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Hero MotoCorp Ltd.
BUY
- 1 of 32 - Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
ST
OC
K P
OIN
TE
R
Target Price ₹4054 CMP ₹2979 FY18E 14.4x
Index Details Hero MotoCorp (Hero) is India’s largest two wheeler manufacturer.
Of the top five best-selling motorcycles in India, four belong to
Hero’s stable, viz. Splendor, Deluxe, Passion and Glamour. Hero, a
market leader, is a debt-free, cash-rich company operating on a
negative working capital cycle with superior return ratios.
We are positive about the company’s prospects given that:
Prospects of the domestic two wheeler industry are expected
to improve (CAGR of 11% in FY17-18 from CAGR of 2.4%
during FY12-16) with the pick-up in economic activity,
government’s thrust on rural area development and favorable
demographics.
Hero is expanding its annual capacity from 7.65 mn units to
nearly 10 mn units by FY18. Given the capacity expansion and
improving industry prospects, we expect Hero to report a 3
year revenue CAGR of 10.1% to Rs 36,751 crore by FY18E.
Hero has been able to maintain a leadership position in the
two-wheeler segment despite stiff competition on the back of
higher warranties, established distribution strength and
increasing spends on R&D.
We expect the EBITDA margin to expand to 16.8% in FY18E
from 15.5% in 9MFY16 led by operational efficiencies derived
from its ‘LEAP’ programme and relatively lower raw material
costs.
Hero’s exports have grown at a healthy pace and have helped
de-risk the business model to a certain extent.
We initiate coverage on Hero as a BUY with a Price Objective of
₹4054, representing a potential upside of 36% over a period of 18
months. We have arrived at our target price by assigning a PE of 20x
to FY18E EPS of ₹203. The assigned PE is at premium of ~15% to its
5 year median forward multiple of 17.5x. The premium assigned is
reflective of the anticipated expansion in margins, superior return
ratios, leadership position and strong balance sheet.
Sensex 25,400
Nifty 7,759
BSE 100 7,810
Industry Auto
Scrip Details
Mkt Cap (₹cr) 59,495
BVPS (₹) 449.7
O/s Shares (Cr) 20.0
Av Vol (Lacs) 0.4
52 Week H/L 2987/2252
Div Yield (%) 2.0
FVPS (₹) 2.0
Shareholding Pattern
Shareholders %
Promoters 34.6
Public 65.4
Total 100.0
Hero vs. Sensex
1000
1500
2000
2500
3000
3500
20000
21000
22000
23000
24000
25000
26000
27000
28000
29000
30000
Mar-
15
Ap
r-15
May-1
5
Ju
n-1
5
Ju
l-15
Au
g-1
5
Sep
-15
Oct-
15
No
v-1
5
Dec-1
5
Jan
-16
Feb
-16
BSE_SENSEX Hero MotoCorp (RHS)
Key Financials (₹ in Cr)
Y/E Mar Net
Sales EBITDA PAT
EPS (Rs)
EPS Growth (%)
RONW (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
2015 27,538 3406 2363 118 12% 36.1 51.9 24.7 16.4
2016E 28,331 4461 3118 156 32% 37.3 52.1 18.7 12.4
2017E 32,900 5385 3618 181 16% 33.9 47.3 16.1 10.2
2018E 36,751 6181 4047 203 12% 30.3 42.2 14.4 8.7
- 2 of 32- Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Company Background
Incorporated in 1984, Hero MotoCorp (Hero) is India’s largest two wheeler
manufacturer with a market share of 35% as on 9MFY16. It was promoted as a joint
venture between India’s Hero Group and Japan’s Honda Motor. Amid rising
differences, Honda exited the JV in a phased manner in 2010 and the company was
renamed to Hero MotoCorp from Hero Honda.
Hero has 4 manufacturing plants, 3 located in Haryana (Dharuhera and Gurgaon)
and 1 in Uttarakhand ((Haridwar) with a combined capacity of 7.65 mn units as on
FY15. Post the capacity expansion in Neemrana and Halol, Gujarat, Hero’s capacity
is slated to reach nearly 10 mn units by FY18E. It earns majority of its revenues from
the sale of entry level motorcycles ( 75-125cc).
Hero MotoCorp manufacturing locations
Haridwar plant : Daily
capacity 8500 units
Gurgaon plant : Daily
capacity 6500 units
Dharuhera plant : Daily
capacity 6500 units
Neemrana plant : Daily
capacity 1250 units (in
FY16)
Halol, Gujarat plant : Daily
capacity 5000 units ( by
FY18)
Source: Hero, Ventura Research
- 3 of 32- Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Key Investment Highlights
Hero holding fort amidst increasing competition
Hero, India’s largest two wheeler manufacturer, has managed to hold on to its
leadership position even as the industry has seen an influx of new players and
models. Post, its split with Honda in 2010-11, market shares in the industry have
seen substantial changes as Honda managed to capture market share from existing
players through a spree of new launches and aggressive marketing. Despite, the
changing industry dynamics, Hero continues to dominate the industry with a 35%
market share as on 9MFY16, down 600 bps from FY12.
Hero has been able to hold on to its leadership position despite cut-throat
competition on the back of:
i) Higher warranty period: Hero offers a simplified and no-cost warranty for an
extended period, unlike its peers. Despite the liberal warranty policy, Hero has
managed to maintain relatively higher EBITDA margins vis-à-vis peers, except for
Bajaj Auto, which has a dominant presence in the high end, high margin segment
(>125 cc segment).
Hero’s dominance in 2012 continues… …albeit at a lower share
Hero Moto, 41%
Honda Motor, 14%
Bajaj Auto, 25%
T V S Motor, 14%
India Yamaha, 3%
Suzuki, 2%
Eicher , 1%
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2002-0
3
2003-0
4
2004-0
5
2005-0
6
2006-0
7
2007-0
8
2008-0
9
2009-1
0
2010-1
1
2011-1
2
2012-1
3
2013-1
4
2014-1
5
2015-1
6E
x
Two wheeler industry to GDP multiple Average Std Deviation -1 Std Deviation +1
Source: CMIE, Ventura Research
Source: CMIE, Ventura Research
- 4 of 32- Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
ii) Increasing spends on R&D: Historically, Hero’s spends on R&D were low
because of the technological expertise of its partner – Honda. However, post split,
Hero has increased its R&D spend from ~0.4% in FY10 to ~0.7% at present. The
management aims to increase it to ~1.1% of sales in the coming years. With this, it
is slowly catching up with the R&D spend of peers – Bajaj Auto – ~1.7% and TVS
Motors ~1.9%.
iii) Well established dealer network: Hero has a little over 6,000 customer touch
points, including dealers and service centers, spare part outlets and dealer
appointed outlets primarily located in the semi-urban and rural areas from where it
derives ~45% of its revenues.
Insurance Policy and EBITDA margin comparison
Warranty Hero Bajaj TVS Honda Yamaha
Policy Standard policy
coverage at no
cost for all models
purchased after
13th April 2013
Basic coverage only
upto 2 years/30,000
kms, extended
warranty available at
a nominal charge/
Different models
have different
warranties
Basic coverage only
upto 2 years,
extended warranty
available at a
nominal charge
Basic coverage only
upto 2 years,
extended warranty
available at a
nominal charge
Basic Coverage: 2 years
or 30,000 kms whichever
is sooner for motorcycles,
Basic Coverage: 2 years
or 24,000 kms whichever
is sooner for scooters
Motorcycles 5 years or 70,000
kms whichever is
sooner
5 years or 50,000
kms whichever is
sooner
5 years or 60,000
kms whichever is
sooner
Upto 5 years or
40000 kms
5 years or 70,000 kms
whichever is sooner
Scooters 5 years or 50,000
kms whichever is
sooner
5 years or 60,000
kms whichever is
sooner
Upto 5 years or
36000 kms
5 years or 60,000 kms
whichever is sooner
Mopeds 3 years or 36,000
kms whichever is
sooner
EBITDA margin Hero Bajaj TVS Honda YamahaEBITDA margin ( 3
year average) 13.1% 21.6% 5.7% 10.6% 9.1%
Source: Ventura Research
- 5 of 32- Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Revenues to grow at a healthy pace
Hero’s revenues are expected to grow at a 3 year CAGR of 10.1% to Rs 33,405
crore by FY18, driven by the anticipated pick-up in demand and capacity expansion.
Hero’s dealer and service centers close to 3K
0
500
1000
1500
2000
2500
3000
3500
Hero Bajaj TVS Honda Yamaha
Dealers Service Centres
Source: Ventura Research
Revenues to grow at a 3 year CAGR of 10%
0%
5%
10%
15%
20%
25%
20000
22000
24000
26000
28000
30000
32000
34000
36000
38000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Rs crs
Revenues Growth YoY (RHS)
Source: Hero, Ventura Research
- 6 of 32- Tuesday 05th
April, 2016
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Two wheelers poised to grow at a steady rate
India is expected to register two wheeler sales of 19.1 mn units in 2015-16, a 5 year
CAGR of 7.6%. The growth momentum is expected to pick-up from here on with
sales volumes expected to touch ~30 mn units by 2020.
As can be seen from the above chart, two wheeler sales grew at a modest CAGR of
4.7% during FY12-FY16E as a domestic slowdown set in following:
policy logjam
halt in capex cycle
drought in certain states, which impacted crop yields, and
declining food prices and a lower increase in MSP which led to a wide spread
slowdown in consumption spending.
Going forward, we expect sales to grow at a two year CAGR of ~11% from FY16-
FY18 given that:
i) Historically, two wheeler sales have grown at an average of 1.6x India’s GDP
growth rate. According to the IMF, India is pegged to clock the fastest growth rate of
7.4% over FY15-FY18. Accordingly, two wheelers, sales of which are closely linked
to the overall health of the Indian economy, have the potential to grow in the range
of 11-12%. With Hero commanding a leadership position in the largest segment of
the two wheeler industry – i.e. motorcycles, it is expected to be the biggest
beneficiary of the pick-up in economy.
Domestic Two wheelers sales to pick-up from FY16 onwards
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
in mn units
Sales Units Growth (RHS)
FY12 growth: 15.7%4 yr CAGR : 4.7% 2 yr CAGR 11.2%
Source: CMIE, Ventura Research
- 7 of 32- Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
ii) The top three players in this segment – Hero, Honda and Bajaj derive nearly 30-
50% of their sales from rural areas. The Union Budget 2016-17 has spelled out a
number of agri-oriented measures with an aim to double rural incomes in the coming
5 years. These measures include higher allocations for MNREGA, irrigation and soil
testing, crop insurance schemes, interest subvention on loan to farmers, thrust to
organic farming along with adequate physical and digital infrastructure support. An
uptick in the rural economy could help revive two wheeler sales in India.
iii) Favourable demographics – With half of the population below 25 years of age,
India ‘s demographics are conducive to aspiration spending.
Two wheeler industry sales v/s GDP growth rate Industry/GDP growth rate multiple trend
-10
-5
0
5
10
15
20
25
30%
Two wheeler industry growth rate GDP growth rate
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
Mar-
14
Ap
r-14
May-1
4
Ju
n-1
4
Ju
l-14
Au
g-1
4
Sep
-14
Oct-
14
No
v-1
4
Dec-1
4
Jan
-15
Feb
-15
Mar-
15
Ap
r-15
May-1
5
Ju
n-1
5
Ju
l-15
Au
g-1
5
Sep
-15
Oct-
15
No
v-1
5
Dec-1
5
Jan
-16
Feb
-16
Mar-
16
EV 9X 10X 11X 12X 13X
Source: CMIE, Ventura Research
Source: Ventura Research
Favorable demographics to boost consumption spending
Source: CIA World Factbook
- 8 of 32- Tuesday 05th
April, 2016
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Motor cycles to drive two wheeler growth
The motorcycles segment, which accounts for ~69% of the total two wheeler
industry in India, has grown at a 4 year CAGR of 2.4% to ~13.1 mn unit sales in
FY16E.
The modest growth during FY12-FY16 can be attributed to the loss of market-share
to the scooters segment. While the share of motorcycles’ within the two-wheeler
industry declined from 80% in FY10 to 69% in FY16, the scooters segment gained
market share -- from 14% to 28% during the same period. Sleek designs, unisex
appeal, advancements in technology to achieve good stability and attractive pricing
are few reasons for the success of the scooters segment. However, during FY16-
FY18, motorcycles are expected to grow at 13.8% CAGR, while the growth in
scooters is expected to slow-down to 7.1%.
Domestic Motorcycle sales to pick-up
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0.0
5.0
10.0
15.0
20.0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
in mn units
Mototrcycles Sales Growth % (RHS)
FY12 growth: 13.9%4 yr CAGR : 2.4% 2 yr CAGR 13.5%
Source: CMIE, Ventura Research
- 9 of 32- Tuesday 05th
April, 2016
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Top Selling motorcycles: Hero vrooming ahead
In FY15, motorcycles constituted 87% of the Hero’s total sales during the year. As
per the latest industry data available, of the top 5 best-selling motorcycles in India,
four belong to Hero’s stable.
Note: Model-wise sales numbers used in the report have been obtained from various internet
sources, hence authenticity of numbers cannot be verified
Domestic Scooter sales trend
0%
5%
10%
15%
20%
25%
30%
0.0
2.0
4.0
6.0
8.0
10.0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
in mn units
Scooter Sales Growth % (RHS)
FY12 growth: 26%
4 yr CAGR : 18.7%
2 yr CAGR 7.1%
Source: CMIE, Ventura Research
Top 5 selling motorcycles in India
0
10000
20000
30000
40000
50000
60000
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
Hero Splendor Hero HF Deluxe Hero Passion Hero Glamour Honda CB Shine
in Rs in units
Feb 16 monthly sales Price (RHS)
Source: CMIE, Ventura Research
- 10 of 32- Tuesday 05th
April, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
The segment-wise performance of the two wheeler segment can be detailed as
follows:
75-110 cc -- 84% of total Hero’s motorcycle sales
Hero largely dominates this entry-level segment with its models -- Splendor,
Deluxe and Passion. Hero derives nearly 40-45% of total sales from rural
India on the back of its high selling entry level motorcycles. As mentioned
earlier, any uptick in rural demand could translate to significant gains for Hero.
Hero plans to further strengthen its position in this segment with the launch of
Hero Splendor iSMART this year.
Segment-wise motorcycle industry trends
Segment-wise CC % of total
Motorcycle sales
3 year CAGR
(FY12-FY15)
3 year CAGR
(FY16-FY18)
75-110cc 62% 1.3% 8.4%
110-125cc 16% 5.8% 6.5%
125-150cc 13% -2.3% 0.0%
150-200cc 5% 20.5% 27.8%
200-250cc 1% -1.1% 7.3%
250cc+ 2% 60% 37.8%
Source: CMIE, Ventura Research
75-110 cc Competitive landscape
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in units
Hero Moto Bajaj Auto Honda T V S Motor
Source: CMIE, Ventura Research
- 11 of 32- Tuesday 05th
April, 2016
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75-110 cc Competitive landscape
Source: Ventura Research
- 12 of 32- Tuesday 05th
April, 2016
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110-125 cc -- 13% of total Hero’s motorcycle sales
Two players largely dominate the Executive segment – Hero and Honda with
their models Glamour and CB Shine respectively; both of them command a
share of ~45% each. However, while Honda CB Shine’s three month average
monthly sales (December to February) has remained at ~62k YoY, Hero
Glamour’s three month average monthly sales has increased from ~43k to
~57k, an increase of 33% YoY. While both the models are quite similar
technically and pricing-wise, Hero has managed to eat into Honda’s share
through aggressive marketing and a relatively stylish appearance. The
strategy to appeal youth looking for a stylish decent performance bike
available at a reasonable price has reaped rich dividends.
There are no new launches in this segment.
Hero’s strategy of concentrated focus on ramping up Glamour to take on CB
Shine is a well thought out one and has been successful till date.
110-125 cc Competitive landscape
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in units
Honda Hero Moto Bajaj Auto T V S Motor Suzuki India Yamaha
Source: Ventura Research
- 13 of 32- Tuesday 05th
April, 2016
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110-125cc Competitive landscape
Source: Ventura Research
- 14 of 32- Tuesday 05th
April, 2016
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125-150 cc -- 2% of total Hero’s motorcycle sales
Bajaj clearly dominates this segment with its Pulsar and Avenger series
(monthly sales of ~63k) which together account for nearly 80% of the total
sales.
Hero has a modest presence in this segment with its Achiever and Xtreme
models, which have picked up at a decent pace since their launch (monthly
sales of 4.6k)
Hero RNT is expected to be launched this month; this model combines a
series of technological advancements and utilities at an affordable price
range.
We believe Hero models may be able to capture a marginal share of Bajaj’s
sales. Nevertheless, Bajaj will continue to dominate this segment in the near
future.
125-150 cc Competitive landscape
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in units
Bajaj Auto India Yamaha Honda Hero Moto
Source: CMIE, Ventura Research
- 15 of 32- Tuesday 05th
April, 2016
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125-150cc Competitive landscape
Source: Ventura Research
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April, 2016
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150-200 cc -- nil revenues for Hero
TVS, Honda and Bajaj have a presence in this category, with TVS Apache
leading the segment with monthly sales of ~20k units.
Honda has made rapid progress in this segment with the success of its new
launches – Honda Hornet and Unicorn, whose combined sales have reached
23.8k units in February 2016.
Hero has no presence in this segment; plans to launch Honda Xtreme 200S to
enter this category
150-200 cc Competitive landscape
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in units
T V S Motor Bajaj Auto
Source: Ventura Research
- 17 of 32- Tuesday 05th
April, 2016
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150-200cc Competitive landscape
Source: Ventura Research
- 18 of 32- Tuesday 05th
April, 2016
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200-250 cc -- 0.5% of total Hero’s motorcycle sales
Bajaj leads this high-end segment with its Pulsar and KTM Duke models,
which constitute nearly 98% of total sales
Yamaha is planning an entry into this segment with the YRF R25 and MT25
models.
Hero has a small presence in this segment through its Karizma model. It plans
to launch HX250R and XF3R STD in this segment to further gain market
share. Being a small segment, it is possible that a new launch may suddenly
capture a large share in a short span of time. Hero is aiming to expand its
presence in the high-end segments which are rapidly growing and would yield
high margins. In the absence of new launches by existing players, Hero has
an opportunity to capture market share in this segment.
150-200 cc Competitive landscape
0
50,000
100,000
150,000
200,000
250,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in units
Bajaj Auto Hero Moto Honda
Source: Ventura Research
- 19 of 32- Tuesday 05th
April, 2016
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200-250cc Competitive landscape
Source: Ventura Research
- 20 of 32- Tuesday 05th
April, 2016
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>250 cc -- Nil revenues for Hero
Eicher Motors with its Royal Enfield brand of performance bikes is the market
leader in the >250 cc category.
However, all the major players, including Hero, Honda, Bajaj, and Yamaha
have planned new launches in this segment.
Hero will make an entry into this segment with its Hastur model. However,
while this re-iterates its efforts to enter into the high end motor-cycle category,
we believe Eicher Motors will dominate this space in the near term.
Top Selling scooters: Hero has made steady progress
Scooters contributed ~13% of Hero’s total FY15 sales unit. The scooters market is
dominated by Honda’s flagship model, Activa, which continues to remain the market
leader since 2004, within three years of its launch. Hero’s Maestro is a distant
second with monthly sales of ~ 50k as compared to ~2.1L for Honda Activa. Hero’s
three models together clocked sales of ~ 88k in February 2016, steady progress
from 65k units sold in November 2014 led by the success of Hero Duet which was
launched in November 2015 and clocked sales of 31k in Feb 2016.
The scooter segment has re-gained its popularity with stylish designs and creative
advertising directed at promoting scooters as a unisex vehicle. With healthy growth
prospects, the company has lined up four launches/variants viz. Leap, Dare, ZR, and
Dash. These launches will help Hero maintain the 22% CAGR that it clocked from
FY12-15.
Scooters growth momentum may slow down
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in units
Honda Hero Moto T V S MotorSuzuki Motorcycle India Yamaha MahindraPiaggio
Source: CMIE, Ventura Research
- 21 of 32- Tuesday 05th
April, 2016
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Strategy in a nutshell
In sum, Hero is looking to reinforce its dominance in the entry level motorcycles
segment with the launch of a variant of Splendor. It is also looking to increase its
presence in the high end category of motorcycles to diversify its portfolio and expand
margins. A spree of new scooter launches may ensure healthy growth, even as it will
largely remain a distant second in the scooters segment.
Scooters Competitive landscape
Source: Ventura Research
- 22 of 32- Tuesday 05th
April, 2016
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Capacity expansion to boost volumes
As at FY15, Hero’s combined annual capacity in its four plants viz. Dharuhera,
Gurgaon, Haridwar and Neemrana stood at 7.65 mn units. The management has
chalked out an aggressive expansion plan which will take the capacity to nearly
10mn units by end-FY18.
On the back of its planned expansions, we expect Hero’s sales volumes to increase
at a 3 year CAGR of 5% to 7.65 mn units by FY18E. We expect the effective
utilization to drop to 77% in FY18 from 87% in FY15 as we conservatively assume
that new capacities will operate at low utilizations in the initial years of
commissioning. Assuming an ASP of Rs 51,000 in FY18, we arrive at revenues of
Rs 36,751 crores (net of excise), which translate to a 3 year CAGR of 10%.
Capacity expansion details
Location Date Capacity ( in mn
tonnes)
Status Projections Investment (in
Rs crore)Dharuhera, Gurgaon,
Haridwar and Neemrana
FY15 7.65 Operational Included
Neemrana FY16 0.45 Operational Included 760
Halol, Gujarat FY17 1.2 Construction in
Progress
Included
Halol, Gujarat FY18 0.6 Construction in
Progress
Included
Andhra Pradesh Not finalised 1.8 MoU singed with
AP Government
in FY14, project
in planning stage
Not included 1600
1600
Source: Hero, Ventura Research
Capacity and Effective Utilisation trend Volumes and average ASP trend
0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Total Capacity ( in mn units) Effective utilisation (RHS)
0
10000
20000
30000
40000
50000
60000
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
in Rs per vehicle
Total Sales Volumes Avg ASP (RHS)
Source: Ventura Research
Source: Ventura Research
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EBITDA margin to ‘LEAP’ on soft commodity prices
In May 2013, Hero launched a ‘LEAP’ drive focused on achieving operational
savings and improving margins. Among a wide gamut of areas, the drive involved:
Pricing and feature optimization
Raw material optimization
Controlling marketing expenditure to ~2.5% of sales, and
Bringing efficiencies in logistics and procurement by digitalizing operations
The ‘LEAP’ programme will help drive incremental expansions in margins
Hero’s EBITDA margin fell to 12.4% in FY15 from an average of ~13.5% in FY13-14
owing to faster growth of the low margin scooters segment. However, margins have
recovered to 15.5% in 9MFY16 helped by soft commodity prices and consequently
lower raw material costs – from 72% of sales in FY15 to 68% in 9MFY16. We expect
Hero to clock an EBIDTA margin of 15.7% in FY16 and further expand to 16.8% by
FY18 as commodity prices are expected to increase only marginally. Further,
operational efficiencies from the ‘LEAP’ drive will help offset any adverse movement
in raw material prices. PAT margin is expected to remain flat at 11% in FY18E from
9MFY16 levels, owing to higher depreciation from the newly commissioned
capacities which we have assumed will operate at low utilization rate in the initial
months.
Increasing proportion of scooters… …caused dip in margins in FY15
93%91%
89%87% 87%
7%9%
11%13% 13%
80%
85%
90%
95%
100%
FY12 FY13 FY14 FY15 9MFY16
Motorcycles Scooters
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
EBITDA margin PAT margin
Source: CMIE, Ventura Research
Source: Ventura Research
- 24 of 32- Tuesday 05th
April, 2016
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Exports to de-risk business model
Hero exported 2L units in FY15, an increase of 53% YoY with its major export
markets being Sri Lanka, Bangladesh, the Latin American and African belt. Overall,
it has a presence in 22 countries across the globe. The management aims to
enhance export volumes and is targeting an entry into new markets viz. Argentina,
Mexico and Nigeria in the coming fiscal. It aims to generate ~10% of revenues from
exports by FY18 as compared to 4-5% currently. Against the back-drop of a
gradually recovering domestic economy, an export presence will help de-risk the
business model to a certain extent.
Characteristics of key export markets:
i) China is the largest market for two-wheelers in the world; however the industry
dynamics are different and not conducive for Indian players to establish presence in.
ii) Latin America belt: In this market, Japanese players have a 75% share, 5-10%
is with China and the remaining with India.
iii) African belt: 65% of the market share is with Chinese players, 10-15% with
Japan and the remaining with India. Indian players are competing with their Chinese
counterparts in the global markets on the basis of quality available at a reasonable
price.
iv) Brazil has a requirement of mixing ethanol with fuel which makes it unviable for
Indian players to operate in that market.
Hero’s global presence set to expand
Source: Hero, Ventura Research
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April, 2016
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Key Monitorables Technology: Prior to 2010, Honda provided technical support to Hero in
return for a royalty, which ranged from 2.5% to maximum 5% of net sales
depending on the product sold. However, post the split, Hero set up its own
R&D centre and tied up with various technological partners. In order to regain
mindshare and market share, Hero will have to make sustained investments
in R&D to come up with new launches in the already competitive motorcycles
segment. Further, there is a probability that the technological partners could
fall through. For instance, in 2013, Hero had bought a 49% stake in Erik Buell
Racing (EBR) – a US bike maker—with an aim to enter the high end
performance bikes category. However, EBR filed for bankruptcy in 2015
which stalled certain new launches that EBR was working on for Hero – 17 of
which 12 have been completed, resulting in a delay in new launches.
Stiff competition: The two wheeler industry is extremely competitive with
existing players entering new segments with new launches. Also, there are a
number of global players aiming to establish a presence in the high end
segment. Hero will have to innovate and launch new products to maintain its
market share, which has shrunk 600 bps YoY from FY12 to 35% currently.
Success in export markets: Chinese and Japanese players are the major
competitors in the export markets. Hero’s success in these markets is a key
monitorable; if successful it will help de-risk the business model.
- 26 of 32- Tuesday 05th
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Financial Performance
In Q3FY16, Hero reported a revenue growth of 6.7% YoY to Rs 7,295 crores backed
by ~4% realization growth and 2.5% volume growth. Volumes for Q3FY16 stood at
1.69 mn units. The EBITDA margin expanded by 360 bps YoY to 15.6% led by lower
commodity prices and benefits from the company’s ‘LEAP’ program. The PAT
margin expanded 240 bps YoY to 10.9% driven by an expansion in operating
margins.
Quarterly Financial Performance (₹ in crore)
Particulars Q3FY16 Q3FY15 FY15 FY14
Net Sales 7,294.78 6,839.25 27,538.03 25,275.47
YoY Growth 6.7% 9.0%
Total Expenditure 6,154.85 6,017.46 24,132.08 21,829.22
EBITDA 1139.9 821.8 3406.0 3446.3
Margin % 15.6% 12.0% 12.4% 13.6%
Depreciation 113.94 83.75 540.45 1,107.37
EBIT (Excl. OI) 1026.0 738.0 2865.5 2338.9
Other Income 84.17 93.6 582.89 537.04
EBIT 1110.2 831.6 3448.4 2875.9
Margin % 15.2% 12.2% 12.5% 11.4%
Finance Costs 0.55 2.42 11.7 11.82
Exceptional Income 0.0 0.0 -144.73
PBT 1109.6 829.2 3292.0 2864.1
Margin % 15.2% 12.1% 12.0% 11.3%
Tax Expense 313.8 246.24 943.45 758.17
PAT 795.8 583.0 2348.5 2105.9
Margin % 10.9% 8.5% 8.5% 8.3%
Minority Interest 1.0 0.4
Share of Associate 15.2 -3.6
Adj PAT 2362.6 2102.0
Source: Hero, Ventura Research
- 27 of 32- Tuesday 05th
April, 2016
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Financial Outlook We expect Hero’s revenues to grow at a 3 year CAGR of 10.1% to Rs 36,751 crore
in FY18E led by a pick-up in volumes. The EBITDA is expected to clock a 3 year
CAGR of 22% to Rs 6,181 crore by FY18E. EBITDA margin is expected to expand
to 16.8% by FY18E from 15.5% in 9MFY16 led by relatively soft commodity prices
and operational efficiencies from the LEAP drive. We expect the company to report a
PAT of Rs 4,047 crore which translates to a 3 year CAGR of 19.6%. PAT margin is
expected to remain flat at 11% in FY18E from 9MFY16 levels, owing to higher
depreciation from the newly commissioned capacities which we have assumed will
operate at low utilization rate in the initial months.
Revenues to grow at a steady pace EBITDA margin to expand
0%
5%
10%
15%
20%
25%
20000
22000
24000
26000
28000
30000
32000
34000
36000
38000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Rs crs
Revenues Growth YoY (RHS)
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
EBITDA margin PAT margin
Source: Ventura Research
Source: Ventura Research
Return ratios in excess of 25% Asset turnover to moderate on new capacities
5%
15%
25%
35%
45%
55%
65%
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
RoE RoCE
0.1
2.1
4.1
6.1
8.1
10.1
12.1
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Asset Turover
Source: Ventura Research
Source: Ventura Research
- 28 of 32- Tuesday 05th
April, 2016
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Hero – Peer Comparison
In Rs CrSales EBITDA PAT
EBITDA
Mgn PAT Mgn EPS
ROE
(%)
P/E
(x)
P/BV
(x)
EV/EBITD
A
(x)
Indian Peers
Hero Moto Corp2015 27538 3406 2363 12.4% 8.6% 118.4 36.1 24.7 8.9 16.4
2016E 28331 4461 3118 15.7% 11.0% 156.1 37.3 18.7 7.0 12.4
2017E 32900 5385 3618 16.4% 11.0% 181.2 33.9 16.1 5.5 10.2
2018E 36751 6181 4047 16.8% 11.0% 202.7 30.3 14.4 4.4 8.7
Bajaj Auto2015 21569.1 4307.2 3316.4 20.0% 15.4% 114.8 31.4 21.3 6.2 16.1
2016E 22565.0 4755.7 3773.1 21.1% 16.7% 130.4 31.9 18.8 5.6 13.8
2017E 25109.0 5214.2 4173.8 20.8% 16.6% 144.3 30.3 17.0 4.8 12.3
2018E 27931.9 5771.3 4711.0 20.7% 16.9% 162.8 29.3 15.0 4.1 10.7
TVS Motors2015 10181.6 629.1 359.2 6.2% 3.5% 7.5 23.2 43.1 9.3 24.9
2016E 11397.5 800.4 452.3 7.0% 4.0% 9.5 24.9 33.9 7.8 20.1
2017E 13531.5 1111.2 673.0 8.2% 5.0% 14.2 30.1 22.8 6.3 14.2
2018E 15022.2 1341.9 839.2 8.9% 5.6% 17.7 33.3 18.3 5.0 11.4
Eicher Motors2015 11541.3 1674.2 924.8 14.5% 8.0% 336.3 31.9 55.6 15.7 30.2
2016E 15459.9 2457.1 1347.7 15.9% 8.7% 469.0 38.2 39.8 13.7 20.5
2017E 17224.3 2963.4 1669.2 17.2% 9.7% 612.9 36.5 30.5 10.0 16.6
2018E 20484.6 3647.5 2106.5 17.8% 10.3% 773.3 34.4 24.2 7.8 13.2
Source: Ventura Research
- 29 of 32- Tuesday 05th
April, 2016
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Valuation We initiate coverage on Hero as a BUY with a Price Objective of ₹4054,
representing a potential upside of 36% over a period of 18 months. We have
arrived at our target price by assigning a PE of 20x to FY18E EPS of ₹203.
The assigned PE is at premium of ~15% to its 5 year median forward multiple
of ~17.5x. The premium assigned is in account of:
i) We expect Hero to maintain its leadership position with a market share of
~45% in FY18E on the back of capacity expansion and new launches.
ii) Anticipated expansion in margins on the back of soft commodity prices and
operational efficiencies from the LEAP drive.
iii) Superior return ratios – RoE in the range of 30-35% and RoCE 45-50%.
iv) Despite expansions, the company will continue to maintain its near debt
free status on the back of ample internal accruals.
v) Negative working capital cycle which ensures sustenance of healthy cash
flow generation.
Hero has traded at a 5 year median forward PE of 17.5x
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
CMP 14X 16X 18X 20X 22X
Source: Ventura Research
- 30 of 32- Tuesday 05th
April, 2016
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Hero’s P/B trend Hero’s EV/EBITDA trend
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
CMP 5X 6X 7X 8X 9X
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
Mar-
14
Ap
r-14
May-1
4
Ju
n-1
4
Ju
l-14
Au
g-1
4
Sep
-14
Oct-
14
No
v-1
4
Dec-1
4
Jan
-15
Feb
-15
Mar-
15
Ap
r-15
May-1
5
Ju
n-1
5
Ju
l-15
Au
g-1
5
Sep
-15
Oct-
15
No
v-1
5
Dec-1
5
Jan
-16
Feb
-16
Mar-
16
EV 9X 10X 11X 12X 13X
Source: Ventura Research
Source: Ventura Research
- 31 of 32- Tuesday 05th
April, 2016
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Financials and Projections
Y/E March, Fig in ` Cr FY15 FY16E FY17E FY18E Y/E March, Fig in ` Cr FY15 FY16E FY17E FY18E
Profit & Loss Statement Per Share Data (Rs)
Net Sales 27538.0 28331.4 32900.0 36751.4 Adj. EPS 118.4 156.1 181.2 202.7
% Chg. 2.9 16.1 11.7 Cash EPS 145.4 180.2 217.7 249.5
Total Expenditure 24132.1 23870.2 27514.6 30570.1 DPS 60.0 65.0 66.0 68.0
% Chg. -1.1 15.3 11.1 Book Value 327.5 418.6 533.8 668.5
EBDITA 3405.9 4461.3 5385.4 6181.2 Capital, Liquidity, Returns Ratio
EBDITA Margin % 12.4 15.7 16.4 16.8 Debt / Equity (x) 0.0 0.0 0.0 0.0
Other Income 582.9 385.0 400.0 400.0 Current Ratio (x) 1.3 1.5 1.5 1.9
PBDIT 3988.8 4846.3 5785.4 6581.2 ROE (%) 36.1 37.3 33.9 30.3
Depreciation 540.5 480.2 728.6 934.1 ROCE (%) 51.9 52.1 47.3 42.2
Interest 11.7 3.0 3.0 3.0 Dividend Yield (%) 2.1 2.2 2.3 2.3
Exceptional items -144.7 0.0 0.0 0.0 Valuation Ratio (x)
PBT 3292.0 4363.1 5053.8 5644.2 P/E 24.7 18.7 16.1 14.4
Tax Provisions 943.5 1265.3 1465.6 1636.8 P/BV 8.9 7.0 5.5 4.4
Reported PAT 2348.5 3097.8 3588.2 4007.4 EV/Sales 2.0 2.0 1.7 1.5
Minority Interest 1.0 0.0 0.0 0.0 EV/EBIDTA 16.4 12.4 10.2 8.7
Share of Associate 15 20 30 40 Efficiency Ratio (x)
PAT 2362.6 3117.8 3618.2 4047.4 Inventory (days) 10 12 12 13
PAT Margin (%) 8.6 11.0 11.0 11.0 Debtors (days) 15 16 16 16
RM / Sales (%) 71.9 68.8 68.5 68.8 Creditors (days) 34 30 30 30
Balance Sheet Cash Flow Statement
Share Capital 40.6 40.6 40.6 40.6 Profit Before Tax 3292.0 4363.1 5053.8 5644.2
Reserves & Surplus 6499.4 8319.2 10619.4 13308.9 Depreciation 540.5 480.2 728.6 934.1
Minority Interest 18.5 25.0 30.0 35.0 Working Capital Changes -355.3 -312.8 -199.2 -494.6
Long Term Borrowings 12.0 12.0 12.0 12.0 Others -1291.6 -1647.3 -2134.1 -2326.0
Deferred Tax Liability -73.5 56.9 128.3 220.5 Operating Cash Flow 2185.5 2883.2 3449.2 3757.7
Other Non Current Liabilities 97.5 94.1 101.9 119.9 Capital Expenditure -33.3 -2181.5 -2022.0 -2308.0
Total Liabilities 6595 8548 10932 13737 Other Investment Activities 64.7 385.0 400.0 400.0
Gross Block 8158.0 10008.0 11758.0 12358.0 Cash Flow from Investing 31.4 -1796.5 -1622.0 -1908.0
Less: Acc. Depreciation 5205.8 5686.0 5686.0 5686.0 Changes in Share Capital 0.0 0.0 0.0 0.0
Net Block 2952.3 4322.1 6072.1 6672.1 Changes in Borrowings 100.0 0.0 0.0 0.0
Capital Work in Progress 719.2 600.0 700.0 800.0 Dividend and Interest -2231.1 -990.9 -1777.7 -1800.1
Other Non Current Assets 881.8 979.1 1088.4 1211.4 Cash Flow from Financing -2131.1 -990.9 -1777.7 -1800.1
Net Current Assets 1393.6 1946.5 2271.5 4153.5 Net Change in Cash 85.8 95.9 49.5 49.6
Long term Loans & Advances 647.8 700.0 800.0 900.0 Opening Cash Balance 69 155 250 300
Total Assets 6595 8548 10932 13737 Closing Cash Balance 155 250 300 350
- 32 of 32- Tuesday 05th
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