HERO MOTOCORP LTD: A HERO OF EVERY PORTFOLIO !!!

Scrip Code: 500182 / HEROMOTOCO

CMP:  Rs. 1945.25; Buy at Rs.1925 - 1935 levels.

Short term Target: Rs. 2,000, 6 month Target – Rs. 2160; STOP LOSS – Rs. 1770.50; Market Cap: Rs. 38,844.21 Cr; 52 Week High/Low: Rs. 2249.70 / Rs. 1375.75

Total Shares: 19,96,87,500 shares; Promoters : 10,42,59,490 shares –52.21 %; Total Public holding : 9,54,28,010 shares – 47.79 %; Book Value: Rs. 148.03; Face Value: Rs. 2.00; EPS: Rs. 113.99; Div: 5250.00 % ; P/E: 17.06 times; Ind. P/E: 16.58; EV/EBITDA: 14.18.

Total Debt: 1491.16 Cr; Enterprise Value: Rs. 40,019.37 Cr.

HERO MOTOCORP LTD:  Hero Motocorp Ltd was incorporated in 1984 and is based in New Delhi, India. The company changed its name to Hero Motocorp from Hero Honda Motors Ltd in July 2011. Hero MotoCorp Limited engages in the manufacture and sale of motorcycles in India. It provides a range of two wheeler products, including motorcycles and scooters; and spare parts. The company markets its products under various brands, including CD Dawn, CD Deluxe, Splendor Plus, Splendor NXG, Passion and Passion Pro, Passion Plus, Glamour, Super Splendor, Splendor PRO, Achiever, Glamour FI, Hunk, CBZ X-treme, Karizma, Pleasure, and Karizma ZMR. It offers its products through a network of dealers, service and spare parts outlets, and dealer-appointed outlets. The Company's bikes are manufactured across three manufacturing facilities. Two of these are based at Gurgaon and Dharuhera, which are located in the state of Haryana in northern India. The third manufacturing plant is based at Haridwar, in the hill state of Uttrakhand. The Company was a joint venture between India's Hero Group and Japan's Honda Motor Co where by the promoter the munjals bought the 26 % stake of Honda for Rs. 3,841.83 Cr in July 2011. The Company offers Achiever in 135 cubic centimeter segment. In the 150 cubic centimeters and above the Company offers brands like Hunk, CBZ X-treme, Karizma and the Karizma ZMR. It also offers a 100 cubic centimeter scooter, Pleasure. The company is compared to Bajaj Auto Limited, TVS Motor Company Limited and Ashok Leyland Limited.

Investment Rationale:

