CRISIL IER Independent Equity Research · PDF fileHero MotoCorp Ltd Q3FY14 Results Update. ... CRISIL is a global analytical company providing ratings, research, and risk and policy

RESEARCH

CRISIL IER Independent Equity Research

Enhancing investment decisions

Hero MotoCorp Ltd

Q3FY14 Results Update


Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process – Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-

point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade Assessment

CRISIL Valuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP) 4/5 Superior fundamentals 4/5 Upside (10-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-10% from CMP) 2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP) 1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India’s leading ratings agency. We are also the foremost provider of high-end research to the world’s largest banks and leading corporations. About CRISIL Research CRISIL Research is India's largest independent and integrated research house. We provide insights, opinions, and analysis on the Indian economy, industries, capital markets and companies. We are India's most credible provider of economy and industry research. Our industry research covers 70 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 4,500 primary sources, including industry experts, industry associations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the macroeconomy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sector experts, company analysts, and information management specialists. CRISIL Privacy CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of McGraw Hill Financial you may find of interest.

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Last updated: May, 2013 Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Disclaimer: This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially outside India or published or copied in whole or in part, for any purpose.

RESEARCH

Hero MotoCorp Ltd

Weak demand and intense competition affected market share

Fundamental Grade 5/5 (Excellent fundamentals)

Valuation Grade 3/5 (CMP is aligned)

Industry Automobiles

1

February 06, 2014

Fair Value ₹1,939 CMP ₹1,985

For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

Hero MotoCorp Ltd’s Q3FY14 earnings were largely in line with CRISIL Research’s expectations. Revenues grew 11.3% y-o-y primarily driven by 6.9% volume growth. Though royalty outgo increased due to higher contribution from new models (launched after April 2011), EBIT margin improved by 108 bps y-o-y to 9.1% following lower raw material costs. PAT grew by 7.5% y-o-y to ₹5,247 mn. Owing to weak demand for two-wheelers, we have lowered Hero MotoCorp’s volume growth estimate for FY14 to 5.5% from 7% and for FY15 to 7.2% from 8.1%. Though weak demand and stiff competition from Honda have been exerting pressure on Hero MotoCorp’s market share, we remain positive on the company due to its leadership position, large distribution network, rural reach and strong brand recall. We maintain the fundamental grade of 5/5. Weak demand and intense competition impacted market share

Owing to weak demand and stiff competition, sales of Hero MotoCorp’s two-wheelers grew by 6.9% y-o-y to 1.7 mn units in Q3FY14 (lower than industry’s growth of 9.7% y-o-y to 4.5 mn units). The company’s share in the two-wheeler market dropped by 100 bps y-o-y to 37.6% in Q3FY14. However, its share increased in the domestic motorcycles segment by 90 bps y-o-y to 52.8%.

Though royalty outgo increased, EBIT margin improved on lower raw material costs Though royalty outgo (part of other expenses) increased, EBIT margin improved 108 bps y-o-y to 9.1% following lower raw material costs, which as a percentage of sales fell by 152 bps to 73% in Q3FY14. Price hike of 4% y-o-y helped to offset the rise in key raw materials - steel and aluminium. Royalty payments increased y-o-y due to higher contribution from new models launched after April 2011 (it pays 5% royalty to Honda for new models). We expect EBIT margin to improve to 11.7% in FY15 primarily as royalty payments to Honda, which are being amortised for the existing models (launched before April 2011), will end in June 2014.

New model launches to strengthen product portfolio

Leveraging its in-house R&D and technology tie-ups, Hero MotoCorp has recently unveiled five new models: Dash 110cc scooter, Leap 125cc scooter, RNT 150cc concept diesel bike, HX250R 250cc and Xtreme 150cc motorcycle (details on pg 7). These new models should add volume traction to an aging product portfolio and lead to better positioning of the company in a competitive industry.

