HERO MOTOCORP LTD: HERO OF TWO WHEELER MARKET !!!

Scrip Code: 500182 / HEROMOTOCO

CMP:  Rs. 2035.95; Accumulate at every dips.

Medium to Long term Target: Rs. 2140; STOP LOSS – Rs. 1873.25; Market Cap: Rs. 40,655.37 Cr; 52 Week High/Low: Rs. 2150.00 / Rs. 1435.00

Total Shares: 19,96,87,500 shares; Promoters : 7,97,12,482 shares –39.92 %; Total Public holding : 11,99,75,018 shares – 60.08 %; Book Value: Rs. 250.70; Face Value: Rs. 2.00; EPS: Rs. 104.77; Div: 3000 % ; P/E: 19.55 times; Ind. P/E: 19.24; EV/EBITDA: 10.96.

Total Debt: ZERO Cr; Enterprise Value: Rs. 40,520.42 Cr.

HERO MOTOCORP LIMITED:  HERO MOTOCORP Ltd was incorporated in 1984 and is based in New Delhi, India. The company changed its name to Hero MotoCorp after splitting from Hero Honda Motors Ltd in July 2011. Hero MotoCorp engages in the manufacturing and sales of motorcycles in India. It provides a range of two wheeler products, including motorcycles and scooters and spare parts. The company markets its product under various brands, including CD Dawn, CD Deluxe, Splendor Plus, Splendor NXC, Passion and Passion Pro, Passion Plus, Glamour, Super Splendor Pro, Achiever, Glamour FI, Hunk, CBZ X-treme, Karizma, Pleasure and Karizma ZMR. The company offers its product 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 100 cubic centimeter scooter Pleasure. 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 in Gurgoan 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 Motors Co whereby the promoter the Munjal’s bought the stake of Honda in July 2011. The company is compared to Bajaj Auto Ltd, TVS Motor Company Ltd, Atlas Cycles (Haryana), Shivam Auto Ltd, and Ashok Leyland Ltd locally and is globally compared with Harley-Davidson Inc of USA, Suzuki Motor Corp of Tokyo, Yamaha Motor Co ltd of Tokyo, Isuzu Motors Ltd of Japan, Aftab Automobiles Ltd of Middel East, Fuji Heavy Industries Ltd of Japan, Daihatsu Motor Co Ltd of Japan, Kawasaki Heavy Industries Ltd of Japan, Shimano Inc of Japan globally.

Investment Rationale:

Hero MotoCorp Ltd, India’s largest two-wheeler manufacturer, is charting out new growth strategy post Honda’s exit from the joint venture in January 2011. Post separation, Honda’s aggressive expansion plan has been exerting pressure on the market share of all two-wheeler players. However, Hero Motocorp is expected to maintain its leadership due to its largest distribution network with a deep presence in rural markets, and with a strong brand recall and also due to investment in building its own R&D and tie-ups with overseas technology partners. The company is targeting 1o lakhs two wheelers to be annually exported by FY17E. Over the years, Hero MotoCorp has built its distribution network of 750 dealers and 4,350 service centres. The network, has now grown more than 3 times in the past seven years, and now is fairly spread across rural and semi-urban areas. The rural sector constitutes around 46 % of Hero MotoCorp’s total sales volumes in FY13. Despite low industry volume off-take and stiff competition in the Indian two-wheeler market, Hero MotoCorp remains the market leader with 37.1 % share of industry sales volumes in H1FY14 followed by Bajaj Auto and Honda who are the closest competitors reporting 21.3 % and 20.8 % share, respectively, during the same period. HeroMotoCorp dominates the two-wheeler market with 51.4 % market share of the domestic motorcycles segment, led by its number one position in the executive sub-segment. Although intense competition is likely to impact Hero MotoCorp’s market share but still, it is expected that the company will hold leadership position around 52 % in market share in the domestic motorcycles market which can be possible for Hero MotoCorp as it has the largest distribution reach with 5,100 touch points, it has a strong brand recall especially in rural areas. The company has announced plans to invest Rs. 2,575 Cr in the coming years for setting up of new capacities which will increase its capacities by 20 lakhs units to 90 lakhs units, a part distribution centre at Rajasthan and has also recently set up its own R&D team and has tied up with three overseas technology companies viz Engines Engineering, AVL Austria and Erik Buell Racing, and management has also indicated to launch seven to eight new variants every year. Hero MotoCorp launched 15 models/variant in H2FY14 including a refresh version of its high-end bike Karizma. Karizma is the company’s first commercial production developed in collaboration with its technological partner EBR. The company has taken a price increase of Rs. 500 to Rs. 1500 on all models from 1 October 2013. The company is also developing a low-cost motorcycle for the Indian market; the motorcycle will be priced lower than the existing entry-level model HF Dawn which is priced at ₹37,000. It has indicated that once this model is successful in the Indian market, it would be considered for exports.

