hero motocorp ltd. -...

Hero MotoCorp Ltd.

BUY

- 1 of 32 - Tuesday 05th

April, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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Target Price ₹4054 CMP ₹2979 FY18E 14.4x

Index Details Hero MotoCorp (Hero) is India’s largest two wheeler manufacturer.

Of the top five best-selling motorcycles in India, four belong to

Hero’s stable, viz. Splendor, Deluxe, Passion and Glamour. Hero, a

market leader, is a debt-free, cash-rich company operating on a

negative working capital cycle with superior return ratios.

We are positive about the company’s prospects given that:

Prospects of the domestic two wheeler industry are expected

to improve (CAGR of 11% in FY17-18 from CAGR of 2.4%

during FY12-16) with the pick-up in economic activity,

government’s thrust on rural area development and favorable

demographics.

Hero is expanding its annual capacity from 7.65 mn units to

nearly 10 mn units by FY18. Given the capacity expansion and

improving industry prospects, we expect Hero to report a 3

year revenue CAGR of 10.1% to Rs 36,751 crore by FY18E.

Hero has been able to maintain a leadership position in the

two-wheeler segment despite stiff competition on the back of

higher warranties, established distribution strength and

increasing spends on R&D.

We expect the EBITDA margin to expand to 16.8% in FY18E

from 15.5% in 9MFY16 led by operational efficiencies derived

from its ‘LEAP’ programme and relatively lower raw material

costs.

Hero’s exports have grown at a healthy pace and have helped

de-risk the business model to a certain extent.

We initiate coverage on Hero as a BUY with a Price Objective of

₹4054, representing a potential upside of 36% over a period of 18

months. We have arrived at our target price by assigning a PE of 20x

to FY18E EPS of ₹203. The assigned PE is at premium of ~15% to its

5 year median forward multiple of 17.5x. The premium assigned is

reflective of the anticipated expansion in margins, superior return

ratios, leadership position and strong balance sheet.

Sensex 25,400

Nifty 7,759

BSE 100 7,810

Industry Auto

Scrip Details

Mkt Cap (₹cr) 59,495

BVPS (₹) 449.7

O/s Shares (Cr) 20.0

Av Vol (Lacs) 0.4

52 Week H/L 2987/2252

Div Yield (%) 2.0

FVPS (₹) 2.0

Shareholding Pattern

Shareholders %

Promoters 34.6

Public 65.4

Total 100.0

Hero vs. Sensex

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BSE_SENSEX Hero MotoCorp (RHS)

Key Financials (₹ in Cr)

Y/E Mar Net

Sales EBITDA PAT

EPS (Rs)

EPS Growth (%)

RONW (%)

ROCE (%)

P/E (x)

EV/EBITDA (x)

2015 27,538 3406 2363 118 12% 36.1 51.9 24.7 16.4

2016E 28,331 4461 3118 156 32% 37.3 52.1 18.7 12.4

2017E 32,900 5385 3618 181 16% 33.9 47.3 16.1 10.2

2018E 36,751 6181 4047 203 12% 30.3 42.2 14.4 8.7

- 2 of 32- Tuesday 05th

April, 2016


Company Background

Incorporated in 1984, Hero MotoCorp (Hero) is India’s largest two wheeler

manufacturer with a market share of 35% as on 9MFY16. It was promoted as a joint

venture between India’s Hero Group and Japan’s Honda Motor. Amid rising

differences, Honda exited the JV in a phased manner in 2010 and the company was

renamed to Hero MotoCorp from Hero Honda.

Hero has 4 manufacturing plants, 3 located in Haryana (Dharuhera and Gurgaon)

and 1 in Uttarakhand ((Haridwar) with a combined capacity of 7.65 mn units as on

FY15. Post the capacity expansion in Neemrana and Halol, Gujarat, Hero’s capacity

is slated to reach nearly 10 mn units by FY18E. It earns majority of its revenues from

the sale of entry level motorcycles ( 75-125cc).

Hero MotoCorp manufacturing locations

Haridwar plant : Daily

capacity 8500 units

Gurgaon plant : Daily

capacity 6500 units

Dharuhera plant : Daily

capacity 6500 units

Neemrana plant : Daily

capacity 1250 units (in

FY16)

Halol, Gujarat plant : Daily

capacity 5000 units ( by

FY18)

Source: Hero, Ventura Research


April, 2016


Key Investment Highlights

Hero holding fort amidst increasing competition

Hero, India’s largest two wheeler manufacturer, has managed to hold on to its

leadership position even as the industry has seen an influx of new players and

models. Post, its split with Honda in 2010-11, market shares in the industry have

seen substantial changes as Honda managed to capture market share from existing

players through a spree of new launches and aggressive marketing. Despite, the

changing industry dynamics, Hero continues to dominate the industry with a 35%

market share as on 9MFY16, down 600 bps from FY12.

Hero has been able to hold on to its leadership position despite cut-throat

competition on the back of:

i) Higher warranty period: Hero offers a simplified and no-cost warranty for an

extended period, unlike its peers. Despite the liberal warranty policy, Hero has

managed to maintain relatively higher EBITDA margins vis-à-vis peers, except for

Bajaj Auto, which has a dominant presence in the high end, high margin segment

(>125 cc segment).

Hero’s dominance in 2012 continues… …albeit at a lower share

Hero Moto, 41%

Honda Motor, 14%

Bajaj Auto, 25%

T V S Motor, 14%

India Yamaha, 3%

Suzuki, 2%

Eicher , 1%

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2013-1

4

2014-1

5

2015-1

6E

x

Two wheeler industry to GDP multiple Average Std Deviation -1 Std Deviation +1

Source: CMIE, Ventura Research



April, 2016


ii) Increasing spends on R&D: Historically, Hero’s spends on R&D were low

because of the technological expertise of its partner – Honda. However, post split,

Hero has increased its R&D spend from ~0.4% in FY10 to ~0.7% at present. The

management aims to increase it to ~1.1% of sales in the coming years. With this, it

is slowly catching up with the R&D spend of peers – Bajaj Auto – ~1.7% and TVS

Motors ~1.9%.

iii) Well established dealer network: Hero has a little over 6,000 customer touch

points, including dealers and service centers, spare part outlets and dealer

appointed outlets primarily located in the semi-urban and rural areas from where it

derives ~45% of its revenues.

Insurance Policy and EBITDA margin comparison

Warranty Hero Bajaj TVS Honda Yamaha

Policy Standard policy

coverage at no

cost for all models

purchased after

13th April 2013

Basic coverage only

upto 2 years/30,000

kms, extended

warranty available at

a nominal charge/

Different models

have different

warranties

Basic coverage only

upto 2 years,

extended warranty

available at a

nominal charge

Basic coverage only

upto 2 years,

extended warranty

available at a

nominal charge

Basic Coverage: 2 years

or 30,000 kms whichever

is sooner for motorcycles,

Basic Coverage: 2 years

or 24,000 kms whichever

is sooner for scooters

Motorcycles 5 years or 70,000

kms whichever is

sooner

5 years or 50,000

kms whichever is

sooner

5 years or 60,000

kms whichever is

sooner

Upto 5 years or

40000 kms

5 years or 70,000 kms

whichever is sooner

Scooters 5 years or 50,000

kms whichever is

sooner

5 years or 60,000

kms whichever is

sooner

Upto 5 years or

36000 kms

5 years or 60,000 kms

whichever is sooner

Mopeds 3 years or 36,000

kms whichever is

sooner

EBITDA margin Hero Bajaj TVS Honda YamahaEBITDA margin ( 3

year average) 13.1% 21.6% 5.7% 10.6% 9.1%

Source: Ventura Research


April, 2016


Revenues to grow at a healthy pace

Hero’s revenues are expected to grow at a 3 year CAGR of 10.1% to Rs 33,405

crore by FY18, driven by the anticipated pick-up in demand and capacity expansion.

Hero’s dealer and service centers close to 3K

0

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3500

Hero Bajaj TVS Honda Yamaha

Dealers Service Centres


Revenues to grow at a 3 year CAGR of 10%

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20000

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32000

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FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Rs crs

Revenues Growth YoY (RHS)



April, 2016


Two wheelers poised to grow at a steady rate

India is expected to register two wheeler sales of 19.1 mn units in 2015-16, a 5 year

CAGR of 7.6%. The growth momentum is expected to pick-up from here on with

sales volumes expected to touch ~30 mn units by 2020.

As can be seen from the above chart, two wheeler sales grew at a modest CAGR of

4.7% during FY12-FY16E as a domestic slowdown set in following:

policy logjam

halt in capex cycle

drought in certain states, which impacted crop yields, and

declining food prices and a lower increase in MSP which led to a wide spread

slowdown in consumption spending.

Going forward, we expect sales to grow at a two year CAGR of ~11% from FY16-

FY18 given that:

i) Historically, two wheeler sales have grown at an average of 1.6x India’s GDP

growth rate. According to the IMF, India is pegged to clock the fastest growth rate of

7.4% over FY15-FY18. Accordingly, two wheelers, sales of which are closely linked

to the overall health of the Indian economy, have the potential to grow in the range

of 11-12%. With Hero commanding a leadership position in the largest segment of

the two wheeler industry – i.e. motorcycles, it is expected to be the biggest

beneficiary of the pick-up in economy.

Domestic Two wheelers sales to pick-up from FY16 onwards

0%

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4%

6%

8%

10%

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14%

16%

18%

0.0

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10.0

15.0

20.0

25.0

30.0

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

in mn units

Sales Units Growth (RHS)

FY12 growth: 15.7%4 yr CAGR : 4.7% 2 yr CAGR 11.2%



April, 2016


ii) The top three players in this segment – Hero, Honda and Bajaj derive nearly 30-

50% of their sales from rural areas. The Union Budget 2016-17 has spelled out a

number of agri-oriented measures with an aim to double rural incomes in the coming

5 years. These measures include higher allocations for MNREGA, irrigation and soil

testing, crop insurance schemes, interest subvention on loan to farmers, thrust to

organic farming along with adequate physical and digital infrastructure support. An

uptick in the rural economy could help revive two wheeler sales in India.

iii) Favourable demographics – With half of the population below 25 years of age,

India ‘s demographics are conducive to aspiration spending.

Two wheeler industry sales v/s GDP growth rate Industry/GDP growth rate multiple trend

-10

-5

0

5

10

15

20

25

30%

Two wheeler industry growth rate GDP growth rate

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

Mar-

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Sep

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4

Dec-1

4

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-15

Feb

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5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

EV 9X 10X 11X 12X 13X



Favorable demographics to boost consumption spending

Source: CIA World Factbook


April, 2016


Motor cycles to drive two wheeler growth

The motorcycles segment, which accounts for ~69% of the total two wheeler

industry in India, has grown at a 4 year CAGR of 2.4% to ~13.1 mn unit sales in

FY16E.

The modest growth during FY12-FY16 can be attributed to the loss of market-share

to the scooters segment. While the share of motorcycles’ within the two-wheeler

industry declined from 80% in FY10 to 69% in FY16, the scooters segment gained

market share -- from 14% to 28% during the same period. Sleek designs, unisex

appeal, advancements in technology to achieve good stability and attractive pricing

are few reasons for the success of the scooters segment. However, during FY16-

FY18, motorcycles are expected to grow at 13.8% CAGR, while the growth in

scooters is expected to slow-down to 7.1%.

Domestic Motorcycle sales to pick-up

0%

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10%

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14%

16%

18%

20%

0.0

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10.0

15.0

20.0

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

in mn units

Mototrcycles Sales Growth % (RHS)

FY12 growth: 13.9%4 yr CAGR : 2.4% 2 yr CAGR 13.5%



April, 2016


Top Selling motorcycles: Hero vrooming ahead

In FY15, motorcycles constituted 87% of the Hero’s total sales during the year. As

per the latest industry data available, of the top 5 best-selling motorcycles in India,

four belong to Hero’s stable.

