Hold Hero MotoCorp, target Rs 3,162: Edelweiss Financial Services

Edelweiss Financial Services has a hold call on Hero MotoCorp with a target price of Rs 3,162.

The current market price of Hero MotoCorp is Rs 2,898.70.

Time period given by the brokerage is one year when Hero MotoCorp price can reach the defined target.

View of Edelweiss on the company:
Hero MotoCorp (HMCL) posted Q2FY19 EBITDA of Rs 13.8bn (down 5.3 per cent YoY), which came in 2.5 per cent ahead of our estimate due to higher revenue. Management reiterated FY19 as well as festival season sales outlook of 8–10 per cent despite a sluggish start. Besides, rural demand is likely to outgrow urban (versus H1FY19) driven by higher minimum support prices (MSPs) and stronger crop output. We believe H2FY19 is critical given upcoming launches (two 125cc scooters) and recently launched Xtreme 200R. While we appreciate HMCL’s financial discipline and stable margin profile despite loss of overall market share, success of the aforementioned launches are critical to the stock re-rating. Bajaj Auto’s recent aggressive pricing strategy is a cause for concern too.

In-line quarter: Revenue, up 8.6 per cent YoY to Rs 90.9bn, came in 2 per cent above our estimate due to higher spare part sales (Rs 7.1bn, up 24 per cent YoY versus Rs 6bn; down 20 per cent YoY in Q1FY19). As a result, gross margins surprised with an uptick of 50bp QoQ. EBITDA, up 6 per cent YoY to Rs 13.8bn, is 2.5 per cent above our estimate. We expect H2 margin to be lower than H1’s due to higher advertising & promotion costs. A sharp jump in other income led to a strong PAT beat of 9.4 per cent to Rs 9.7bn (down 3.4 per cent YoY).

Scooters’ and premium bikes’ success critical: HMCL recently launched Xtreme 200R and plans to launch two 125cc scooters heading into the festive season. While the company would benefit from the expected recovery in rural demand in FY19, long-term market share gains hinge on the success of launches—all the more important as these are the first products from HMCL’s in-house R&D centre since it parted ways with Honda in 2010.

Outlook and valuations- Fairly valued; maintain ‘HOLD’: We estimate volume/EPS CAGR of 9 per cent/3 per cent over FY18–20E. We maintain ‘HOLD/SU’ with a TP of Rs 3,162, valuing the stock at 16x FY20E core EPS + cash/share at Rs 442. While the valuation is attractive, we prefer to wait for signs of pricing stability as well success in the premium and/or scooter segments. At current price, the stock is trading at 14.8x FY20E PER.