Valuations: Current market price is aligned Though we lower our earnings estimates, we raise our fair value to ₹1,939 from ₹1,882 per share as we roll forward our model to FY16. At the current market price of ₹1,985, our valuation grade is 3/5.

KEY FORECAST

(₹ mn) FY12 FY13 FY14E FY15E FY16E Operating income 238,789 239,788 255,271 283,275 325,937 EBITDA 36,330 32,921 35,707 39,868 46,400 Adj net income 23,788 21,187 20,650 26,303 32,123 Adj EPS (₹) 119.1 106.1 103.4 131.7 160.9 EPS growth (%) 18.4 (10.9) (2.5) 27.4 22.1 Dividend yield (%) 2.6 3.5 3.1 3.5 3.6 RoCE (%) 69.5 46.1 46.0 51.2 50.5 RoE (%) 65.7 45.6 38.1 40.7 40.3 PE (x) 16.7 18.7 19.2 15.1 12.4 P/BV (x) 9.3 7.9 6.8 5.6 4.5 EV/EBITDA (x) 10.0 11.1 10.5 9.0 7.3

NM: Not meaningful; CMP: Current market price

Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICS NIFTY/SENSEX 6036/20311NSE/BSE ticker HEROMOTOCOFace value (₹ per share) 2Shares outstanding (mn) 199.7Market cap (₹ mn)/(US$ mn) 396,405/6,498Enterprise value (₹ mn)/(US$ mn) 395,265/6,48052-week range (₹)/(H/L) 2,209/1,435Beta 0.5Free float (%) 60.1%Avg daily volumes (30-days) 273,108Avg daily value (30-days) (₹ mn) 556

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-mHero MotoCorp -4% -6% 7% 13%

NIFTY -3% -3% 9% 1%

ANALYTICAL CONTACT Mohit Modi (Director) [email protected] Elizabeth John [email protected] Vishal Rampuria [email protected]

Client servicing desk +91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fund

amen

tal

Gra

de

Poor Fundamentals

ExcellentFundamentals

Stro

ngDo

wns

ide

Stro

ngU

psid

e52.2% 52.2%

39.9% 39.9%

30.6% 29.9%

30.4% 30.6%

8.5% 9.3%

8.8% 8.5%

8.8% 8.7%20.9% 21.0%

0%

10%

20%

30%40%

50%

60%

70%

80%

90%

100%

Mar-13 Jun-13 Sep-13 Dec-13

Promoter FII DII Others


2

Q3FY14 Results Summary (₹ mn) Q3FY14 Q2FY14 Q3FY13 q-o-q (%) y-o-y (%) 9MFY14 9MFY13 y-o-y (%)

Net sales 68,459 56,965 61,513 20.2 11.3 186,692 175,103 6.6Other operating income 309 298 363 3.8 -15.0 933 1,121 -16.8Operating income 68,768 57,262 61,876 20.1 11.1 187,625 176,224 6.5Consumption of raw materials 49,787 41,145 44,016 21.0 13.1 135,634 129,316 4.9(Increase)/decrease in stock in trade 203 (190) 1,838 -207.0 -89.0 (134) 1,889 -107.1Raw materials cost (% of sales) 73.0% 71.9% 74.5% 112bps -152bps 72.6% 74.9% -235bpsEmployees cost 2,439 2,290 1,982 6.5 23.0 6,944 5,950 16.7Other expenses* 7,360 5,690 6,253 29.4 17.7 18,722 16,345 14.5Total expenditure 59,788 48,935 54,090 22.2 10.5 161,166 151,877 6.1EBITDA 8,980 8,327 7,787 7.8 15.3 26,459 24,347 8.7EBITDA margin 13.1% 14.5% 12.6% -148bps 47bps 14.1% 13.8% 29bpsDepreciation and amortisation# 2,732 2,869 2,832 -4.8 -3.5 8,345 8,762 -4.8EBIT 6,247 5,458 4,954 14.5 26.1 18,114 15,585 16.2EBIT margin 9.1% 9.5% 8.0% -45bps 108bps 9.7% 8.8% 81bpsInterest and finance charges (net) 30 30 30 0.7 0.7 89 88 0.6Other income 957 1,155 901 -17.1 6.2 3,234 2,939 10.0Exceptional item - - - - - - -PBT 7,174 6,583 5,826 9.0 23.2 21,259 18,435 15.3Tax 1,928 1,769 947 9.0 103.6 5,712 2,996 90.7Reported PAT 5,247 4,814 4,879 9.0 7.5 15,547 15,439 0.7Adj PAT 5,247 4,814 4,879 9.0 7.5 15,547 15,439 0.7Adj PAT margin 7.6% 8.4% 7.9% -78bps -26bps 8.3% 8.8% -48bpsNo. of equity shares (mn) 199.7 199.7 199.7 - - 199.7 199.7 -Reported EPS (₹) 26.3 24.1 24.4 9.0 7.5 77.8 77.3 0.7Adj EPS (₹) 26.3 24.1 24.4 9.0 7.5 77.8 77.3 0.7

