Prabhudas Lilladher recommended accumulate rating on Hero Motocorp with a target price of Rs 2769 in its research report dated February 06, 2019.
Prabhudas Lilladher's research report on Hero Motocorp
Hero MotoCorp's Q3FY20 performance were better, with EBITDA margins at 14.8% (+80bp YoY/ +30bp QoQ, PLe: 14.8%) led by gross margin expansion due to RM, cost control benefits and higher spare sales. Management hinted for better H2FY21 on the back of improved rural sentiments should aid sales (>50% of HMCL sales). Unlike general perception, HMCL's inventory has also come down to ~6 weeks as of 3QFY20 and ~5 weeks by Jan-20. HMCL also managed to pass complete BS6 cost increase in launches it has done so-far. We believe, margin accretion led by inventory correction (~20-30bp) to get reverse in the coming quarters. Also, RM headwinds led by increase in precious metal prices (~4-5% of RM basket) will be partially offset by continued cost control benefits. We therefore factor in stable margins at -13.5% for FY21/22E respectively.
Outlook
We maintain 'Accumulate' with a price target of Rs 2,769 (earlier Rs 2,740) based on 14x Dec'22 EPS (~20% discount to 10 year LPA). We cut FY21/22 EPS by 3% each to factor in mix impact.
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