RESULTS REVIEW 4QFY19 28 APR 2019

Hero Motocorp BUY

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Driving uphill, value in sight?Hero’s 4Q results were inline with estimates at the operating level – the EBITDA came in at Rs 10.7bn, with a reported margin of 13.6%. Higher tax led to a PAT miss (-25% YoY, -5% QoQ). With a full year dividend of Rs 87 (~3.3% yield) and steady market share, our BUY stands. Our TP is Rs 3,080 (at 16x FY21E EPS), with estimates falling by ~4%.

HIGHLIGHTS OF THE QUARTER

Financial highlights: 4Q volumes declined -11% YoY, but revenues fell 8% YoY as realisations grew 2% on 13% higher spares revenue. EBITDA margin was 13.6% (-240 bps), a tad weaker than est. 13.8%. Higher tax rate at 32% (vs.30.3% YoY) led to a reported PAT of Rs7.3bn (-24.5% YoY).

Premium segment launches to continue: Co will continue to launch new premium segment products to broad base the portfolio. The Xpulse 200cc and Maestro Edge 125cc scooter will be launched in May-19. These follow the Xtreme 200R and the Destini 125cc scooter, launched in Oct-18. Hero’s marginal presence in the high end segment will improve. We

believe it will be able to defend market share at ~50% sustainably in motorbikes.

The two wheeler industry is requesting the ministry to lower GST rates on 100cc bikes to 18% (from 28%). This can partly offset price hikes on BSVI upgrades.

Hero has defended market share in the entry segment (actually risen to 65% in 4Q) and reduced dealer inventory. Hero is addressing white spaces in its portfolio via models in the premium 200cc motorbike segment and in the 125cc scooter segment.

STANCE

Amidst a challenging demand environment and rising competition (particularly from Bajaj), Hero has defended market share due to its brand franchise. Further, management is upping the ante in the premium segment with multiple product launches. The stock is trading at attractive valuations of 14.5x on FY20E estimates and it offers a dividend yield of ~3.3%. The company continues to enjoy healthy return ratios (with ROE’s in excess of 20%). We re-iterate our BUY rating on the stock.

Financial Summary YE March (Rsmn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY17 FY18 FY19 FY20E FY21E Net Sales 78,850 85,640 (7.9) 78,648 0.3 284,750 322,305 336,505 370,168 398,856 EBITDA 10,693 13,706 (22.0) 11,048 (3.2) 46,348 52,802 49,301 52,043 55,690 APAT 7,303 9,674 (24.5) 7,691 (5.0) 33,771 36,974 33,848 35,927 38,456 Diluted EPS (Rs) 36.6 48.4 (24.5) 38.5 (5.0) 169.1 185.1 169.5 179.9 192.6 APAT Growth (%) 6.9 9.5 (8.5) 6.1 7.0 P/E (x) 15.4 14.1 15.4 14.5 13.6 RoE (%) 35.7 33.8 26.9 25.2 23.9 Source: Company, HDFC sec Inst Research

INDUSTRY AUTOS CMP (as on 26 Apr 2019) Rs 2,604 Target Price Rs 3,080 Nifty 11,755 Sensex 39,067 KEY STOCK DATA Bloomberg HMCL IN No. of Shares (mn) 200 MCap (Rsbn) / ($ mn) 520/7,428 6m avg traded value (Rsmn) 1,945 STOCK PERFORMANCE (%) 52 Week high / low Rs 3,819/2,515 3M 6M 12M Absolute (%) (2.5) (3.7) (30.8) Relative (%) (10.9) (20.9) (43.3) SHAREHOLDING PATTERN (%) Dec-18 Mar-19 Promoters 34.6 34.6 FIs & Local MFs 15.4 16.1 FPIs 40.0 38.2 Public & Others 10.1 11.1 Pledged Shares 0.0 0.0 Source : BSE Aditya Makharia aditya.makharia@hdfcsec.com +91-22-6171-7316 Mansi Lall mansi.lall@hdfcsec.com +91-22-3021-2070

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CON-CALL HIGHLIGHTS

Hero’s retails in Mar19 were healthy at 700k units (vs. wholesales of 550k). Thus, system inventory has reduced to 45-50 days. The insurance scheme benefitted sales.