*Includes royalty payments to Honda for new models (launched after April 2011 – post split with Honda) #Includes royalty payments amortised to Honda for existing models (launched before April 2011 – pre split with Honda) Source: Company, CRISIL Research 2-wheeler industry sales volume up 9.7% y-o-y, 9.9% q-o-q Hero MotoCorp’s sales volume up 6.9% y-o-y, 18.7% q-o-q

Source: SIAM, CRISIL Research Source: SIAM, CRISIL Research

3,87

8

3,88

9

4,04

3

3,74

0

4,07

9

3,89

7

3,94

8

4,06

8

4,47

3

13% 12%9%

-5%

5%

0.2%-2.3%

8.8% 9.7%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

3,200

3,400

3,600

3,800

4,000

4,200

4,400

4,600

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

('000)

Two-wheeler sales Growth y-o-y % (RHS)

1,58

9

1,57

2

1,64

0

1,33

3

1,57

3

1,52

7

1,55

9

1,41

6

1,68

1

11% 8% 7%

-14%

-1% -3% -5%

6% 7%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

250

500

750

1,000

1,250

1,500

1,750

2,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

('000)

Hero MotoCorp Growth y-o-y % (RHS)

Hero MotoCorp Ltd

3

RESEARCH

Market share dipped y-o-y in two wheelers... ... but improved in domestic motorcycles

Source: SIAM, CRISIL Research Source: SIAM, CRISIL Research Revenues increased 11% y-o-y Realisations grew y-o-y helped by price hike in October

Source: Company, CRISIL Research Source: Company, CRISIL Research Raw material cost / vehicle up 2% y-o-y and 3% q-o-q EBIT / vehicle improved y-o-y

Source: Company, CRISIL Research Source: Company, CRISIL Research

41.0% 40.4% 40.6%35.6%

38.6% 39.2% 39.5%34.8%

37.6%

24% 23% 24% 25% 24% 22.1% 21.8%

20.9%

19.8%

15% 16% 16% 19% 17%18.3% 18.8%

22.7%

22.2%

0%

10%

20%

30%

40%

50%

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Hero MotoCorp Bajaj Auto HondaYamaha TVS Motors

56.2% 56.2% 56.5%50.0% 51.9% 54.0% 54.1%

48.7%52.8%

25.1% 24.5% 23.5% 25.7% 26.0%22.5% 22.6% 20.3% 18.9%

8.1% 8.7% 9.9%13.1% 11.5% 12.7% 12.5%

17.5% 15.4%

0%

10%

20%

30%

40%

50%

60%

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Hero MotoCorp Bajaj Auto HondaYamaha TVS Motors

59,8

36

59,6

25

62,0

78

51,5

12

61,5

13

60,7

25

61,2

68

56,9

65

68,4

59

16%11% 10%

-11%

3% 2%-1%

11% 11%

-40%

-30%

-20%

-10%

0%

10%

20%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

(₹ mn)

