february 1, 2019 hero motocorp (herhon) |...

February 1, 2019

ICICI Securities Ltd | Retail Equity Research

Result Update

Mixed Q3, compelling risk-reward play …

Hero MotoCorp (HMCL) reported a mixed Q3FY19 performance

Total 2-W sales volume for the quarter came in at 18.0 lakh units, up

5.3% YoY. Scooter sales volume was at 1.8 lakh units, down 18.4%

YoY. Motorcycle sales volume was at 16.2 lakh units, up 8.8% YoY

Consequent net sales were at | 7,865 crore, up 7.7% YoY, with

blended realisations (ASP) for the quarter amounting to | 43,720/unit

vs. | 42,600/unit in Q2FY19 and | 42,745/unit in Q3FY18

EBITDA in Q3FY19 was at | 1,105 crore, down 4.6% YoY with

corresponding EBITDA margins at 14.0% (vs. | 1,158 crore, 15.9%

YoY). Higher other expenses dented margins sequentially, driven by

higher advertising and promotion (A&P) spends.

Consequent PAT for Q3FY19 was at | 769.1 crore, down 4.5% YoY

The company also announced an interim dividend of | 55/share with

record date for the same fixed at February 12, 2019

Recent blip in volumes, scooters a particular drag!

Despite being the overall 2-W space market leader, HMCL has not been at

the forefront of the trend of scooterisation that has played out in the

industry in the past. While the share of scooters in total 2-W has increased

from ~24% to ~33% in FY14-18, scooter volumes as a proportion of

HMCL’s total volumes have remained largely stagnant at ~12% during

the same time period. As a result of lower growth rates vis-à-vis the

industry, HMCL has seen its scooter market share halve between FY14

and H1FY19 (~19.2% vs. ~10.7%). However, in its core motorcycle

segment, the company has withstood competitive intensity and retained

its market share at ~51-53% from FY13-18. In 9MFY19, the company’s

market share has suffered slightly as a result of not participating in

competitive pricing cuts. However, we view this decision favourably as it

prevents structural deterioration in profitability and returns ratios.

Two-wheelers relative bright spot, HMCL as market leader to benefit!

The 2-W space acts as a barometer for Indian auto industry and drives a

lion’s share of vehicle volumes. In near to medium term, we expect 2-W

space to continue to benefit from farm loan waivers in key states (Madhya

Pradesh, Chhattisgarh, Rajasthan) and possible income support for

farmers. Additional income in the hands of individual tax payers due to

increase in standard deduction announced in Interim Union Budget 2019-

20 is a further positive. HMCL has maintained its position as market leader

in the 2-W space over the years, with market share of ~36-40% & would

be a key beneficiary of any fillip to the 2-W industry.

Safe bet in auto OEM space, lucrative dividend yield, retain BUY!

Hero is a market leader in the domestic 2-W segment with market share at

35%+ and 50%+ in its core (~90% of total volumes) motorcycle

segment. The company has consciously refrained from a price war in the

entry level segment and has itself grown by double digits in this segment,

thereby maintaining the quality of earnings. The 2-W industry, over the

long term, has grown at ~1x GDP growth rate and is expected to do so

over FY20E with HMCL growing in tandem with the industry growth rate.

Going forward, revising our estimates, we now factor in 6.5% CAGR in

volumes, with consequent sales & PAT CAGR expected at 8.6% & 3.9%,

respectively. We value HMCL at | 3,000 i.e. 15x P/E on FY20E EPS of

| 200/share and retain our BUY rating on the stock. We also drive comfort

on HMCL from attractive dividend yield of ~4%, CFO yield of ~8% and

FCF yield of ~6%.

Hero MotoCorp (HERHON) | 2625

Rating matrix

Rating : Buy

Target : | 3000

Target Period : 12 months

Potential Upside : 14%

What’s changed?