For FY20, growth is expected to be back ended as pre buy will drive sales in 2H.

Management expects industry to grow in mid-single digits and margins are likely to be in the ~14% range over the year.

The finance penetration is at 40% currently (this has been impacted by the funding crunch at NBFCs). Hero Fincorp accounts for 40% of the overall 2W’s financed.

Capex for FY19 was Rs 8bn and it will increase to Rs 15bn in FY20 as the Andhra plant gets commissioned.

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Quarterly Financials Snapshot: Standalone Particulars (in mn) 4QFY18 3QFY19 4QFY19 YoY (%) QoQ (%) FY18 FY19 YoY (%) Volumes (in units) 2,001,571 1,798,905 1,781,160 (11.0) (1.0) 7,587,169 7,820,745 3.1 Net ASP (Rs/veh) 42,787 43,720 44,269 3.5 1.3 42,480 43,027 1.3

Net sales (incl OOI) 85,640 78,648 78,850 (7.9) 0.3 322,305 336,505 4.4 Material Expenses 57,931 54,145 54,385 (6.1) 0.4 218,346 233,177 6.8 Employee Expenses 3,809 4,357 4,473 17.4 2.7 15,401 17,302 12.3 Other Operating Expenses 10,195 9,098 9,298 (8.8) 2.2 35,755 36,725 2.7 Total Expenditure 71,935 67,601 68,156 (5.3) 0.8 269,503 287,205 6.6 EBITDA 13,706 11,048 10,693 (22.0) (3.2) 52,802 49,301 (6.6) Depreciation 1,483 1,520 1,502 1.3 (1.2) 5,556 6,020 8.4 EBIT 12,223 9,528 9,191 (24.8) (3.5) 47,246 43,281 (8.4) Other Income 1,665 1,876 1,642 (1.4) (12.5) 5,258 6,913 31.5 Interest Cost 15 20 22 42.2 9.5 63 86 37.6 PBT 13,872 11,384 10,811 (22.1) (5.0) 52,442 50,107 (4.5) Tax 4,198 3,693 3,508 (16.4) (5.0) 15,468 16,259 5.1 APAT 9,674 7,691 7,303 (24.5) (5.0) 36,974 33,848 (8.5) Adj EPS 48.4 38.5 36.6 (24.5) (5.0) 185.1 169.5 (8.5) Source: Company, HDFC sec Inst Research

Margin Analysis: Standalone As % of sales 4QFY18 3QFY19 4QFY19 YoY (bps) QoQ (bps) FY18 FY19 YoY (bps) Material Expenses 67.6 68.8 69.0 132.9 12.9 67.7 69.3 155 Employee Expenses 4.4 5.5 5.7 122.5 13.3 4.8 5.1 36 Other Operating Expenses 11.9 11.6 11.8 (11.2) 22.4 11.1 10.9 (18) Total Expenditure 84.0 86.0 86.4 244.2 48.5 83.6 85.3 173 EBITDA 16.0 14.0 13.6 (244.2) (48.5) 16.4 14.7 (173) RPAT 11.3 9.8 9.3 (203.4) (51.7) 11.5 10.1 (141) Tax as % of PBT 30.3 32.4 32.4 218.5 0.6 29.5 32.4 295 Source: Company, HDFC sec Inst Research

Realisations were higher 4% YoY, 1% QoQ due to 13% growth in spare part revenues EBITDA Margins came in at 13.6%, (largely inline with expectations of 13.8%).

