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1QFY20 operating performance was a beat as margins at 14.4% were up +90bps QoQ on improved cost management. Amidst an uncertain environment, Hero is addressing white spaces in its portfolio and upgrading its existing products. Re-iterate BUY, with a TP of Rs 2,875 (16x FY21 EPS).
HIGHLIGHTS OF THE QUARTER
* Financials: Revenue at Rs 80.3bn (-9/+2% YoY/QoQ) was higher than our estimates as realisations increased 4% YoY to Rs 43.5k, aided by price hikes. EBITDA margin came in at 14.4% (-120bps YoY, +90bps QoQ). The reduction in other expense ratio (-170bp QoQ) surprised despite sluggish vols as the co saved on logistics and ad spends. This more than offset the 60bps QoQ decline in gross margin. Contribution from spares reduced 230bps QoQ, which impacted RM cost. Softer commodity prices will be a tailwind over 2H.
* Demand environment: Management is hopeful of improved retails in the upcoming festive season as well as pre-buy ahead of BSVI. The industry continues to lobby for lower GST rates on 2Ws to aid demand.
* Premium products: As Hero has rolled out new models across the 200cc bike segment / 125cc scooter segment, they expect vols to ramp up over the year. It has also launched a refreshed 110cc Pleasure scooter to upgrade its scooter portfolio. Hero now offers a complete product portfolio across segments, which will benefit the co in the medium term.
* Electric vehicles: Hero is adopting a differentiated strategy by investing in Ather Energy. They expect the industry to go through an evolutionary phase. We believe Hero is preparing for a gradual transition towards EVs and will ramp up its presence as the market evolves.
Maintain BUY as
(1) Hero has successfully defended market share in the 2W segment in the current downturn.
(2) The premium launches will further enhance its addressable customer base. The market share shift away from scooters will benefit given its motorbike dominant portfolio.
(3) The stock is trading at attractive valuations of 13.7x on FY20E estimates and offers a dividend yield of ~3.9%. The co has healthy return ratios with an ROE of 24%.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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