Target Changed from | 3350 to | 3000

EPS FY19E Changed from | 186.6 to | 174.5

EPS FY20E Changed from | 209.6 to | 199.9

Rating Unchanged

Quarterly performance

(|Crore) Q3FY19 Q3FY18 YoY Q2FY19 QoQ

Revenues 7,864.8 7,305.5 7.7 9,090.9 -13.5

EBITDA 1,104.8 1,158.0 -4.6 1,378.7 -19.9

EBITDA (%) 14.0 15.9 -62 bps 15.2 -37 bps

Reported PAT 769.1 805.4 -4.5 976.3 -21.2

Key financials

| Crore FY17 FY18 FY19E FY20E

Net Sales 28,475 32,230 34,177 37,989

EBITDA 4,634.8 5,280.2 5,122.5 5,871.3

Net Profit 3,377.1 3,697.4 3,485.5 3,991.4

EPS (|) 169.1 185.1 174.5 199.9

Valuation summary

FY17 FY18 FY19E FY20E

P/E (x) 15.5 14.2 15.0 13.1

Target P/E (x) 17.7 16.2 17.2 15.0

EV/EBITDA (x) 10.2 8.7 9.0 7.7

P/BV (x) 5.2 4.5 4.0 3.6

RoNW (%) 33.4 31.4 26.9 27.4

RoCE (%) 44.0 42.4 38.0 39.0

Stock data

Particular Amount

Market Capitalization (| Crore) | 52421.3 Crore

Total Debt (FY18) (| Crore) | 0 Crore

Cash & Investments (FY18) (| Crore) | 6645.6 Crore

EV (| Crore) | 45775.6 Crore

52 week H/L (|) 3862 / 2562

Equity capital (| crore) 39.9

Face value (|) | 2

Price performance

1M 3M 6M 12M

Bajaj Auto Ltd -8.0 -2.2 -6.5 -25.6

Hero MotoCorp Ltd -16.4 -5.9 -18.7 -29.2

Eicher Motors Ltd -18.2 -10.0 -33.8 -29.1

Research Analyst

Shashank Kanodia, CFA

[email protected]

Jaimin Desai

[email protected]


Variance analysis

Q3FY19 Q3FY19E Q3FY18 YoY (%) Q2FY19 QoQ (%) Comments

Total Operating Income 7,865 7,778 7,305 7.7 9,091 -13.5 Revenues came in marginally ahead of our estimates primarily tracking higher-

than-expected ASPs

Raw Material Expenses 5,415 5,390 4,922 10.0 6,300 -14.1

Employee Expenses 436 428 402 8.4 434 0.4

Other expenses 910 836 824 10.5 978 -7.0 Other expenses were a tad higher primarily driven by higher advertisement and

promotion expenses

Operating Profit (EBITDA) 1,105 1,124 1,158 -4.6 1,379 -19.9

EBITDA Margins (%) 14.0 14.5 15.9 -62 bps 15.2 -37 bps Margin came in lower tracking higher other expenses partly compensated by

lower raw material costs

Other Income 188 163 110 70.6 224 -16.1 Other income came in a tad higher

Interest 2.2 1.5 1.6 37.6 2.1 0.9

Depreciation 151.8 149.9 138.3 9.8 151.8 0.0

PBT after Exceptional Items 1,138.4 1,135.6 1,128.2 0.9 1,448.5 -21.4

Total Tax 369.3 370.2 322.7 14.4 472.2 -21.8

PAT 769.1 765.4 805.4 -4.5 976.3 -21.2 PAT was broadly in line with our estimates

EPS (Adjusted) 38.5 38.3 40.3 -4.5 48.9 -21.2

Key Metrics

Motorcycle volumes ('000s) 1,619.2 1,605.6 1,488.8 8.8 1,927.3 -16.0

Motorcycle volume grew a healthy 8.8% YoY primarily driven by growth at the

entry level segment

Scooter volumes ('000s) 179.7 193.2 220.3 -18.4 206.8 -13.1 In scooter segment, sales came in muted

Export volumes('000s) 45.2 43.5 43.6 3.7 59.2 -23.6

Net Blended ASP (|/unit) 43,720 43,239 42,745 2.3 42,600 2.6 Increase in ASPs was the real surprise and was up by | 1120/unit

RM/Vehicle (|/unit) 30,099 29,963 28,799 4.5 29,520 2.0

EBITDA/Vehicle (|/unit) 6,499 6,250 7,576 -14.2 6,785 -4.2

Source: Company, ICICI Direct Research

Change in estimates

(| Crore) Old New % Change Old New % Change Comments

Revenue 35,547 34,177 -3.9 40,125 37,989 -5.3 Downward revision in volume estimates leads to downward revision in sales

estimates for FY19E & FY20E

EBITDA 5,459 5,122 -6.2 6,240 5,871 -5.9

EBITDA Margin (%) 15.4 15.0 -37 bps 15.6 15.5 -9 bps Revise downward our margin estimates given high competitive intensity in the

marketplace and raw material tailwinds commencing from Q1FY20

PAT 3,726 3,486 -6.5 4,186 3,991 -4.6

EPS (|) 186.6 174.5 -6.5 209.6 199.9 -4.6 Downward revision in sales & margin estimates leads to downward revision in