Revenues Growth y-o-y (RHS)

37,6

49

37,9

29

37,7

99

38,6

49

39,1

02

39,7

58

39,2

93

40,2

23

40,7

27

5.0%

3.1%

2.6%

3.2%

3.9%

4.8%

4.0% 4.1% 4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

36,000 36,500 37,000 37,500 38,000 38,500 39,000 39,500 40,000 40,500 41,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

(₹)

Realisations Growth y-o-y (RHS)

27,6

53

28,1

06

28,0

25

28,2

88

29,1

48

29,0

67

28,5

75

28,9

19

29,7

39

4% 4%

1%3%

5% 3%2% 2% 2%

-14%

-10%

-6%

-2%

2%

6%

10%

20,000 21,000 22,000 23,000 24,000 25,000 26,000 27,000 28,000 29,000 30,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

(₹)

Raw material costs per vehicle Growth y-o-y (RHS)

37,6

49

37,9

29

37,7

99

38,6

49

39,1

02

39,7

58

39,2

93

40,2

23

40,7

27

4,05

5

4,10

2

3,85

7

3,22

4

3,14

9

3,82

5

4,11

0

3,85

4

3,71

7

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

(₹ mn)

Realisation per vehicle EBIT per vehicle (RHS)


4

Tax rate increased y-o-y as only 30% of the Haridwar plant’s profits are exempt from tax (compared to 100% earlier)

PAT margins declined by 26 bps y-o-y and 78 bps sequentially

Source: Company, CRISIL Research Source: Company, CRISIL Research Steel HR prices rose 6.7% y-o-y and 3.1% q-o-q Aluminium prices up 3.8% y-o-y and 0.4% q-o-q

Source: Metal Bulletin, CRISIL Research Source: Metal Bulletin, CRISIL Research Share price movement Fair value movement since initiation

-Indexed to 100

Source: NSE, CRISIL Research Source: NSE, BSE, CRISIL Research

15.3%

19.2%

16.3%

16.3%

16.3%

16.3%

26.9%

26.9%

26.9%

0%

5%

10%

15%

20%

25%

30%

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

6,13

0

6,03

6

6,15

5

4,40

6

4,87

9

5,74

2

5,48

6

4,81

4

5,24

7

10.2% 10.1% 9.9%8.5%

7.9%

9.3% 8.9% 8.4%7.6%

0%

2%

4%

6%

8%

10%

12%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

(₹ mn)

Adj PAT PAT margins (RHS)

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Q3

FY07

Q3

FY08

Q3

FY09

Q3

FY10

Q3

FY11

Q3F

Y12

Q3F

Y13

Q3F

Y14

(₹/tonne)

HR price trend CR price trend

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

Q3

FY07

Q3

FY08

Q3

FY09

Q3

FY10

Q3

FY11

Q3F

Y12

Q3F

Y13

Q3F

Y14

(₹/tonne)

0

50

100

150

200

250

300

350

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

Jun-

13

Oct

-13

Feb-

14

Hero MotoCorp NIFTY

0

1,000

2,0003,000

4,0005,000

6,000

7,0008,000

9,000

0

500

1,000

1,500

2,000

2,500

Dec

-09

Feb

-10

May

-10

Aug

-10

Oct

-10

Jan-

11M

ar-1

1Ju

n-11

Sep

-11

Nov

-11

Feb

-12

May

-12

Jul-1

2O

ct-1

2Ja

n-13

Mar

-13

Jun-

13A

ug-1

3N

ov-1

3F

eb-1

4

('000)(₹)

Total Traded Quantity(RHS) CRISIL Fair ValueHero MotoCorp

Hero MotoCorp Ltd

5

RESEARCH

Key developments New models launched Leveraging its own R&D and technology tie-ups, Hero MotoCorp has unveiled five new

models recently. They are:

■ Dash 110cc scooter: Currently, Hero MotorCorp has only two scooter brands – Maestro

and Pleasure. Dash 110cc will enhance its presence in the scooter segment

■ Leap 125cc scooter: It is an electric hybrid scooter targeted initially at the global markets.