Outlook and Valuation:

Hero MotoCorp’s efforts for brand building post the Honda split and its investment phase and intensifying competition in two-wheelers will exert pressure on its profitability in the short term. In the global market, Honda has largely maintained more than 50 % market share and it is aggressively trying to replicate its success in India. Honda’s brand image along with technology edge may increase competitive pressure. It is expected that the overall motorcycle sales in India which is 80 % of two-wheeler industry sales to grow at 7 % - 9 % CAGR during FY13-18, led by rural demand. Hero MotoCorp’s domestic motorcycle sales volumes which are dominated by rural sales are expected to grow at 6 % CAGR during FY13-FY15. The company’s strong distribution network in rural markets and brand image are expected to drive growth. Also, it plans to expand in the export markets and its exports are expected to grow at a CAGR of 20 % during FY13-15. However, contribution of export to sales would still be low at 3 % in FY15. Hero MotoCorp is working on variant or models to meet specific requirement of export markets. Hero Motocorp expects to roll out its first own-technology based two-wheeler by FY14. Ability to successfully launch variant or new models will be a key to monitor. Post the split from Honda, Hero MotoCorp is building its own R&D facility in Rajasthan at an investment of Rs. 400 Cr and is expected to be operational by FY14 end. The company’s annual report mentions that the R&D centre will be spread across 250 acres, making it the largest two-wheeler R&D unit in India. It is expected that in FY15, with the royalty outflow to Honda going out from Q2 FY15 its volume growth expectations will become higher and its margins will continue to outperform. Its earnings will not be hampered with the impact of higher tax rate of around 27 % arising out from Haridwar benefit getting stopped and surcharge of 10 %. Factoring these pros and cons, HERO MOTOCORP looks as a good buy for the medium to long term with the target price to Rs. 2,240. At current price of Rs. 2035.95, the stock is trading at P/E of 19.06 x on FY14E & 14.61 x on FY15E. In my view Hero Motocorp could post EPS of Rs. 106.80 for FY14E & Rs. 139.30 for FY15E and one can ACCUMULATE the stock and would advise investors to use declines in the stock to buy with a long term view with a target price of Rs. 2240.00 for Medium to Long term investment. And for short term it would be Rs. 2137.00

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	23,878.90	23,978.80	26,087.20	29,178.00
NET PROFIT (₹ Cr)	2,378.80	2,118.70	2,132.90	2,782.70
EPS (₹)	119.10	106.10	106.80	139.30
PE (x)	17.50	19.70	19.50	15.00
P/BV (x)	9.70	8.30	7.10	5.80
EV/EBITDA (x)	10.50	11.70	10.60	9.10
ROE (%)	65.70	45.60	39.20	42.70
ROCE (%)	69.50	46.10	47.30	53.00

I would buy HERO MOTOCORP LTD for Short term it would be Rs. 2137.00 and for the Medium to Long term it would be Rs. 2240. 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 ₹ 1873.25 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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