EPS estimates

FY19E FY20E


Assumptions

Current Earlier Introduced Comments

FY17 FY18 FY19E FY20E FY19E FY20EFY20E

Motorcycle volumes ('000s) 5,834 6,677 7,194 7,772 7,374 8,061 Revise downward our volume estimates over FY19E, FY20E primarily

tracking higher competition and general softness in demand

Scooter volumes ('000s) 830 910 769 831 926 1,025 The company has underperformed the industry in the scooter segment

despite new product launch in this segment, leading us to have a cautious

outlook on volumes, going forward

Export volumes('000s) 180 204 223 242 232 273

Gross Blended ASP (|/unit) 45,926 43,276 42,917 44,157 42,829 44,164 Broadly maintain ASP estimates for FY19E & FY20E

RM/Vehicle (|/unit) 28,530 28,742 29,687 30,398 29,678 30,606

EBITDA/Vehicle (|/unit) 7,058 7,325 6,445 6,825 6,512 6,868



Conference Call Highlights

Management outlook/guidance and demand

The management sees Q4FY19E as being better than Q3FY19 for

the industry and expects high single digit YoY growth for FY20E

Retail demand has picked up strongly in the latter half of January

Rural demand is slightly muted due to low sentiment and

subdued Rabi season sowing. However, the management is

hopeful of rural demand recovering by Q1FY20E

The industry has witnessed downward migration from 125 cc

category to 100 cc category due to insurance incidence increase

Scooterisation trend has slowed down on the back of a rise in fuel

costs impacting the relatively lesser fuel efficient segment

HMCL channel inventory levels are at six to eight weeks of sales

Newly launched Destini 125 garnered favourable response,

grabbing 14% market share in the fast growing segment on the

back of traction in multi ownership households and upgrades

from 100 cc products

Future launches Maestro Edge 125 cc scooter and X Pulse

Premium motorcycle are expected to arrive by H1CY19E

Sales, costs & margins

Commodity headwinds are largely behind HMCL with reduction in

input cost pressures to appear with a quarter’s leg

CBS and ABS cost incidence is expected to be to the tune of

~| 500/unit and ~| 5,000/unit, respectively, with both seen as

being margin neutral

ABS acceptance at the customer level would be a work in

progress and is not expected to be absorbed immediately.

HMCL sees A&P spends remaining at the usual run rate of ~2.5%

of sales.

Spare parts revenue registered 5.5% growth YoY from | 692

crore in Q3FY18 to | 730 crore in Q3FY19.

Others

HMCL has appealed against an income tax demand to the tune of

| 2,337 crore for FY11 received during the quarter. The company

expects a favourable judgement on the same and does not

envision any adverse impact on the financials.

Receivables days have increased by 10 days

Half of the product portfolio has already migrated to CBS-ABS

Dealership count has increased to 725

Share of financing has increased from ~37% last year to ~40%,

with the growth even stronger in Hero Fincorp’ s book at 59%

YoY


Company Analysis

Two-wheeler segment, steady growth to sustain, Hero to benefit!!

Despite being the overall 2-W space market leader, HMCL has not been at

the forefront of the trend of Scooterisation that has played out in the

industry in the past. While the share of scooters in total 2-W has increased

from ~24% to ~33% in FY14-18, scooter volumes as a proportion of

HMCL’s total volumes have remained largely stagnant at ~12% during

the same time period. As a result of lower growth rates vis-à-vis the

industry, HMCL has seen its scooter market share halve between FY14

and H1FY19 (~19.2% vs. ~10.1%). However, in its core motorcycle

segment, the company has withstood competitive intensity and retained

its market share at ~51-53% from FY13-18. In 9MFY19, the company’s

market share has suffered slightly as a result of not participating in

competitive pricing cuts. However, we view this decision favourably as it

prevents structural deterioration in profitability and returns ratios.

Exhibit 1: Growth in revenues

25,275

27,585

28,443

28,475

32,230

34,177

37,989

-

9.1

3.1

0.1

13.2

6.0

11.2

(2)

-

2

4

6

8

10

12

14

0

5000

10000

15000

20000

25000

30000

35000

40000

FY14 FY15 FY16 FY17 FY18 FY19E FY20E

(%

)

(| crore)

Net Sales Growth


Exhibit 2: Product mix

1,246

1,499

1,401

1,523

1,498

1,410

1,369

1,477

1,402

1,416

1,441

1,527

1,573

1,291

1,444

1,638

1,783

1,489

1,767

1,911

1,927

1,619

172

181189

192 195238

207169

173274 281

219251

183

177

216

240

220

234

196 207

180

-300

200

700

1,200

1,700

2,200

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

('0

00s)

Scooters Motorcycles


We expect HMCL’s 2-W volumes to grow at a CAGR of 6.5% in FY19E-20E

to 8.6 million units in FY20E (7.6 million units in FY18). Consequently, we

expect revenues to grow at 8.6% CAGR in FY19E-20E to | 37,989 crore in

FY20E (| 32,230 crore in FY18).


Margin trajectory to gradually softer in FY19E-20E

The margin trajectory is likely to soften a bit, going forward, in FY18-20E.

This is primarily factoring in calibrated price hikes by the company amid

increase in raw material costs due to a substantial hike in steel prices and

intense completion in the marketplace. Going forward, we expect HMCL

to report EBITDA margins of 15.0% in FY19E and 15.5% in FY20 vs. a

high of 16.4% realised in FY18. Consequent, EBITDA growth is likely to

lag sales growth with EBITDA growing at a CAGR of 2.8% in FY19E-20E to

| 5,871 crore in FY20E vs. | 5,280 crore in FY18.

Exhibit 3: Margins trend

3,540

3,542

4,455

4,635

5,280

5,122

5,871

14.0

12.8

15.7 16.3 16.4

15.0 15.5

-

2

4

6

8

10

12

14

16

18

0

1000

2000

3000

4000

5000

6000

7000


(%

)

(| crore)

EBITDA EBITDA Margins (%)


Exhibit 4: Raw material costs, other expenses hit margins

29629

28892

28787

28449

28425

28014

29206

29099

28169

28799

28942

29265

29520

30099

4840

5009

5063

4803

4837

5680

6372

5283

4547

4659

4706

4642

4260

4700

15.8

15.6

15.7

16.6 17.6

17.0

13.8

16.3

17.4

15.9

16.0

15.6

15.2

14.0

10

11

12

13

14

15

16

17

18

20000

24000

28000

32000

36000

40000

Q

2FY16

Q

3FY16

Q

4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

(%

)

(|)

Raw material costs /unit Other expenses /unit EBITDA Margins (%)


Profitability growth to lag sales, EBITDA growth due to other overheads

Going forward, with sales & EBITDA CAGR of 8.6% & 2.8%, respectively,

we expect PAT growth to be 3.9% in FY19E-20E. This is largely factoring

in lower other income amid high dividend payout ratio, capex plans and

decline in yields on surplus cash & cash equivalents. Depreciation is also

expected to increase thereby denting PAT margins to 10.5% in FY20E vs.

11.5% in FY18.


Exhibit 5: Trend in profitability

2,109

2,386

3,160

3,377

3,697

3,486

3,991

(11.3)

13.1

32.5

6.9

9.5

(5.7)

14.5

(15)

(10)

(5)

-

5

10

15

20

25

30

35

0

500

1000

1500

2000

2500

3000

3500

4000

4500


(%

)

(| crore)

PAT Growth


Strong FCFs as working capital cycle continues to remain impressive

HMCL continues to boast of a negative working capital cycle and robust

FCF generation. Even with fairly aggressive capex planned, FCF

generation is likely to be strong as the working capital management

remains strong. At the CMP, it offers an attractive FCF yield of ~6%.

Exhibit 6: Negative working capital cycle fuels strong FCFs; capex withstanding

2153.5

674.8 2

381.7

3132.5

3501.2

2042.0

3525.8

1,071.7

1,067.9

1,002.2

1,163.6

667.9

1,250.0

1,250.0

(10.1)

(8.4) (8.9)

(13.2)

(11.0)

(2.4)

(3.2)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

00

400

800

1200

1600

2000

2400

2800

3200

3600

4000


(days)

(| crore)

FCF Capex Working Capital Cycle


Return ratios to remain elevated, capital efficient business moat stays

With a strong asset turnover and high dividend payout, return ratios are

expected to remain strong, thereby providing a high margin of safety.

