Hero Moto Corp: Q2FY16 Result Is Slightly Better Than Street Estimates

Only Sustaining Above 2630-2650, Expect Some Fireworks Up to 2800-3000

Q2 PAT at Rs.772 Cr, up by 1.1% YOY (median estimate 717 cr)

Q2 EPS at 38.66 against street estimates of 35.65

CMP:2606

Buy: 2600-2580

TGT: 2650-2678-2705-2750-2795 (T+5)

TGT: 2920-3030-3165-3275 & 3500-4300 (1-12 & 24M)

TSL<2550

Note: Consecutive closing below 2550 for any reason, HMC can fall up to 2497-2435, where it may be again accumulated for better investment buying average. 

Some key takeaways:

Q2FY16 result of HMC published yesterday after market hours was slightly above street expectations. Although net sales declined by 1.72% YOY (against expectation of -6.96%),EBITDA/bottom line was improved by higher realisations per unit aided by reduced input costs and better internal cost control measures (LEAP). As a result, realisations per unit & EBITDA improved by 5.6% and 15.9% (YOY).

Weak rural demand amid fragile rural economy and uneven monsoon in some parts of the country this year might be one of the reason for falling sales in its motorcycle segment. Also, in urban area, there are more preferences towards light weight scooter/scooty and premium segment of bikes and competitors of HMC has some edge on it.Rural sales contribute almost 50% of HMC's revenue. 

In the urban scooter market to compete with its rival Honda, HMC has brought in two new models, which are completely been developed in-house. The company is hopeful to gain further overall domestic market share from its present 52% on the back of its new models and likely increased demand for the ongoing festival season. Its also recently launched Splendor Pro & Plus(manual & self-start feature) at reasonable & competitive price with convenience & comfort for a Splendor ride. 

The company has also inaugurated its first overseas manufacturing facility in Columbia and is very hopeful for its global expansion drive in the coming days.

Looking ahead, analysts are quite hopeful of sustained margin expansion for HMC due to lower input/commodity prices, better product mix and internal cost reduction programme.But new launches and its foray in to the premium segment may hold the keys.

Apart form festival demand, implementation of 7-th pay commissions may also increase the demand for both 4 & 2 wheelers significantly and all the major auto companies, including HMC may be a  beneficiary of that also. HMC has also strengthened its R&D ecosystem both ingeniously and by partnering several partners overseas in the last one year after separation from Honda. It may also diversify into defence sector in future.

As par BG metrics & current market parameters:

Present median valuation of HMC may be: 2650 (FY:15)

Projected median valuations might be: 2900-3100-3400 (FY:16-18)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
HEROMOTOCO	129.28	327.58	21	2640.14	2631.15	2635.65	2567.46	2550.01

HEROMOTOCO

155.15

384.9

21

2892.26

2882.41

2887.34

2567.46

2550.01

HEROMOTOCO

178.5

455.25

21

3102.28

3091.72

3097.00

2567.46

2550.01

HEROMOTOCO

215.5

535.15

21

3408.67

3397.07

3402.87

2567.46

2550.01

Analytical Charts: