>HERO MOTO CORP LIMITED: Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme & Production at Nemrana plant started

Core business earnings in line with estimates; exports all set to pick up

Hero MotoCorp (HMCL IN) adjusted operational earnings came broadly in line with our estimate of INR7bn, though reported earnings at INR7.6bn was higher led by a one-off other income to the tune of INR0.68bn. Blended realisation was flat QoQ and up 2% YoY with mix broadly remaining the same leading to a revenue growth of 21% YoY at INR69bn, broadly in line with estimates. EBITDA
margin at 13.5% too was in line with estimates and flat QoQ despite higher staff costs on account of commencement of production at Nemrana plant from July led by slight improvement in gross margin QoQ. We believe with the excise duty disparity in Hardwar plant impacting margin by ~130bps getting away from equation possibly from 4QFY15 onwards along with rising scale and rising impact
of internal cost cutting strategy, we expect margin to inch up a notch towards 14-14.5% in FY16e. With scooter capacity set to ramp up to 100k units by January 2015 and to 150k by mid-FY16 from 75k now, we believe attaining the short term target of 250k exports would get easier. First time motorcycle buyers have come back in the scheme of things after a long break in recent months boosting overall industry demand along with HMCL maintaining share around 54%. With couple of new launches in the scooter portfolio along with continuous launch of variants across the motor cycle portfolio on and above higher exports, we are confident of a 12% volume CAGR in FY14-16e resulting in a volume of 7.85mn in FY16e. We are maintaining our volume and margin estimates for FY16e resulting in a robust earnings CAGR of 32% in FY14-16e.

Conference call highlights
􀂄 Festive season demand going on pretty strong and HMCL is confident to close festive season with 10-11% growth this year. With inventory being pretty much in control amid high competitive intensity we believe HMCL has done a commendable job of maintaining market share despite a high base.

􀂄 Launched 2 new variants in Maestro, both have seen good response from the market. Have 75k unit scooter capacity currently and will take capacity to 100k by January 2015 and plan to increase to 150k by mid-FY16. Planning a couple of new scooter launches in the next one year with focus towards the 125cc segment.

􀂄 Target of exports at 250k unit in FY15 with higher scooter capacity helping to boost exports soon. Have vision to export to 50 countries by 2018 from 20 markets presently. Got a large order of 45k unit of scooters in export markets and will be executed by November only.

􀂄 Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme.

􀂄 Production at Nemrana plant started July onwards and is expected to ramp up production this quarter itself with peak capacity of 1.2mn.

Valuation
We maintain our Buy on HMCL with a price target of INR3,151 based on 18x FY16e core EPS of INR161 and INR255/share of cash and equivalents. We believe interim dividend of INR30/ share this quarter along with visibility of annualized payout of 55-60% signifying a FY16e DPS of ~INR100, implies HMCL is trading at an attractive dividend yield of ~3-4%.

RISH TRADER