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Volume Assumptions (in units) FY17 FY18 FY19 FY20E FY21E Motorcycle sales 5,834,260 6,677,207 7,080,873 7,531,931 7,857,917 % YoY 1.7% 14.4% 6.0% 6.4% 4.3% Scooter sales 829,786 909,986 739,958 823,232 864,808 % YoY -7.4% 9.7% -18.7% 11.3% 5.1% Total sales 6,664,046 7,587,193 7,820,831 8,355,163 8,722,724 % YoY 0.5% 13.9% 3.1% 6.8% 4.4% Source: Company, HDFC sec Inst Research

The management expects mid -single digit growth in FY20, with growth being back ended. (Pre Buy will drive sales)

HERO MOTOCORP : RESULTS REVIEW 4QFY19

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Volumes Trend Realization

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research EBITDA margin (%) Market share in Motorcycle segment

Source: Company, HDFC sec Inst Research Source: SIAM, HDFC sec Inst Research

Realisation increased by 3.5% YoY to Rs 44k Hero has consistently maintained a market share of 50% in its core motorcycle segment

6.2 10

.9

16.0

23.4

13.6

5.5

5.3

-11.

0

-12

-6

0

6

12

18

24

1,000

1,200

1,400

1,600

1,800

2,000

2,200

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

Volumes ('000 units) % change YoY -RHS

43.0

41.3

42.7 42.8

41.8

42.6

43.744.3

39.0

40.0

41.0

42.0

43.0

44.0

45.0

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

Avg realisation (Rs '000)

48

50

52

54

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

Mar

-19

Domestic motorcycles market share (%)

16.3

17.4

15.9

16.0

15.6

15.2

14.0

13.6

12

14

16

18

8,000

10,000

12,000

14,000

16,000

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

EBITDA (Rs mn) EBITDA Margin (%) - RHS

HERO MOTOCORP : RESULTS REVIEW 4QFY19

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Overall market share in the 2W industry Model Launches Calendar

Source: SIAM, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research 1 year forward P/E band

Dest

ini 1

25cc

Mae

stro

Edg

e 12

5cc

Xtre

me

200R

XPul

se 2

00

3QFY19 1QFY20

5

10

15

20

25

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Mar

-19

PE Mean +1 SD -1 SD

34

35

36

37

38

39

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

Mar

-19

Domestic market share (%)

HERO MOTOCORP : RESULTS REVIEW 4QFY19

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Peer Set Comparison

Mcap (Rsbn)

CMP (Rs/sh) Reco TP

Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E

Maruti Suzuki 2,067 6,843 BUY 7,350 248.4 290.2 334.5 27.6 23.6 20.5 15.5 12.6 10.5 16.9 17.6 17.9 Bajaj Auto 881 3,045 BUY 3,174 149.4 170.5 190.5 20.4 17.9 16.0 14.4 12.1 10.4 21.5 22.1 21.8 Eicher 554 20,331 SELL 21,000 829.7 923.5 1,013.1 24.5 22.0 20.1 16.2 14.2 12.2 29.0 30.1 28.7 Hero Motocorp 520 2,604 BUY 3,080 169.5 179.9 192.6 15.4 14.5 13.6 8.8 8.1 7.2 26.9 25.2 23.9 Ashok Leyland 259 89 NEU 90 6.7 7.2 6.9 13.1 12.3 12.8 7.4 6.5 6.6 25.7 24.1 20.8

Source: HDFC sec Inst Research

Change in estimates

(In Rs mn.) New Old Change %

FY20 FY21 FY20 FY21 FY20 FY21 Revenue 370,168 398,856 373,797 398,207 (1.0) 0.2 EBITDA 52,043 55,690 55,804 59,063 (6.7) (5.7) EBITDA Margin (%) 14.1 14.0 14.9 14.8 -84 bps -84 bps PAT 35,927 38,456 37,552 39,698 (4.3) (3.1) EPS 179.9 192.6 188.0 199.0 (4.3) (3.1) Source: HDFC sec Inst Research