The management has highlighted that it plans to launch it in Africa.

■ HX250R 250cc : It is a sports bike

■ RNT 150cc concept: It is a diesel bike

■ Xtreme 150cc motorcycle: It is a sports bike

Apart from RNT 150cc concept diesel bike, the models expected to be launched in FY15 are

as follows: ■ Xtreme 150cc motorcycle in Q1FY15

■ Dash 110cc scooter in Q2FY15

■ Leap 125cc scooter and HX250R 250cc in H2FY15

Key takeaways from Q3FY14 conference call Two-wheeler volumes and outlook The management has pegged the domestic two-wheeler industry and company’s growth at 5-

6% each in FY14.

Capex With production of about 6 mn two-wheelers, Hero MotoCorp’s capacity utilisation is close to

90%. It has planned capex totaling ₹26 bn during FY14 and FY15 for (i) its fourth plant

(Rajasthan), (ii) fifth plant (Gujarat), (iii) capacity expansion at the existing plant and (iv) R&D

facility. We have already factored the same in our projections. In FY14, it is expected to spend

₹11 bn, majority of which would be on a new plant in Neemrana, Rajasthan. The Rajasthan

plant, with a capacity of 0.75 mn two-wheelers, is expected to commence operations in FY14-

end. In FY15, the company is expected to incur capex of ₹15 bn, majority of which would be

towards a new plant in Gujarat with a capacity of 0.9 units.

Cost-cutting initiatives ■ Hero MotoCorp’s cost-cutting program, which began in April 2013, is expected to

continue over the next 30 months. The cost-cutting initiative is in the form of vendor

rationalisation, logistics, change of raw materials, etc.

■ This initiative will result in savings of ₹500 mn in Q4FY14. We have factored in largely

the same in our model. The benefits from the cost-cutting initiative will be visible over the

next 12-15 months. The management expects savings of ₹17,000 mn in FY18 from the

cost-cutting exercise, translating into 300 bps margin improvement by FY17.


6

Inventory

Slow demand after the festive season led to higher inventory (six to seven weeks) at the

dealer level, compared to normal inventory of around three weeks. Others ■ Scooter capacity is at 60,000/month, which will go up to 75,000 by FY14-end. Sales of

‘Pleasure’ were muted as the company is working on the re-launch of ‘Pleasure’. The

company is currently using the capacity of existing model ‘Pleasure’ towards ‘Maestro’.

■ Royalty amortisation for the existing models was ₹2.1 bn in Q3FY14 compared to ₹2.3

bn in Q2FY14 following the appreciation of the Indian rupee against the Japanese yen.

■ R&D spend as a percentage of total sales is likely to increase to 0.75% in FY14

compared to 0.47% in FY13.

Exports Hero MotoCorp’s contribution of exports to sales is around 2% in 9MFY14. Currently, it is

present in 15 export markets. It plans to enter five new export markets in Q4FY14. Peer comparison - Q3FY14 results

Q3FY14 Q2FY14 Q1FY14

Hero MotoCorp Bajaj Auto Hero MotoCorp Bajaj Auto Hero MotoCorp Bajaj Auto Two-wheeler sales (mn units) 1.7 0.9 1.4 0.8 1.6 0.9 Market share in two-wheeler industry 37.6% 19.8% 34.8% 20.9% 39.5% 21.8% Operating Income (₹ mn) 68,768 51,312 57,262 54,127 61,595 49,111 EBIT margin (%) 9.1% 21.2% 9.5% 17.9% 10.4% 17.6% PAT (₹ mn) 5,247 9,045 4,814 8,187 5,486 7,377 PAT margin (%) 7.6% 17.6% 8.4% 15.1% 8.9% 15.0%

