITDA margins beat
Exhibit 5: PAT at record high
1,600
20.0
1,200
14.0
1,400
12.0
1,000
1,200
15.0
10.0
800
1,000
8.0
800
10.0
600
6.0
600
400
4.0
400
5.0
200
2.0
200
0
0.0
0
0.0
EBITDA (`cr)
EBITDA margins (%)
Net profit (`cr)
Net margin (%)
Source: Company, Angel Research
Source: Company, Angel Research
Conference call - Key highlights
During the quarter, HMCL has benefitted due to the lower commodity prices
and has indicated that steel, rubber and plastic prices have started to move up
indicating that raw material costs in Q3 will be higher.
The company said that urban demand remained strong in Q2FY17 while rural
demand has just started to pick-up. It expects strong demand once farmers
start to get harvests money.
HMCL also said that a strong traction is seen in scooters segment and H2FY17
will sees higher sales from scooters segment.
Haridwar plant has a maximum production capacity of ~9,000-9,500 units
per day but at the moment it is producing ~6,000 units a day, indicating
utilization of ~67%. The new capacity will be commissioned in 3QFY17.
HMCL will launch emission compliant models from Q4FY17 onwards which
will increase costs by ~`250-300 and it will pass on the additional costs to
customers.
HMCL also holds highest market share than its peers in the 100cc category
and Glamour remains the best selling product in the entry level motorcycle
segment.
October 28, 2016
3
Hero MotoCorp | 2QFY2017 Result Update
Company was under represented in 150cc category but with launch of new
products in this category sales traction is expected to improve in this category.
It acquired 25-30% shareholding of Bangalore based technology start-up
Ather Energy Private Limited for `205cr. The company is in the business of
designing and manufacturing of smart electric vehicles and is already working
on two models. This investment is expected to boost HMCL’s electric vehicle
aspirations.
Investment arguments
Strong recovery in the domestic vehicle demand: The automobile demand in
India is seeing a strong traction due improvement in the consumer sentiment
as well as recovery in the rural economy. The lowering the interest rate is
expected to further increase the demand. Overall the demand scenario is
expected to remain strong over next few quarters which will result in growth in
volumes for the Automobile companies.
Hero Motocorp well positioned to gain from improving demand: Hero
Motocorp (HMCL) is a well established brand and commands more than 50%
market share in the domestic 2W industry. It has a wide range of brands from
entry level to high end motorbikes. It also has strong presence in scooters
segment and it is a well recognized in brand in rural area. This is expected to
benefit HMCL gong ahead.
Capacity expansion to meet higher demand: HMCL has total installed capacity
of ~8.2 million units. This capacity would further increase by ~0.750mn units
after commissioning of new capacity at Neemrana plant which is currently
under trial product run. Company is also developing a new capacity at Halol
in Gujarat (~1.8mn units), which is expected to be operational in FY2017. As
a result of its capacity expansion, HMCL remains well positioned to meet
future demand. Its Haridwar plant contributes ~35% of the total volumes and
is currently running at the capacity utilization of ~67% which gives enough
room for volume growth in short term.
Outlook and valuation
We believe that HMCL volumes are expected to see further growth this year owing
to the improved consumer sentiment. HMCL is expected to emerge as a strong
beneficiary of the recovery in the rural economy as it has a strong presence in the
rural region. Company holds more than 50% market share in the overall 2W
industry which will also benefit the company further. Company indicated some cost
pressure going ahead as commodity prices have started to move up. However,
overall profitability is expected to increase over higher sales volumes. We have
estimated double digit volume growth (~10%) in remainder of FY2017E and in
FY2018E. We also forecast slightly higher RM costs in our model to accommodate
higher input costs. The stock is currently valued at15.9x of FY2018E EPS. We value
stock at 17.0x of its FY2018E EPS considering current momentum of growth and
earnings. We rate HMCL as “Accumulate” with a price target of `3,541 implying
7% upside.