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Income Statement (Standalone) (Rs mn) FY17 FY18 FY19 FY20E FY21E Net Revenues 284,750 322,305 336,505 370,168 398,856 Growth (%) 0.1 13.2 4.4 10.0 7.8 Material Expenses 190,118 218,346 233,177 256,892 277,587 Employee Expenses 13,960 15,401 17,302 19,033 20,508 Other Operating Expenses 34,324 35,755 36,725 42,199 45,071 Total Expenses 238,402 269,503 287,205 318,125 343,166 EBITDA 46,348 52,802 49,301 52,043 55,690 EBITDA Margin (%) 16.3 16.4 14.7 14.1 14.0 EBITDA Growth (%) 4.0 13.9 (6.6) 5.6 7.0 Depreciation 4,927 5,556 6,020 6,389 6,784 EBIT 41,421 47,246 43,281 45,654 48,906 Other Income (Including EO Items) 5,224 5,258 6,913 7,247 7,973 Interest 61 63 86 67 75 Exceptional Income / Expenses - - - - - PBT 46,585 52,442 50,107 52,834 56,804 Tax (Incl Deferred) 12,813 15,468 16,259 16,907 18,348 Minority Interest - - - - - RPAT 33,771 36,974 33,848 35,927 38,456 APAT 33,771 36,974 33,848 35,927 38,456 APAT Growth (%) 6.9 9.5 (8.5) 6.1 7.0 Adjusted EPS (Rs) 169.1 185.1 169.5 179.9 192.6 Source: Company, HDFC sec Inst Research

Balance Sheet (Standalone) (Rs mn) FY17 FY18 FY19 FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 399 399 399 399 399 Reserves 100,714 117,289 133,764 151,119 170,005 Total Shareholders Funds 101,113 117,689 134,163 151,518 170,404 Long Term Debt - - - - - Short Term Debt - - - - - Total Debt - - - - - Net Deferred Taxes 4,143 5,117 5,219 5,323 5,430 TOTAL SOURCES OF FUNDS 105,256 122,805 139,382 156,842 175,834 APPLICATION OF FUNDS Net Block 43,107 44,859 47,089 53,200 56,416 CWIP 2,707 2,038 2,079 2,120 1,908 Other non-current assets 2,792 2,833 2,833 2,833 2,833 Total Non-current Assets 48,606 49,729 52,000 58,153 61,156 Cash & Equivalents 60,266 76,665 89,440 101,266 119,815 Inventories 6,563 8,236 11,063 12,170 12,020 Debtors 15,619 15,202 17,517 18,255 19,670 Other Current Assets 15,889 17,556 15,906 15,982 16,047 Total Current Assets 98,336 117,659 133,925 147,673 167,552 Creditors 32,473 33,188 35,033 36,510 39,339 Other Current Liabilities &Provns 9,214 11,395 11,509 12,474 13,535 Total Current Liabilities 41,686 44,583 46,543 48,984 52,875 Net Current Assets 56,650 73,076 87,382 98,689 114,677 TOTAL APPLICATION OF FUNDS 105,256 122,805 139,382 156,842 175,834 Source: Company, HDFC sec Inst Research