Source: Companies, CRISIL Research

Hero MotoCorp Ltd

7

RESEARCH

Earnings Estimates Revised Downwards FY14E FY15E FY16E

Particulars Unit Old New % change Old New % change New Sales volume (two-wheelers) 6,510,025 6,375,956 -2.1% 7,035,109 6,836,151 -2.8% 7,563,159 Operating income (₹ mn) 260,872 255,271 -2.1% 291,780 283,275 -2.9% 325,937 EBIT (₹ mn) 25,832 25,043 -3.1% 34,668 33,204 -4.2% 40,352 EBIT margin % 9.9 9.8 -9bps 11.9 11.7 -16bps 12.4 PAT (₹ mn) 21,329 20,650 -3.2% 27,827 26,303 -5.5% 32,123 PAT margin % 8.2 8.1 -9bps 9.5 9.3 -25bps 9.9 EPS ₹ 106.8 103.4 -3.2% 139.3 131.7 -5.4% 160.9

Source: CRISIL Research estimates ■ Owing to weak demand for two-wheelers, we have lowered Hero MotoCorp’s volume

growth estimate for FY14 to 5% from 7.2% earlier. Though we expect a marginal

recovery in FY15, we remain cautious on volume growth and lower our FY15 volume

estimate to 7.2% from 8.1% earlier.

■ We expect EBIT margin to improve significantly in FY15 as the amortisation of royalty

payments for the existing models (launched before April 2011) will end in June 2014. The

margin improvement also factors that the investment in R&D, technology tie-ups and

cost-cutting measures would start paying off gradually.

■ We have introduced FY16 estimates.


8

Valuation Grade: 3/5 Though we lower our earnings estimates we have raised our fair value to ₹1,939 from ₹1,882

per share as we have rolled forward our model to FY16. The fair value is a summation of

discounted cash flow (DCF)-based value of ₹1,931 per share and the investment in Erik Buell

Racing (EBR) at book value of ₹8 per share. At the current market price of ₹1,985, our

valuation grade is 3/5. One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

P/E – premium / discount to NIFTY P/E movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

500

1,000

1,500

2,000

2,500

3,000

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Sep

-11

Jan-

12M

ay-1

2S

ep-1

2Ja

n-13

May

-13

Sep

-13

Jan-

14

(₹)

Hero MotoCorp 9x 12x15x 18x 21x

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Apr

-07

Aug

-07

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-07

Apr

-08

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-08

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-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

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-10

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Jan-

12M

ay-1

2S

ep-1

2Ja

n-13

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-13

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-13

Jan-

14

(₹ mn)

EV 4x 8x 12x 16x

-60%

-40%

-20%

0%

20%

40%

60%

Apr

-07

Aug

-07

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-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

