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Hero MotorCorp’s earnings hit speed bump. Q4FY19 results update

Hero MotorCorp's earnings hit speed bump. Q4FY19 results update

HeromotorCorp is the world’s largest single two-wheeler manufacturer based in India. Also, the company is the worlds No. 1 two-wheeler brand in terms of unit volume sales. Hero MotorCorp has captured a market share of 36% in the two-wheeler industry and 50% of market share in the Motorcycle segment. The company has 4 manufacturing facilities 2 of them are located at Dharuhera and Gurgaon in the state of Haryana. The 3rd manufacturing facility is in Haridwar in the state of Uttrakhand. The company added one latest state-of-the-art manufacturing facility at Hero Garden Factory in Neemrana, Rajasthan.

Market Data:

CMP

Rs. 2604

BSE Code

500182

NSE Code

HEROMOTOCO

Market CAP

Rs. 52,009 Cr.

52 Week High

Rs. 3819

52Week Low

Rs. 2,515

  1. Net profit: 3384.8 crores
  2. P/E: 51.10x
  3. ROE :8%
  4. EPS: 172.44
  5. ROCE: 25%
  6. ROIC: 23%
  7. Dividend Yield: 65%

 

Financial for the year 2017-18

  • The Revenue for Q4FY19 was down by 8% YoY at Rs.7, 885 crores as compared to Rs. 8,564 crores in Q4FY18. The decline in revenue was due to the drop in the unit volume sales by 11% YoY from Rs. 20Lakh units sold in Q4FY18 to 17.81 lakh units in Q4FY19.

 

  • In Q4FY19 there was an increase in realisation per vehicle by 3.5% YoY from Rs. 4278.7 crores per vehicle in Q4FY18 to Rs. 4426.9 crores per vehicle in Q4FY19. It was due to the price hikes taken by the company.

 

  • EBITDA for the quarter stood at Rs. 1,069.3 crores against Rs. 1,370.5 crores indicating a decline of 22% YoY. EBITDA Margins declined in Q4FY19 by 240bps from 16% on Q4FY18 to 13.6% in Q4FY19. The decline in the margins was largely due to raw material and inventory cost as a per cent of sales increased by 140 bps on a YoY basis to 69%. There was an increase in the employee cost increased by 120bps YoY at 5.7% of the revenue. The margins were impacted also due to the higher discounts provided by the company in order to increase the sale of units.

 

  • The tax rate increased from 30.3% in Q4FY18 to 32% in Q4FY19.

 

  • All these factors led to a sharp decline in the net profits of the company, it was down by 24.5% YoY at Rs. 730.3 crores in Q4FY19 against Rs. 967.4 crores in Q4FY18.

 

  • The spare parts segment of the company reported a revenue growth of 13% YoY and overall segment growth of 6% in Q4FY19.

 

  • Hero MotorCorp will be setting up its first-ever technology centre in Germany.

 

  • On the premium Motorcycle front, the company launched 2 new products ‘Xtreme 200R’ and in 125cc scooter by launching ‘Destini 125’ in this year.

 

  • In Q4FY19 the market share in the entry segment increased to 65%

 

  • The Working Capital (WC) days of the company stood at -5 days in FY19 against -24 days in FY18. The fall in WC days was due to the increase in the receivables to 31 days in FY 19 from 17 days in FY18. The Payable days decreased from 55days in FY18 to 53 days in FY19. The Inventory levels continued to remain elevated at 45-50 days, driven by lower festive sales season in FY19.

 

  • There was a robust demand during the quarter from the Northern and Eastern parts of India. Even Central parts of India were seen to increase the demand in April 2019. Furthermore, the company has gained traction on account of Gudi Padwa from Western parts of India. Apart from this, Southern India still has declined in the demand

 

  • The growth In the Two-Wheeler industry declined from H2FY19 due to higher insurance cost, volatile commodity prices, Liquidity funding crunch by NBFC, higher vehicle prices and election uncertainty led to drag in the margins and demand for the two-wheelers.

 

  • The Board of Directors of the company has approved a final dividend of Rs. 32 per share of Rs. 2 each.

 

Future Outlook:

  • The Two-Wheeler industry has requested the Ministry to reduce the GST charged on 200cc motorcycles from 28% at present to 18%. The GST reduction will aid the industry as they can offset to a certain extent the price hikes on the BSVI upgrades.

 

  • Hero MotorCorp will launch Xpulse 200cc and Maestro edge under 125cc scooter by the end of May 2019.

 

  • The company expects the Two-Wheeler industry to grow in a range of 14% in FY20
  • Hero MotorCorp incurred Capex of Rs. 800 crores in FY19, and expects the Capex to increase to Rs. 1500 crores in the next year mainly due to setting up of new plant in Andhra Pradesh. It will increase also due to the BSVI lines of manufacturing and annual maintenance CapEx in the coming year.

 

  • The company expects mid-single digit growth in FY20 due to the stringent BSVI emission norms and near-term uncertainty due to various macro-economic factors, the Two-Wheeler industry will start gaining traction from H2FY20.

 

Shareholding pattern

%

Promoter & Promoter Group

34.63%

Mutual Funds

6.60%

Foreign Portfolio Investors

38.19%

Financial Institutions

1.86%

Insurance Companies

7.62%

Non-Institution

11.10%

 

Shareholding Pattern:

Valuation:

At CMP of Rs. 2604, the stock is quoting at a P/E multiple of 15.10x on FY20E estimates. The company’s ROE is at 25.8%. Hero MotorCorp has strong traction in the lower cc segment and along with this, the new launches in the premium motorcycle range of 200cc and scooter of 125cc will aid in the increase in demand before the BSVI norms kick in. Moreover, the upcoming launches will provide stiff competition to its peers. The margins in future will improve as the commodity prices have settled a little and other macroeconomic factors in the long term can improve margins. Considering all these factors, we maintain BUY recommendation on this stock with a target price of Rs. 2806.43.

 

Financial Highlights –

                                                                                                                               (In crores)

Particulars

Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Net Revenues

8612.91

8362

7314

8564

8809.82

9090.94

7864.8

7885

EBITDA

1295.9

 

1158

1370.6

1,377.29

1378.71

1069.3

1069.3

EBITDA Margin

16.3%

17.4%

15.9%

16%

15.6%

15.2%

14%

13.6%

Net Profit

914.04

1010.5

805

967.4

909.17

976.28

769.1

730.3

 

 

EBITDA Margin

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