October 28, 2016
4
Hero MotoCorp | 2QFY2017 Result Update
Exhibit 6: Key assumptions - Volumes
Y/E March (` cr)
FY2013
FY2014
FY2015
FY2016E
FY2017E
FY2018E
Total two-wheelers
6,075,583
6,245,960
6,631,826
6,632,322
7,372,660
8,071,888
Source: Company, Angel Research
Company background
Hero MotoCorp (HMCL) is a leading 2W manufacturer globally and the market
leader in the domestic motorcycle segment with more than 50% market share.
HMCL has four manufacturing facilities in India, located at Gurgaon, Dharuhera,
Haridwar and Neemrana. It has also a production facility in Colombia. Together it
has a capacity of ~8.2mn units/year as of September 2016. Over 2010-16,
HMCL recorded a strong volume CAGR of ~12%, backed by its strong brands
(Passion and Splendor) and a well-entrenched dealership network (~19,000),
which has a good presence across rural areas as well.
October 28, 2016
5
Hero MotoCorp | 2QFY2017 Result Update
Profit and loss statement (Standalone)
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017E
FY2018E
Total operating income
25,125
27,351
28,001
30,958
34,139
% chg
6.5
8.9
2.4
10.6
10.3
Total Expenditure
21,735
24,198
23,982
26,094
28,771
Cost of Materials
18,230
19,754
19,315
21,047
23,209
Personnel
930
1,173
1,314
1,441
1,611
Others Expenses
2,576
3,271
3,354
3,606
3,950
EBITDA
3,389
3,152
4,018
4,863
5,368
% chg
7.8
(4.3)
31.7
20.0
9.9
(% of Net Sales)
13.5
11.5
14.4
15.7
15.7
Depreciation& Amortisation
1,107
540
441
481
529
EBIT
2,282
2,612
3,577
4,382
4,838
% chg
16.6
14.5
36.9
22.5
10.4
(% of Net Sales)
9.1
9.6
12.8
14.2
14.2
Interest & other Charges
12
11
5
6
6
Other Income
446
493
423
557
515
(% of PBT)
16.4
15.9
10.6
11.3
9.6
Recurring PBT
2,717
3,094
3,995
4,933
5,347
% chg
15.9
13.9
29.1
23.5
8.4
Prior Period & Extraord. Exp./(Inc.)
-
-
-
-
-
PBT (reported)
2,717
3,094
3,995
4,933
5,347
Tax
758
943
1,275
1,555
1,699
(% of PBT)
27.9
30.5
31.9
31.5
31.8
PAT (reported)
1,958
2,151
2,720
3,378
3,648
Add: Share of earnings of asso.
-
-
-
-
-
Less: Minority interest (MI)
-
-
-
-
-
PAT after MI (reported)
1,958
2,151
2,720
3,378
3,648
ADJ. PAT
1,958
2,151
2,720
3,378
3,648
% chg
(0.4)
13.1
32.5
22.3
7.6
(% of Net Sales)
7.8
7.9
9.7
10.9
10.7
Basic EPS (`)
105.6
119.5
158.3
193.6
208.3
Fully Diluted EPS (`)
105.6
119.5
158.3
193.6
208.3
% chg
(0.4)
13.1
32.5
22.3
7.6
October 28, 2016
6
Hero MotoCorp | 2QFY2017 Result Update
Balance sheet statement (Standalone)
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017E
FY2018E
SOURCES OF FUNDS
Equity Share Capital
40
40
40
40
40
Reserves& Surplus
5,560
6,501
7,905
10,031
12,111
Shareholders Funds
5,600
6,541
7,945
10,071
12,151
Minority Interest
-
-
-
-
-
Total Loans
284
-
-
-
-
Deferred Tax Liability
5
6
239
239
239
Other Liabilities
74
97
119
119
119
Total Liabilities
5,963
6,645
8,303
10,430
12,510
APPLICATION OF FUNDS
Gross Block
6,909
8,114
9,397
10,697
11,597
Less: Acc. Depreciation
4,666
5,201
5,560
6,041
6,571
Net Block
2,243
2,913
3,837
4,656
5,026
Capital Work-in-Progress
854
713
605
680
780
Investments
4,089
3,154
4,266
4,266
4,266
Current Assets
2,805