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-10

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-11

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-11

Jan-

12M

ay-1

2S

ep-1

2Ja

n-13

May

-13

Sep

-13

Jan-

14

Premium/Discount to NIFTYMedian premium/discount to NIFTY

0

5

10

15

20

25

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

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Apr

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Jan-

12M

ay-1

2S

ep-1

2Ja

n-13

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-13

Sep

-13

Jan-

14

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev

Hero MotoCorp Ltd

9

RESEARCH

CRISIL IER reports released on Hero MotoCorp Ltd

Date Nature of report Fundamental

grade Fair value Valuation

grade CMP

(on the date of report) 03-Dec-09 Initiating coverage 5/5 ₹1,747 3/5 ₹1,693

28-Jan-10 Q3FY10 result update 5/5 ₹1,775 4/5 ₹1,565

21-Apr-10 Q4FY10 result update 5/5 ₹1,937 3/5 ₹1,852

10- Aug-10 Q1FY11 result update 5/5 ₹1,910 3/5 ₹1,865

09- Nov-10 Q2FY11 result update 5/5 ₹1,893 3/5 ₹1,829

25-Feb-11 Q3FY11 result update 5/5 ₹1,893 5/5 ₹1,505

05-May-11 Q4FY11 result update 5/5 ₹1,797 4/5 ₹1,598

22-Jul-11 Q1FY12 result update 5/5 ₹1,797 3/5 ₹1,789

20-Sep-11 Detailed Report 5/5 ₹1,797 2/5 ₹2,201

25-Oct-11 Q2FY12 result update 5/5 ₹1,797 2/5 ₹2,071



20-Jul-12 Q1FY13 result update 5/5 ₹2,023 3/5 ₹2,082

25-Oct-12 Q2FY13 result update 5/5 ₹1,939 3/5 ₹1,838



01-Aug-13 Q1FY14 result update 5/5 ₹1,733 3/5 ₹1,820

24-Oct-13 Detailed Report 5/5 ₹1,882 3/5 ₹2,085

06-Feb-14 Q3FY14 result update 5/5 ₹1,939 3/5 ₹1,985


10

Annexure: Financials

Source: Company, CRISIL Research

Income statement Balance Sheet(₹ mn) FY12 FY13 FY14E FY15E FY16E (₹ mn) FY12 FY13 FY14E FY15E FY16EOperating income 238,789 239,788 255,271 283,275 325,937 LiabilitiesEBITDA 36,330 32,921 35,707 39,868 46,400 Equity share capital 399 399 399 399 399 EBITDA margin 15.2% 13.7% 14.0% 14.1% 14.2% Reserves 42,499 49,663 58,026 70,389 88,058 Depreciation 10,973 11,418 10,663 6,664 6,048 Minorities - - - - - EBIT 25,357 21,504 25,043 33,204 40,352 Net worth 42,898 50,062 58,426 70,788 88,457 Interest 213 119 121 121 121 Convertible debt - Operating PBT 25,144 21,385 24,922 33,083 40,231 Other debt 165 210 210 210 210 Other income 3,510 3,913 3,308 2,875 3,475 Total debt 165 210 210 210 210 Exceptional inc/(exp) (7) (6) - - - Deferred tax liability (net) 2,083 1,324 1,324 1,324 1,324 PBT 28,647 25,292 28,230 35,958 43,705 Total liabilities 45,146 51,596 59,960 72,322 89,991 Tax provision 4,866 4,110 7,580 9,655 11,582 AssetsMinority interest - - - - - Net fixed assets 17,431 18,918 20,338 31,445 32,397 PAT (Reported) 23,781 21,182 20,650 26,303 32,123 Capital WIP 1,940 3,173 9,173 8,173 6,173 Less: Exceptionals (7) (6) - - - Total fixed assets 19,371 22,091 29,511 39,618 38,570 Adjusted PAT 23,788 21,187 20,650 26,303 32,123 Investments 6,145 5,229 6,129 6,729 6,729

Current assetsRatios Inventory 6,756 6,368 9,092 7,761 8,930

FY12 FY13 FY14E FY15E FY16E Sundry debtors 3,923 9,050 9,199 10,131 11,656 Growth Loans and advances 8,005 9,067 9,653 10,711 12,325 Operating income (%) 21.0 0.4 6.5 11.0 15.1 Cash & bank balance 337 1,350 1,137 17,558 38,674 EBITDA (%) 37.7 (9.4) 8.5 11.7 16.4 Marketable securities 33,929 31,470 22,042 22,042 22,042 Adj PAT (%) 18.4 (10.9) (2.5) 27.4 22.1 Total current assets 52,950 57,304 51,123 68,203 93,627 Adj EPS (%) 18.4 (10.9) (2.5) 27.4 22.1 Total current liabilities 53,743 44,820 31,512 45,165 51,873

