Hero MotoCorp Ltd. share price target

Rural slate forms > 50% of HMCL volumes. The company is the undisputed leader in the domestic motorcycle segment (a predominantly rural product), commanding 52% market share in the space as of FY20. In a post-Covid-19 world, enhanced awareness around social distancing (pan India basis) and apprehension around usage of congested public transport (largely relevant to urban, metro areas) are seen acting as a tailwind for lower ticket priced means of private transport, including entry and mid-level motorcycles (75125 cc). Consequently, HMCL's leadership in 75-110 cc products (Splendor, HF Deluxe & Passion) and 110-125 cc products (Glamour, Splendor 125)...

In addition to EFI, HMCL is working on e-carburator which is a cheapest solution for entry level BS6 segment to thereby complete with BJAUT. We interacted with senior management of HMCL where management tried to address key investor concerns such as a) unsold BS4 stock at ~1.5L units (v/s expectations ranging ~3-5L units) and b) media articles about stoppage of payment to vendors (v/s vendor payment have been prioritized in actual)....

At Hero MotoCorp's (HMCL) investor call today, senior management stated that proactive steps have been taken to ensure business continuity.

31 March 2020 HMCL had ~150k BS4 inventory as of the lockdown date. According to the SC order, vehicles sold till 31 March earlier). Of the unsold BS4 inventory March, only 10% can be sold beyond the deadline. Dealers are now selling online based on the earlier inquiries or purchasing on their firms name to resell in the second- hand market later. The company is providing incentive of INR10k per motorcycle and INR15k per scooter to support dealers for online sales (ex- Delhi NCR). It will take back Delhi NCR stock of ~12k units as it has decided not to sell online as well. HMCL setup a BCP task force earlier in Jan20 (when COVID-19 was identified as threat in China). First priority is to safeguard health of all employees and business partners. Currently, it is not thinking of growth and profits, but health of its ecosystem is important including liquidity within its ecosystem.

While the customer acceptance of the new products in the white spaces' will be gradual, we re-iterate BUY as Hero has successfully defended market share in the 2W segment in the current downturn. We value the stock at 16x Dec-21 EPS, in-line with its average trading multiple. Management laid out the road map at the CIT (Center of Innovation) visit. CIT is gradually ramping up (since its commencement in 2016) and has helped reduce lead times for new product development by 25%. Hero has invested $600mn in R&D; over the last few years, which is now bearing fruit. With the launch of the Xtreme 160cc bike, Hero will now address 96% of the Indian 2W market and compete effectively in the premium segment.

We visited Hero Moto's (HMCL) R&D; centre and attended its investor meet.

CIT to play crucial role in HMCL premiumisation drive! HMCL houses ~1,000 engineers & automotive experts at its R&D; centres at CIT & Germany, which will help overcome its mass product brand perception though development of new and exciting products in the premium category. With the right product mix, HMCL is also well poised for its exports push and is undertaking new age marketing techniques to increase its brand quotient in the domestic market. At the event, HMCL also launched the BSVI refresh products under the Glamour & Passion family, which were indeed...

Maintain BUY on Hero as (1) Hero has successfully defended market share in the 2W segment in the current downturn (2) The stock is trading at an attractive valuation of 15/14x FY20/21E; however, the extent of price hikes on BS-VI will delay the recovery in our view. We lower our target P/E multiple to 16x (vs. 18x earlier), which is in-line with its average historic trading multiple, to factor in a delayed recovery (2HFY21) and a slower than expected ramp up in the premium segment. Heros 3QFY20 EBITDA margin surprised at 14.8% despite weak volumes. However, the outlook over FY21 remains mixed as management expects a recovery only in 2HFY21 as customers get accustomed to price hikes (12-15%) on BS-VI models. Retain BUY with a revised TP of Rs 2,980 (16x on Dec-21 EPS).

Hero MotoCorp is the World's single largest two-wheeler motorcycle company. The Company manufactures and sells motorized two wheelers up to 350 cubic centimeters (cc) engine capacity, spare parts and related services. Its manufacturing plants are located in Dharuhera, Gurgaon, Haridwar, Neemrana, Villa Rica (Colombia). Its research and development center is located in Jaipur, Rajasthan. It has a Global Parts Centre for manufacturing and supplying the parts at...

estimates of 13.5% and 12% respectively mainly on account of lower RM cost. We maintain our FY20/FY21 volume estimates and factored in increase realization on account of BSVI transition. We expect two-wheeler industry volumes to be weak in H1FY21, as cost increases (BSIV to BSVI transition) would hurt 2W industry demand. Due to recent change in share price we change our rating to ACCUMULATE (earlier HOLD) with TP of Rs2,700 based on PER of 17x FY21 earnings. Result Highlights and Investment Rationale Operationally strong quarter: Revenue declined -11%...