3,669
3,632
4,736
5,961
Inventories
670
815
673
1,018
1,309
Sundry Debtors
921
1,390
1,283
1,527
1,871
Cash
118
159
131
365
630
Loans & Advances
572
627
601
712
853
Other Assets
525
677
944
1,114
1,297
Current liabilities
4,139
3,883
4,049
3,920
3,535
Net Current Assets
(1,334)
(215)
(417)
816
2,425
Deferred Tax Asset
111
80
11
11
11
Mis. Exp. not written off
-
-
-
-
-
Total Assets
5,963
6,645
8,303
10,430
12,510
October 28, 2016
7
Hero MotoCorp | 2QFY2017 Result Update
Cash flow statement (Standalone)
Y/E March (` cr)
FY2014E FY2015E FY2016 FY2017E FY2018E
Profit before tax
2,867
3,329
4,395
5,421
5,859
Depreciation
1,107
540
441
481
529
Change in Working Capital
55
(337)
446
(999)
(1,345)
Interest / Dividend (Net)
(134)
(142)
(173)
6
6
Direct taxes paid
(649)
(1,000)
(1,103)
(1,555)
(1,699)
Others
(282)
(141)
(92)
-
-
Cash Flow from Operations
2,963
2,250
3,914
3,354
3,351
(Inc.)/ Dec. in Fixed Assets
(937)
0
0
(1,375)
(1,000)
(Inc.)/ Dec. in Investments
(680)
12
(2,271)
-
-
Cash Flow from Investing
(1,617)
12
(2,271)
(1,375)
(1,000)
Issue of Equity
-
-
1
-
-
Inc./(Dec.) in loans
0
0
0
0
0
Dividend Paid (Incl. Tax)
(1,199)
(1,897)
(1,398)
(1,740)
(2,080)
Interest / Dividend (Net)
(216)
(333)
(287)
(6)
(6)
Cash Flow from Financing
(1,415)
(2,231)
(1,684)
(1,746)
(2,086)
Inc./(Dec.) in Cash
(69)
32
(42)
234
265
Opening Cash balances
135
66
98
131
365
Closing Cash balances
66
98
56
365
630
October 28, 2016
8
Hero MotoCorp | 2QFY2017 Result Update
Key ratios
Y/E March
FY2014E FY2015E FY2016 FY2017E FY2018E
Valuation Ratio (x)
P/E (on FDEPS)
31.4
27.7
20.9
17.1
15.9
P/CEPS
20.6
22.6
18.4
15.2
14.1
P/BV
11.8
10.1
8.3
6.6
5.4
Dividend yield (%)
2.0
1.8
2.2
2.6
3.1
EV/Sales
2.6
2.4
2.4
2.1
1.9
EV/EBITDA
19.6
20.9
16.4
13.5
12.2
EV / Total Assets
6.6
6.3
5.3
4.6
4.1
Per Share Data (`)
EPS (Basic)
105.6
119.5
158.3
193.6
208.3
EPS (fully diluted)
105.6
119.5
158.3
193.6
208.3
Cash EPS
161.1
146.5
180.4
217.7
234.8
DPS
65.1
60.0
72.0
87.1
104.2
Book Value
280.4
327.6
397.8
504.3
608.5
Returns (%)
ROCE
38.8
39.9
45.0
43.5
39.8
Angel ROIC (Pre-tax)
136.0
80.9
100.8
80.6
66.7
ROE
35.0
32.9
34.2
33.5
30.0
Turnover ratios (x)
Asset Turnover (Gross Block)
3.6
3.4
3.0
2.9
2.9
Inventory / Sales (days)
10
11
9
12
14
Receivables (days)
13
19
18
20
-
Payables (days)
33
38
38
32
26
WC cycle (ex-cash) (days)
(10)
(8)
(11)
-
(12)
October 28, 2016
9
Hero MotoCorp | 2QFY2017 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL
and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a
registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number
INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing
/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public
offering of securities of the company covered by Analyst during the past twelve months.
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the
contrary view, if any.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from
or in connection with the use of this information.
Disclosure of Interest Statement
Hero MotoCorp
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
October 28, 2016
10