Exhibit 7: Return ratios to remain high

51.2 53.2

48.7

44.0

42.4

38.0

39.0 37.7

38.8

35.8

33.4

31.4

26.9 27.4

4.5

4.2

3.1

2.7 2.6

2.5 2.5 2.2

2.7

3.2

3.7

4.2

4.7

20

25

30

35

40

45

50

55


(%

)

RoCE RoE Asset turnover



Decent dividend payout policy, net debt negative profile

With strong CFO generation meeting most capex needs, HMCL has

maintained a healthy balance sheet. This has led to a strong dividend

payout policy as investment requirements in two-wheelers remain low

vis-à-vis other automotive segments. Accumulated profits (ex-

appropriations) have largely added to the huge liquid investment

portfolio. Thus, the company has a strong balance sheet with negative net

debt while the cash & cash equivalents including investment comprise

>50% of the asset side. Going ahead, we expect strong cash flow

generation to further lead to an increase in cash & cash equivalents to

~| 7,026 crore by FY20E.

Exhibit 8: Net debt negative as strong cash, equivalents form >50% of total assets

3,284.6

2,449.6

3,600.5

5,150.9

6,645.6

6,153.1

7,026.5

60.4

43.6

54.8 56.5

62.7

49.6

51.6

20

25

30

35

40

45

50

55

60

65

0

1000

2000

3000

4000

5000

6000

7000

8000


(%

)

(| crore)

Cash & Cash Equivalents As % of total assets


HMCL has also been a decent dividend payer with payouts at ~45% on

an average (FY07-15, excluding FY10, FY11 that saw special dividends

taking payouts ~100%). Going ahead, we expect dividend payouts to stay

at decent levels (>50%).

Exhibit 9: Decent dividend payout despite continuing capex plan….

60

65

60 7

2

85 95

95

100

56.6

61.6

47.2 45.5

50.3 51.3

54.4

50.0

-

10

20

30

40

50

60

70

30

50

70

90

110

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

(|)

(|)

DPS Dividend Payout

`



Outlook & valuation

Hero is a market leader in the domestic 2-W segment with market share at

35%+ and 50%+ in its core (~90% of total volumes) motorcycle segment.

The company has consciously refrained from price war in the entry level

segment and itself grown in double digits in this segment thereby

maintaining the quality of earnings. The 2-W industry, over the long term,

has grown at ~1x GDP growth rate and is expected to do so over FY20E

with HMCL growing in tandem with the industry growth rate. Going forward,

revising our estimates, we now factor in 6.5% CAGR in volumes, with

consequent sales & PAT CAGR expected at 8.6% & 3.9%, respectively. We

value HMCL at | 3,000 i.e. 15x P/E on FY20E EPS of | 200/share and retain

our BUY rating on the stock. We also drive comfort at HMCL from attractive

dividend yield of ~4%, CFO yield of ~8% and FCF yield of ~6%.

Exhibit 10: Valuations

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE

(| cr) (%) (| cr) (%) (x) (x) (%) (%)

FY17 28,475.0 3.0 169.1 31.3 15.5 10.2 33.4 44.0

FY18 32,230.5 13.2 185.1 9.5 14.2 8.7 31.4 42.4

FY19E 34,177.2 6.0 174.5 (5.7) 15.0 9.0 26.9 38.0

FY20E 37,989.1 11.2 199.9 14.5 13.1 7.7 27.4 39.0


Exhibit 11: One year forward P/E (HMCL currently trading at 13.1x)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-1

3

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-1

4

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-1

5

Nov-15

Jan-16

Mar-16

May-16

Jul-16

Sep-1

6

Nov-16

Jan-17

Mar-17

May-17

Jul-17

Sep-1

7

Nov-17

Jan-18

Mar-18

May-18

Jul-18

Sep-1

8

Nov-18

Jan-19

(|)

Price 18.6x 16.7x 15.8x 14.9x 12.1x 10.2x 8.4x

Source: Reuters, ICICI Direct Research


Recommended history vs. consensus estimate

0.0

20.0

40.0

60.0

80.0

100.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-19Oct-18Jul-18May-18Feb-18Nov-17Aug-17May-17Feb-17Nov-16Aug-16May-16Feb-16Dec-15

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICI Direct Research

Key events

Date Event

Mar-10 Hero MotoCorp looking to add fourth plant on rural demand growth; capacity of 0.85 mn units

Dec-10 Hero Honda and Honda announce break-up of JV after more than two decades. The solo journey of Hero MotoCorp begins

Feb-11 Honda Motor Co. plans to enter into 100 cc segment intensifying competition against Hero MotoCorp

Apr-11 Hero MotoCorp announces dividend payout, which disappoints investors

Nov-11 Hero MotoCorp announces big long term plans of sales for 10 mn units and revenue $10 billion by 2018

Mar-12 Hero looks at various options to gain technology including Ducati. Investors give a thumbs down

May-12 Hero MotoCorp announces plans to spend | 2,500 crore towards plants in Rajasthan, Gujarat along with R&D centre by 2014

Sep-12 Hero MotoCorp reports weakest monthly volumes since April 2010 as rural demand slows down on weak monsoon

Feb-13 Company continues to report YoY volume declines as 2-W industry faces demand slump, competition intensifies

Apr-13 The management pushes a new five-year warranty strategy. The market response is very favourable

May-14 Hero MotoCorp's new strategy of LEAP starts to show marginal benefits

Jun-14 US based PE firm, Bain Capital sells 2.81% stake in the company for ~|1481 crore

Jul-14 HMCL forms subsidiary in Columbia as part of its vision of expanding globalfootprint

Sep-14 Company plans to set up manufacturing plant in Chitoor, Andhra Pradesh with investment of ~| 1600 crore and capacity of 1.8 million units

Oct-14 HMCL Neemrana plant in Rajashthan goes on stream, taking the combined installed capacity of four plants at 7.65 million per annum

Dec-14 Tiger Woods becomes brand endoser for HMCL

Mar-15 HMCL JV with Magnetti Marelli, HMC-MM inagurates its first production and development centre at Manesar, Haryana


Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Hero Group 31-Dec-18 20.4 40.8 0.0

2 Brijmohan Lall Om Prakash Partnership Firm 31-Dec-18 14.0 27.9 0.0

3 LIC Mutual Fund Asset Management Company Ltd. 31-Dec-18 5.2 10.5 -2.4

4 Life Insurance Corporation of India 31-Dec-18 5.2 10.5 2.0

5 OppenheimerFunds, Inc. 31-Dec-18 3.9 7.8 -0.1

6 Lazard Asset Management, L.L.C. 31-Dec-18 2.2 4.4 -0.1

7 Templeton Investment Counsel, L.L.C. 31-Dec-18 2.0 4.0 0.0

8 Aberdeen Standard Investments (Asia) Limited 31-Dec-18 1.8 3.6 -0.5

9 The Vanguard Group, Inc. 31-Dec-18 1.7 3.4 0.0

10 SBI Funds Management Pvt. Ltd. 31-Dec-17 1.6 3.2 0.5

(in %) Mar-18 Jun-18 Sep-18 Sep-18 Dec-18

Promoter 34.6 34.6 34.6 34.6 34.6

FII 42.3 41.9 39.6 38.9 40.0

DII 11.5 12.0 14.4 14.8 15.4

Others 11.5 11.4 11.4 11.7 10.1


Recent Activity

Investor name Value Shares Investor name Value Shares

Westwood Global Investments, L.L.C. +108.1M +2.4M LIC Mutual Fund Asset Management Company Ltd. -107.6M -2.4M

Life Insurance Corporation of India +88.2M +2.0M Somerset Capital Management, L.L.P. -20.7M -0.5M

Nomura Asset Management Co., Ltd. +44.3M +0.9M Aberdeen Standard Investments (Asia) Limited -20.5M -0.5M

Northern Trust Investments, Inc. +9.6M +0.2M Jupiter Asset Management Ltd. -17.7M -0.3M

RBC Global Asset Management (UK) Limited +3.6M +0.1M ICICI Prudential Asset Management Co. Ltd. -12.5M -0.3M

Buys Sells



.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY17 FY18 FY19E FY20E

Total operating Income 28,475.0 32,230.5 34,177.2 37,989.1

Growth (%) 0.1 13.2 6.0 11.2

Raw Material Expenses 19,011.8 21,834.7 23,641.2 26,151.6

Employee Expenses 1,396.0 1,540.1 1,703.5 1,882.4

Other expenses 3,432.4 3,575.5 3,710.0 4,083.8

Total Operating Expenditure 23,840.2 26,950.3 29,054.7 32,117.9

EBITDA 4,634.8 5,280.2 5,122.5 5,871.3

Growth (%) 4.5 13.9 -3.0 14.6

Depreciation 492.7 555.6 598.1 645.8

Interest 6.1 6.3 7.9 6.1

Other Income 522.4 525.8 646.1 702.6

PBT 4,658.5 5,244.2 5,162.5 5,922.0

Total Tax 1,281.3 1,546.8 1,677.0 1,930.6

PAT 3,377.1 3,697.4 3,485.5 3,991.4

Growth (%) 6.9 9.5 -5.7 14.5

EPS (|) 169.1 185.1 174.5 199.9


Cash flow statement | Crore


Profit after Tax 3,377.1 3,697.4 3,485.5 3,991.4

Add: Depreciation 492.7 555.6 598.1 645.8

(Inc)/dec in Current Assets -224.8 -340.1 -917.7 -443.6

Inc/(dec) in CL and Provisions 645.0 250.0 118.2 576.1

CF from operating activities 4,290.0 4,162.8 3,284.1 4,769.7

(Inc)/dec in Investments -1,545.0 -1,490.2 500.0 -850.0

(Inc)/dec in Fixed Assets -1,163.6 -667.9 -1,250.0 -1,250.0

Others 524.3 39.6 -250.0 -250.0

CF from investing activities -2,184.4 -2,118.5 -1,000.0 -2,350.0

Inc/(dec) in loan funds 0.0 0.0 0.0 0.0

Dividend paid & dividend tax -2,091.1 -2,276.6 -2,276.6 -2,396.4

Inc/(dec) in Sec. premium - - - -

CF from financing activities -2,106.3 -2,046.0 -2,284.5 -2,402.5

Net Cash flow 5.4 4.5 7.5 23.3

Opening Cash 131.4 136.8 141.3 148.8

Closing Cash 136.8 141.3 148.8 172.1


Balance sheet | Crore


Liabilities

Equity Capital 39.9 39.9 39.9 39.9

Reserve and Surplus 10,071.3 11,728.9 12,937.9 14,532.9

Total Shareholders funds 10,111.3 11,768.9 12,977.8 14,572.8

Total Debt 0.0 0.0 0.0 0.0

Deferred Tax Liability 414.3 511.7 511.7 511.7

Others 75.3 114.9 114.9 114.9

Total Liabilities 10,600.9 12,395.5 13,604.4 15,199.5

Assets

Gross Block 6,773.2 7,405.1 7,905.1 9,905.1

Less: Acc Depreciation 2,462.4 2,919.3 3,517.4 4,163.2

Net Block 4,310.7 4,485.9 4,387.8 5,742.0

Capital WIP 270.7 203.8 953.8 203.8

Total Fixed Assets 4,581.4 4,689.7 5,341.6 5,945.8

Investments 5,889.9 7,525.2 7,275.2 8,375.2

Inventory 656.3 823.6 877.1 968.6

Debtors 1,561.9 1,520.2 2,340.9 2,602.0

Loans and Advances 24.2 27.6 26.1 29.0

Cash 136.8 141.3 148.8 172.1

Total Current Assets 2,682.1 2,912.4 3,257.0 4,182.2

Creditors 3,247.3 3,318.8 3,444.0 3,905.2

Provisions 39.0 59.8 62.0 70.4

Total Current Liabilities 3,448.3 4,093.3 4,343.3 4,461.5

Net Current Assets -766.2 -1,181.0 -1,086.3 -279.3

Application of Funds 10,600.9 12,395.5 13,604.4 15,199.5


Key ratios


Per share data (|)

EPS 169.1 185.1 174.5 199.9

Cash EPS 193.8 213.0 204.5 232.2

BV 506.3 589.3 649.9 729.7

DPS 85.0 95.0 95.0 100.0

Cash Per Share 6.8 7.1 7.5 8.6

Operating Ratios (%)

EBITDA Margin 16.3 16.4 15.0 15.5

PBT / Net sales 14.5 14.7 13.2 13.8

PAT Margin 8.3 8.6 11.1 11.9

Inventory days 8.4 9.3 9.4 9.3

Debtor days 20.0 17.2 25.0 25.0

Creditor days 41.6 37.6 36.8 37.5

Return Ratios (%)

RoE 33.4 31.4 26.9 27.4

RoCE 44.0 42.4 38.0 39.0

RoIC 95.8 93.7 78.3 71.5

Valuation Ratios (x)

P/E 15.5 14.2 15.0 13.1

EV / EBITDA 10.2 8.7 9.0 7.7

Market Cap / Sales 1.8 1.6 1.5 1.4

Price to Book Value 5.2 4.5 4.0 3.6

Solvency Ratios

Current Ratio 0.8 0.9 1.0 1.0

Quick Ratio 0.6 0.6 0.8 0.8



ICICI Direct coverage universe (Auto & Auto Ancillary)

CMP M Cap

(|) TP(|) Rating (| Cr) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

Amara Raja (AMARAJ) 776 835 Hold 13261 27.6 30.2 39.8 28.1 25.7 19.5 14.8 13.1 10.2 23.3 22.0 24.7 16.0 15.2 17.1

Apollo Tyre (APOTYR) 211 260 Buy 12056 12.7 16.2 21.6 16.7 13.0 9.8 7.5 7.5 6.4 7.8 9.3 11.1 7.4 9.1 10.7

Ashok Leyland (ASHLEY) 83 115 Hold 23335 5.3 7.1 8.9 15.5 11.6 9.3 10.2 8.3 6.2 28.1 32.1 34.6 21.9 25.1 26.2

Bajaj Auto (BAAUTO) 2500 2380 Hold 72343 140.6 149.7 167.2 17.8 16.7 14.9 11.9 11.3 9.3 22.9 21.1 21.7 21.5 20.3 20.2

Balkrishna Ind. (BALIND) 848 1025 Hold 16384 38.2 50.6 59.7 22.2 16.8 14.2 16.5 12.0 10.0 22.4 26.1 26.2 18.1 26.1 26.2

Bharat Forge (BHAFOR) 480 700 Buy 22329 16.2 23.3 28.0 29.6 20.6 17.2 17.6 14.5 12.2 18.2 22.9 25.7 17.3 23.3 23.9

Bosch (MICO) 18526 20500 Hold 58172 449.1 593.7 661.5 41.3 31.2 28.0 27.0 21.9 19.2 14.4 16.4 16.3 21.4 24.4 24.3

Eicher Motors (EICMOT) 20050 25500 Buy 54656 718.9 926.0 1162.1 27.9 21.7 17.3 20.0 17.0 13.2 39.1 35.9 35.0 29.9 27.9 26.9

Escorts (ESCORT) 670 700 Hold 8213 28.1 40.7 44.1 23.8 16.5 15.2 14.2 10.6 9.3 18.8 20.9 20.8 13.5 16.5 15.3

Exide Industries (EXIIND) 230 285 Buy 19563 8.2 9.3 11.5 27.9 24.8 20.0 16.8 14.6 11.8 19.1 18.9 21.2 13.0 13.2 14.7

Hero Moto (HERHON) 2625 3000 Buy 52421 185.1 174.5 199.9 14.2 15.0 13.1 8.7 9.0 7.7 42.4 38.0 39.0 31.4 26.9 27.4

JK Tyre & Ind (JKIND) 96 100 Hold 2175 2.9 12.9 21.9 32.9 7.4 4.4 9.8 6.0 4.6 7.7 12.6 15.4 3.6 15.0 18.6

Mahindra CIE (MAHAUT) 232 280 Buy 8780 9.5 14.5 17.7 24.5 16.0 13.2 13.7 9.9 8.2 9.8 12.9 13.7 11.2 15.0 17.1

Maruti Suzuki (MARUTI) 6520 6000 Hold 196122 255.6 250.3 284.4 25.5 26.0 22.9 13.5 13.8 11.8 21.1 17.8 18.8 18.5 16.3 16.6

Motherson (MOTSUM) 151 165 Hold 47622 5.1 6.2 9.0 29.8 24.2 16.7 10.8 9.0 6.7 16.3 19.6 26.1 17.4 19.4 23.5

Tata Motors (TELCO) 173 200 Hold 51779 26.8 2.3 17.0 6.9 79.0 10.9 2.7 3.2 2.6 9.1 6.1 8.2 10.3 4.3 8.5

Wabco India (WABTVS) 6290 6800 Hold 11951 143.8 172.2 212.3 43.7 36.5 29.6 28.0 24.1 19.1 17.9 17.8 18.2 25.1 25.7 26.0

Sector / Company

RoE (%)EPS (|) P/E (x) EV/EBITDA (x) RoCE (%)



RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong

Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is

defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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february 1, 2019 hero motocorp (herhon) |...

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