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Cash Flow (Standalone) (Rsmn) FY17 FY18 FY19 FY20E FY21E Reported PBT 46,585 52,442 50,107 52,834 56,804 Non-operating & EO Items - - - - - Interest Expenses 61 63 86 67 75 Depreciation 4,927 5,556 6,020 6,389 6,784 Working Capital Change 5,164 (27) (1,532) 520 2,560 Tax Paid (12,813) (15,468) (16,259) (16,907) (18,348) OPERATING CASH FLOW ( a ) 43,923 42,565 38,423 42,902 47,876 Capex (13,204) (6,638) (8,291) (12,542) (9,788) Free Cash Flow (FCF) 30,719 35,927 30,132 30,361 38,088 Investments 49,296 933 102 104 106 Non-operating Income - - - - - INVESTING CASH FLOW ( b ) 36,092 (5,706) (8,188) (12,437) (9,682) Debt Issuance/(Repaid) - - - - - Interest Expenses (61) (63) (86) (67) (75) FCFE 30,659 35,865 30,046 30,294 38,013 Share Capital Issuance - - - - - Dividend 22,656 24,166 21,911 26,323 28,652 Others (43,658) (44,564) (39,284) (44,895) (48,223) FINANCING CASH FLOW ( c ) (21,063) (20,460) (17,460) (18,639) (19,646) NET CASH FLOW (a+b+c) 58,952 16,400 12,774 11,826 18,549 Closing Cash & Equivalents 60,266 76,665 89,440 101,266 119,815 Source: Company, HDFC sec Inst Research

Key Ratios (Standalone) FY17 FY18 FY19 FY20E FY21E PROFITABILITY (%) GPM 33.2 32.3 30.7 30.6 30.4 EBITDA Margin 16.3 16.4 14.7 14.1 14.0 EBIT Margin 14.5 14.7 12.9 12.3 12.3 APAT Margin 11.9 11.5 10.1 9.7 9.6 RoE 35.7 33.8 26.9 25.2 23.9 RoIC (or Core RoCE) 66.7 73.1 60.9 58.8 59.3 RoCE 30.7 29.2 22.3 21.0 19.9 EFFICIENCY Tax Rate (%) 27.5 29.5 32.4 32.0 32.3 Fixed Asset Turnover (x) 6.6 7.2 7.1 7.0 7.1 Inventory (days) 8.4 9.3 12.0 12.0 11.0 Debtors (days) 20.0 17.2 19.0 18.0 18.0 Payables (days) 41.6 37.6 38.0 36.0 36.0 Debt/EBITDA (x) (1.3) (1.5) (1.8) (1.9) (2.2) Net D/E (x) (0.6) (0.7) (0.7) (0.7) (0.7) Interest Coverage (x) 684.6 755.9 503.3 681.4 652.1 PER SHARE DATA (Rs) EPS 169.1 185.1 169.5 179.9 192.6 CEPS 193.8 213.0 199.6 211.9 226.5 Dividend 85.0 95.0 87.0 93.0 98.0 Book Value 506 589 672 759 853 VALUATION P/E (x) 15.4 14.1 15.4 14.5 13.6 P/BV (x) 5.2 4.4 3.9 3.4 3.1 EV/EBITDA (x) 10.0 8.4 8.8 8.1 7.2 EV/Revenues (x) 1.6 1.4 1.3 1.1 1.0 OCF/EV (%) 9.5 9.6 8.9 10.2 11.9 FCF/EV (%) 6.7 8.1 7.0 7.2 9.5 FCFE/Mkt Cap (%) 5.9 6.9 5.8 5.8 7.3 Dividend Yield (%) 3.3 3.6 3.3 3.6 3.8 Source: Company, HDFC sec Inst Research

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RECOMMENDATION HISTORY

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 12-Apr-18 3,732 BUY 4,360 3-May-18 3,664 BUY 4,403 9-Jul-18 3,636 BUY 4,405

26-Jul-18 3,112 BUY 4,403 3-Oct-18 2,972 BUY 3,602 9-Oct-18 2,740 BUY 3,602

16-Oct-18 2,898 BUY 3,602 9-Jan-19 2,970 BUY 3,602 4-Feb-19 2,807 BUY 3,350

12-Apr-19 2,601 BUY 3,180 28-Apr-19 2,604 BUY 3,080

2,000

2,500

3,000

3,500

4,000

4,500

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct

-18

Nov-

18

Dec-

18

Jan-

19

Feb-

19

Mar

-19

Apr-

19

Hero Motocorp TP

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Disclosure: We, Aditya Makharia, CA & Mansi Lall, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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