Hero Motocorp Ltd's new promoter structure now is Hero Investment Pvt Ltd (HIPL) which holds 43.33 % in the company. Hero MotoCorp’s management expects volume momentum to moderate by 10 % - 12 % in Q4FY12. Despite of slowdown seen in both rural & urban markets, rural demand is still more resilient. It is expected that in FY13 volume growth could be at 10 % + levels. Inventory levels were around 1 to 1.5 weeks at dealers end. December inventory has moved up slightly to 2 to 2.5 weeks. Initial 3-4 days of sales post 15 Jan have been very encouraging. However, sustainability of sales needs to be monitored during the quarter. Management does not expect any meaningful saving in commodity costs going ahead and also Company has direct imports (largely cast wheel) of 1.5 % - 2 % (USD denominated) and 14 % - 15 % indirect imports (in both USD/Yen). Some pressure is expected from vendors as they are normally compensated with a lag. The R&D ramp up in terms of talent, international tie ups for technology etc are on track and so the Management maintains a time frame of 3 - 3.5 years (from time of separation from HONDA) for full capability to be able to launch its own products. Capacity is expected to reach 7 mn units by FY12 end. There is a scope for 15 % increase in capacity next year by further de-bottle necking. Haridwar capacity ramp up is on track and is expected to touch 9,500 units per day by mid FY13 (from 8,000 currently). Company expects that there would be strong exports momentum which should continue going ahead. The strategy of strengthening market share in existing markets like South Asia, Latin America and penetrating in new markets in the next 2-3 quarter is on track. Management maintained its vision of 1 mn units of exports in the next 5-6 years. The company maintains its target of achieving 5,000 active touch points by FY12 end from 4,500 in FY11.  All touch points have servicing capability while some of them have dealerships. Royalty would not exceed 5 % of sales on new models (beginning with Impulse). The current arrangement of technological tie ups for new products is till 2017 and so the company has the freedom to modify existing models. It is expected that the demand scenario will moderate slightly going ahead after strong volume growth over the past three years, mainly due to macroeconomic concerns. It is expected that HMCL to slightly under perform the industry’s growth during the period, due to increasing competition in the industry. HMCL commenced expansion plans at its Haridwar plant in Uttarakhand, with the first plant commissioned in April 2008, with an initial capacity of 500,000 units. The company has increased its total installed capacity to 6.15 mn units in FY2011 from 5.4mn units in FY2010, with capacity of 2.25 mn at Haridwar and 1.95 mn each at Dharuhera and Gurgaon. HMCL plans to further expand its capacity to 7 mn units by FY2012 through de bottle necking at existing plants. As a result of capacity expansion, HMCL will be able to meet the increasing demand and, as such, is expected to post a volume CAGR of 12.7 % over FY2011-13E. The Haridwar plant also avails tax benefits, including a 100 % excise exemption for 10 years and a 100 % income tax exemption for the first five years and 30 % for the next five years. Besides the Haridwar plant, two plants in Gurgaon also enjoy tax benefits.

Outlook and Valuation:

HMCL commenced expansion plans at its Haridwar plant in Uttarakhand, with the first plant commissioned in April 2008, with an initial capacity of 500,000 units. The company has increased its total installed capacity to 6.15mn units in FY2011 from 5.4mn units in FY2010, with capacity of 2.25mn at Haridwar and 1.95mn each at Dharuhera and Gurgaon. HMCL plans to further expand its capacity to 7mn units by FY2012 through de-bottlenecking at existing plants. As a result of capacity expansion, HMCL will be able to meet the increasing demand and, as such, is expected to post a volume CAGR of 12.7 % over FY2011-13E. The Haridwar plant also avails tax benefits, including a 100 % excise exemption for 10 years and a 100 % income tax exemption for the first five years and 30 % for the next five years. Besides the Haridwar plant, two plants in Gurgaon also enjoy tax benefits. It is believed that the benefits of lower raw-material costs will be negated due to higher advertising and R&D expenses that HMCL intends to incur going ahead. Further, due to increased competitive activity in the two-wheeler segment, HMCL’s market share will also remain under pressure. HMCL’s current valuations factors in the strong 31 % earnings CAGR that the company is likely to register over FY2011-13E. At the current market price of Rs. 1,945.25, HMCL is fairly valued at 13.43x FY2013E earnings (historical multiple – 15x). The stock is currently trading at a PE of 16.18 x FY12E and 13.43 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 120.20 in FY12E and Rs. 144.80 in FY13E. One can buy HEROMOTOCORP with a Medium to Long term investment with the price target of Rs. 2160 and for the SHORT TERM PLAYERS it should be Rs. 2000.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	15,770.20	19,258.50	23,468.90	26,608.60
NET PROFIT (Rs. Crs)	2,231.80	2,007.70	2,399.60	2,892.50
EPS (Rs.)	111.80	100.50	120.20	144.80
PE (x)	17.50	19.40	16.30	13.50
P/BV (x)	11.30	13.20	10.80	8.60
EV/EBITDA (x)	12.50	14.80	12.80	9.90
ROE (%)	61.40	62.50	73.00	71.00
ROCE (%)	72.90	59.30	60.20	75.40

I would buy HERO MOTOCORP LTD with a price target of Rs. 2160 for Medium to Long term and Rs. 2,000 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1770.50 on every purchase.


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