Net current assets (793) 12,484 19,611 23,038 41,755 Profitability Intangibles/Misc. expenditure 20,424 11,792 4,708 2,937 2,936 EBITDA margin (%) 15.2 13.7 14.0 14.1 14.2 Total assets 45,146 51,596 59,960 72,322 89,990 EBIT margin (%) 10.6 9.0 9.8 11.7 12.4 Adj PAT Margin (%) 10.0 8.8 8.1 9.3 9.9 RoE (%) 65.7 45.6 38.1 40.7 40.3 Cash flowRoCE (%) 69.5 46.1 46.0 51.2 50.5 (₹ mn) FY12 FY13 FY14E FY15E FY16ERoIC (%) 92.9 62.8 50.7 59.7 79.4 Pre-tax profit 28,654 25,298 28,230 35,958 43,705

Total tax paid (5,251) (4,869) (7,580) (9,655) (11,582) Valuations Depreciation 10,973 11,418 10,663 6,664 6,048 Price-earnings (x) 16.7 18.7 19.2 15.1 12.4 Working capital changes (26,842) (14,724) (16,767) 12,993 2,400 Price-book (x) 9.3 7.9 6.8 5.6 4.5 Net cash from operations 7,534 17,123 14,547 45,961 40,571 EV/EBITDA (x) 10.0 11.1 10.5 9.0 7.3 Cash from investmentsEV/Sales (x) 1.5 1.5 1.5 1.3 1.0 Capital expenditure (8,714) (5,506) (11,000) (15,000) (4,999) Dividend payout ratio (%) 43.9 66.2 59.5 53.0 45.0 Investments and others 11,414 3,374 8,528 (600) - Dividend yield (%) 2.6 3.5 3.1 3.5 3.6 Net cash from investments 2,700 (2,132) (2,472) (15,600) (4,999)

Cash from financingB/S ratios Equity raised/(repaid) - - - - - Inventory days 13 12 17 13 12 Debt raised/(repaid) (162) 44 - - - Creditors days 77 54 27 42 42 Dividend (incl. tax) (10,444) (14,018) (14,072) (15,966) (16,556) Debtor days 6 14 13 13 13 Others (incl extraordinaries) (6) (6) 1,785 2,026 2,101 Working capital days (74) (42) (17) (13) (20) Net cash from financing (10,612) (13,979) (12,287) (13,941) (14,455) Gross asset turnover (x) 8.5 7.8 7.3 6.2 5.7 Change in cash position (378) 1,012 (212) 16,420 21,118 Net asset turnover (x) 14.2 13.2 13.0 10.9 10.2 Closing cash 337 1,350 1,137 17,558 38,674 Sales/operating assets (x) 13.0 11.6 9.9 8.2 8.3 Current ratio (x) 1.0 1.3 1.6 1.5 1.8 Quarterly financialsDebt-equity (x) 0.0 0.0 0.0 0.0 0.0 (₹ mn) Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14Net debt/equity (x) (0.8) (0.7) (0.4) (0.6) (0.7) Operating Income 61,876 61,458 61,595 57,262 68,768 Interest coverage 119 181 207 274 334 Change (q-o-q) 19.3% -0.7% 0.2% -7.0% 20.1%

EBIT 4,954 5,843 6,408 5,458 6,247 Per share Change (q-o-q) 15.3% 17.9% 9.7% -14.8% 14.5%

FY12 FY13 FY14E FY15E FY16E EBIT margin 8.0% 9.5% 10.4% 9.5% 9.1%Adj EPS (₹) 119.1 106.1 103.4 131.7 160.9 PAT 4,879 5,742 5,486 4,814 5,247 CEPS 174.1 163.3 156.8 165.1 191.1 Adj PAT 4,879 5,742 5,486 4,814 5,247 Book value 214.8 250.7 292.6 354.5 443.0 Change (q-o-q) 10.7% 17.7% -4.5% -12.2% 9.0%Dividend (₹) 52.3 70.2 61.5 69.8 72.4 Adj PAT margin 7.9% 9.3% 8.9% 8.4% 7.6%Actual o/s shares (mn) 199.7 199.7 199.7 199.7 199.7 Adj EPS 24.4 28.8 27.5 24.1 26.3

RESEARCH

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