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In-line, success of new launch encouraging
Hero Motocorp’s Q1FY20 performance was in-line, with EBITDA margins at 14.4%, lower 120bps YoY but up 80bps QoQ. The sustenance of margins at current levels to continue led by commodity tailwinds in coming quarters. Management hinted for better H2FY20 on the back of festive season, benefit of new product launch, decent spread-out of monsoon in July, BS VI related pre-buy as well as inventory filling for BS6 vehicles in Q4FY20. However, from the pricing perspective, full pass-on of the BS6 cost increase might still be challenging. We, factor in volume growth of -1.5% / 3.4% and stable margins at -14% for FY20/21E respectively. Over the coming quarters, for incremental market share gains and improved profitability, success of new launches in the premium (200cc) motorcycle and scooter (125cc) segments would be key for the company. We maintain ‘Accumulate’ with a price target of Rs2,530 based on 14x Mar’21 EPS (~20% discount to 10 year LPA).
Lower spare parts sales impact blended realizations:
With 12% YoY drop in volumes but 4% improvement in realisations, HMCL reported revenue of Rs80.3bn, lower 8.8% YoY, up 2% QoQ (PLe: Rs82.3bn). Realisations were down ~2% QoQ owing to spare parts forming 7.7% of sales at Rs6.2bn v/s 10% in Q4FY19. ASP for 2Ws was higher by Rs250/unit QoQ, partly led by price increase in Apr-19.
Margins in-line at 14.4%
(down 120bps YoY/ up 80bps QoQ), wherein gross margins improved 40bps YoY (down 60bps QoQ) and staff costs / other expenses as a % of sales were up 110bps / 40bps YoY respectively.
Adj. PAT in-line at INR7.6b:
Higher non-operating income (including one-off NCCD linked interest income amounting to Rs500mn) was offset by higher depreciation provision (including accelerated depreciation of ~Rs650mn), leading to net profit (adjusting for exceptional gain of Rs7.4bn for reversal of NCCD provision) declining 16% YoY at Rs7.6bn (in-line with PLe).
Key takeaways from con-call:
1) Volume decline over Q1FY20 included inventory correction of ~80K units (mainly in the delux segment) taking the current inventory level to ~42 days (v/s 45 days in Q4FY19), which the company is comfortable taking for the festive season.
2) Expect 2HFY20 to be better starting festive season end of Sep’19. Pre-buy and easing liquidity issues should aid volumes.
3) Retails were lower ~6% in 1QFY20 (v/s wholesales decline of 12%), leading to inventory correction.
4) Motorcycles are gaining at the expense of scooters, with scooter contribution over Q1FY20 lower at 30.2%.
5) Financing for HMCL stood at 37.3% of sales wherein Hero Fincorp contributed 47%. 7) The company had taken a small price hike of ~0.8-1% in July’19.
6) Capex for FY20 revised slighlty downwards of the earlier guided Rs15bn. However, the company will be commencing the phase I (capacity of ~600K units) of its A.P. plant in FY20.
7) Retail market share in 125cc segment at 15% while the response for new premium models remain strong.
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