Buy Hero MotoCorp; target of Rs 3450: ICICI Direct

ICICI Direct's research report on Hero MotoCorp

Hero MotoCorp (HMCL) reported a strong set of Q2FY21 numbers. Total 2-W sales volume for the quarter came in at 18.2 lakh units, up 7.7% YoY. Consequent net sales were at Rs 9,367 crore, up 23.7% YoY. Blended ASPs were at Rs 51,412/unit, a rise of ~15% YoY (courtesy BS-VI transition). EBITDA margins at 13.7% were down 80 bps YoY. The margin performance was impacted by a rise in raw material cost but employee and other expenses declined on a percentage of sales basis by 70 bps and 190 bps, respectively. Consequent PAT came in at Rs 953.5 crore (up 9% YoY). Lower depreciation outgo and lower tax aided PAT print.

Outlook

For HMCL, we build 10.2% sales, 4.5% PAT CAGR in FY20-23E. We believe the company’s served segments will continue to see healthy demand traction. HMCL offers a play on rural revival post Covid and 2-W premiumisation. However, margin uptick could be limited in the medium term. We upgrade HMCL to BUY valuing it at Rs 3,450 (20x P/E on average of FY22E, FY23E EPS). The company’s strong financials (debt free b/s, consistent cash generation, robust dividend payout) make it a portfolio play.

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