Edelweiss charges Hero MotorCorp as ‘Maintain’, pegs TP at Rs 3,585

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Hero MotoCorp’s (HMCL) Q4FY17 EBITDA at Rs 9.6 billion (down 20% y-o-y) got here 9% beneath estimate as a result of gross margin miss (higher-than-expected commodity stress).

FY19 will see affect of expiry of excise advantages at its Haridwar plant.Hero MotoCorp’s (HMCL) Q4FY17 EBITDA at Rs 9.6 billion (down 20% y-o-y) got here 9% beneath estimate as a result of gross margin miss (higher-than-expected commodity stress). Key convention name highlights: 2-wheeler business to develop in excessive single digits in FY18; uptrend in share of scooters to maintain; HMCL goals to achieve market share driving rural demand restoration and better scooters pie; present stock stage at ~4-5 weeks versus regular ~5-6 weeks as retail gross sales in April-Could have been sturdy; and Rs 25 billion capex over FY18-19 in the direction of capability addition, R&D, digitisation and upkeep. Keep ‘maintain’ with a TP of Rs 3,585. Income, at Rs 69.1 billion (down 8% y-o-y), got here 1.3% beneath estimate. Reductions of Rs 1.93 billion (our estimate: Rs 2.zero billion) have been provided to clear BS-III stock. Gross margin stunned negatively at 31.5% (estimate 32.8%) as a result of higher-than-expected commodity price stress (uncooked materials per unit up 4% q-o-q). Although price stress is probably going in Q1FY18 as nicely, we count on it to be largely offset by value hikes in Could (~Rs 500-2,200) and softening of commodity costs. Reported PAT of ~`7.2 billion, down 14% y-o-y, surpassed our estimate 8% as a result of decrease efficient tax charge. We count on HMCL to profit from a restoration in rural demand in FY18. Nevertheless, over the long run, market share acquire scope stays difficult given weak franchise throughout fast-growing scooter and premium bike segments. In our view, margin profit from LEAP programme and quantity restoration shall be neutralised by the corporate’s efforts to achieve share in extremely aggressive scooter and premium bike segments. Additionally, FY19 will see affect of expiry of excise advantages at its Haridwar plant (~80bps margin affect). Our considerations on HMCL emanate from: shift in demand from its bread-and-butter govt 100cc motorbike section to scooters; and rising demand for >250cc bikes, the place HMCL’s presence is restricted. Nevertheless, a wholesome enterprise franchise with RoE of ~36% and sturdy free money move era restrict draw back. You might also like to observe this video We keep ‘maintain/SU’ with goal value of Rs 3,585 (17x FY19E core EPS plus `387 money per share). At CMP, the inventory trades at 16x FY19E PER. Administration expects 2W business to develop in excessive single digits in FY18, pushed by regular monsoons, govt spend on infrastructure and demand restoration put up demonetisation.

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