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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HERO MOTOCORP LTD : ON ROAD OF SUCCESS !!!

Scrip Code: 500182 / HEROMOTOCO

CMP:  Rs. 1646.95; Buy at current levels.
Medium to Long term Target: Rs. 1842; STOP LOSS – Rs. 1515.20; Market Cap: Rs. 32,887.53 Cr; 52 Week High/Low: Rs. 2249.00 / Rs. 1615.00

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. 148.58; Face Value: Rs. 2.00; EPS: Rs. 107.54; Div: 5250 % ; P/E: 15.31 times; Ind. P/E: 16.50; EV/EBITDA: 10.72.

Total Debt: 1,491.16 Cr; Enterprise Value: Rs. 34,378.70 Cr.

HERO MOTOCORP LIMITED:  HEROMOTOCORP Ltd was incorporated in 1984 and is based in New Delhi, India. The company changed its name to HeroMotoCorp from Hero Honda Motors Ltd in July 2011. HeroMotoCorp 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) & Ashok Leyland Ltd locally and is compared with Shimano Inc of Japan globally.

Investment Rationale:

HEROMOTOCORP (HEROMOTOCO) management has indicated to launch seven to eight new variants every year. The company is targeting 1 million two wheelers to be annually exported by FY17E. The management also stated that it has neither offered discounts or freebies nor it plans to do so in the future. It has hiked dealer commissions by Rs.100 since October 2012, which is a regular revision followed by the company. HeroMotoCorp’s Q3 FY13 result was lower than street estimates; HeroMotoCorp’s volume in Q3 FY13 was down 1% YoY but up 18% Q-o-Q to 15,73,135 units due to festival season in Q3 in this FY. Contribution from 75-125 cc segments has increased by 97 bps YoY but down 207 bps Q-o-Q. Major contribution in 75-125 cc segments have been 125 cc segments namely Ignitor, Super Splendor and Glamour which has led to growth in realization. Management expects industry and HeroMotoCorp to grow at 5% - 6%. HeroMotoCorp’s Revenue was marginally lower at Rs. 6,151 Cr largely led by higher realization of Rs. 39,102/unit. EBITDA were lower than street estimates at Rs. 779 Cr. and EBIDTA margin were around 12.6%. Other expenditure was higher at Rs. 625 Cr. despite volumes which were down by 1% YoY due to increase in dealer margin by 50% on incremental sales and higher Ad spending in wake of intense competition. PAT for the HeroMotoCorp was at Rs. 488 Cr. Other expenses were high at 10.2% due to brand building and product launches. The management expects these expenses to continue in Q4FY13. It expects ad-spend to remain at 2% of sales. The Tax rate is expected to increase to 23% in FY14 from 16.3% currently as the Haridwar plant will no longer be eligible for tax breaks. The management expects better y-o-y volume growth in Q4FY13 than in Q3FY13. Management is expecting some relief in raw material cost due to depreciating YEN. Hero Moto Corp shipped its first lot of motorcycles to Latin America, it intends to increase its exports to 10% of its total sales. This was one of the key reasons that Hero parted with Honda, to be able to pursue its interests in the International market. The company hopes to sell in around 30 countries around the globe. It is expected that the company will launch 'Hero' as a brand in the south America markets in the next few weeks. It also intends to set up an assembly units in these markets once the relevant volumes are achieved.    

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. However, its fundamentals are intact given its leadership position, robust rural reach and strong brand recall. HeroMotoCorp’s market share in two-wheelers rose by 2.93% quarter on quarter to 38.6%. It also gained market share from Honda in its core domestic motorcycle segment – its market share rose by 1.93% Q-o-Q to 51.9%. 

Hero MotoCorp's manufacturing plant at Haridwar

HeroMotoCorp has started the construction of its fourth manufacturing plant which will have an capacity of 7.50 lakh units per annum and started a new global parts center in Neemrana, Rajasthan at a capex of around Rs. 550 Cr. This plant  is spread over an area of 47 acres and will provide employment to over 1,000 people These are expected to be operational by the end of FY14. Company is also in the process of acquiring land for the Gujarat plant, this plant is expected to be operational by FY15. The Rajasthan and Gujarat projects will take up the total installed capacity to 85 lakh units. Despite festive season, inventory pile-up continues at the dealer’s level on poor demands. Since the rural region accounts for nearly 46% of sales, weak monsoons at the outset have impacted sales volume. Honda’s new launches in the sub-125 cc segment and commissioning of capacities well ahead of HeroMotoCorp’s new capacities is the biggest concern for HeroMotoCorp from its market share erosion point of view. The benefit on account of reduction in royalty Q1 FY15 onward would compensate the incremental cost pressure for HeroMotoCorp. At current price of Rs. 1646.95, the stock is trading at P/E of 15.23 x on FY13 estimates & 13.77 x on FY14 estimates. In my view HeroMotocorp could post EPS of Rs.108.10 for FY13E & Rs.119.60 for FY14E 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. 1842.00 for Medium to Long term investment.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	23,878.90	24,076.80	26,451.70	29,663.70
NET PROFIT(Rs. Crs)	2,378.80	2,157.90	2,357.90	2,999.70
EPS (Rs.)	119.10	108.10	119.60	150.20
PE (x)	15.00	16.50	14.90	11.90
P/BV (x)	8.30	6.50	5.20	4.20
EV/EBITDA (x)	8.90	9.30	8.20	6.90
ROE (%)	65.70	44.10	38.70	39.10
ROCE (%)	69.50	46.00	43.60	46.60

I would buy HERO MOTOCORP LTD with a price target of Rs. 1842 for Medium to Long term. 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. 1515.20 on every purchase.

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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.


READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE