CRISIL revises Hero MotoCorp`s fair value to Rs 2,023

CRISIL Research has come out with its report onHero MotoCorp . The research firm has maintained the fundamental grade of 5/5 to the company in its May 10, 2012 report.

Hero MotoCorp's Q4FY12 earnings were largely in line with CRISIL Research's expectations. As expected, revenues were flat q-o-q due to muted volume growth in two-wheelers despite a marginal price hike. Adjusted PAT fell marginally q-o-q driven by tepid revenue growth, higher raw material costs and tax outgo. CRISIL Research expects the volume growth in the domestic two-wheeler industry to moderate to 10-12% in FY13. We expect Hero MotoCorp's volumes to grow at a two-year CAGR of 11% by FY14. Although, Hero MotoCorp has maintained market share in its core segment - domestic motorcycles, we expect competition to intensify in this segment going forward as Honda gets aggressive with forthcoming product launches post capacity expansions. However, we remain positive on Hero MotorCorp's longterm growth due to its strong presence in the rural markets (~46% share in volumes) combined with strong brand recall and maintain our fundamental grade of 5/5.

Q4FY12 result analysis
• Despite an increase in realisations, revenues were flat q-o-q at Rs 59.6 bn as Hero MotoCorp's sales volume remained muted with 1.5 mn two-wheelers sold. Volumes were muted on account of seasonality - typically Q4 is a sluggish quarter coming in the wake of the festive season which falls in Q3. Realisation per vehicle was up marginally q-o-q to Rs 37,929 to offset the excise duty hike.

• The company surpassed its sales volume guidance of 6 mn two-wheelers for FY12 and sold 6.2 mn two-wheelers for the year, registering a growth of 15.4% y-o-y. However, its market share in the two-wheeler segment dropped to 40.4% (down 60bps) in Q4FY12 due to stiff competition from Honda.

• Raw material cost as a percentage of sales grew 65 bps q-o-q (up 72 bps y-o-y) to 74% due to rise in the price of its key raw material ��" steel. Employee cost declined ~4% q-o-q while depreciation and amortisation was down 6% q-o-q. Depreciation and amortisation was lower due to lower royalty payment following the appreciation of the Indian rupee against the Japanese yen. EBIT margin remained flat q-o-q at 10.8% as lower depreciation offset the rise in raw material costs.

• On account of muted revenue growth, higher raw material costs and tax outgo, adjusted PAT declined 1.5% q-o-q to Rs 6.0 bn with EPS of Rs 30.2. The company announced a final dividend of Rs 45 per share in FY12, which translates into a dividend payout of ~44%.

Valuation: Current market price is aligned
We roll forward our valuations to FY14. Our fair value is revised to Rs 2,023 from Rs 1,890 based on the discounted cash flow method. This translates into an implied PE of 13.5x FY14 earnings estimate. The valuation grade is 3/5.

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