Note: Model-wise sales numbers used in the report have been obtained from various internet

sources, hence authenticity of numbers cannot be verified

Domestic Scooter sales trend

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25%

30%

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2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

in mn units

Scooter Sales Growth % (RHS)

FY12 growth: 26%

4 yr CAGR : 18.7%

2 yr CAGR 7.1%


Top 5 selling motorcycles in India

0

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Hero Splendor Hero HF Deluxe Hero Passion Hero Glamour Honda CB Shine

in Rs in units

Feb 16 monthly sales Price (RHS)



April, 2016


The segment-wise performance of the two wheeler segment can be detailed as

follows:

75-110 cc -- 84% of total Hero’s motorcycle sales

Hero largely dominates this entry-level segment with its models -- Splendor,

Deluxe and Passion. Hero derives nearly 40-45% of total sales from rural

India on the back of its high selling entry level motorcycles. As mentioned

earlier, any uptick in rural demand could translate to significant gains for Hero.

Hero plans to further strengthen its position in this segment with the launch of

Hero Splendor iSMART this year.

Segment-wise motorcycle industry trends

Segment-wise CC % of total

Motorcycle sales

3 year CAGR

(FY12-FY15)

3 year CAGR

(FY16-FY18)

75-110cc 62% 1.3% 8.4%

110-125cc 16% 5.8% 6.5%

125-150cc 13% -2.3% 0.0%

150-200cc 5% 20.5% 27.8%

200-250cc 1% -1.1% 7.3%

250cc+ 2% 60% 37.8%


75-110 cc Competitive landscape

0

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6,000,000

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12,000,000


in units

Hero Moto Bajaj Auto Honda T V S Motor



April, 2016





April, 2016



Two players largely dominate the Executive segment – Hero and Honda with

their models Glamour and CB Shine respectively; both of them command a

share of ~45% each. However, while Honda CB Shine’s three month average

monthly sales (December to February) has remained at ~62k YoY, Hero

Glamour’s three month average monthly sales has increased from ~43k to

~57k, an increase of 33% YoY. While both the models are quite similar

technically and pricing-wise, Hero has managed to eat into Honda’s share

through aggressive marketing and a relatively stylish appearance. The

strategy to appeal youth looking for a stylish decent performance bike

available at a reasonable price has reaped rich dividends.

There are no new launches in this segment.

Hero’s strategy of concentrated focus on ramping up Glamour to take on CB

Shine is a well thought out one and has been successful till date.


0

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1,000,000

1,500,000

2,000,000

2,500,000

3,000,000


in units

Honda Hero Moto Bajaj Auto T V S Motor Suzuki India Yamaha



April, 2016


110-125cc Competitive landscape



April, 2016



Bajaj clearly dominates this segment with its Pulsar and Avenger series

(monthly sales of ~63k) which together account for nearly 80% of the total

sales.

Hero has a modest presence in this segment with its Achiever and Xtreme

models, which have picked up at a decent pace since their launch (monthly

sales of 4.6k)

Hero RNT is expected to be launched this month; this model combines a

series of technological advancements and utilities at an affordable price

range.

We believe Hero models may be able to capture a marginal share of Bajaj’s

sales. Nevertheless, Bajaj will continue to dominate this segment in the near

future.


0

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400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000


in units

Bajaj Auto India Yamaha Honda Hero Moto



April, 2016





April, 2016


150-200 cc -- nil revenues for Hero

TVS, Honda and Bajaj have a presence in this category, with TVS Apache

leading the segment with monthly sales of ~20k units.

Honda has made rapid progress in this segment with the success of its new

launches – Honda Hornet and Unicorn, whose combined sales have reached

23.8k units in February 2016.

Hero has no presence in this segment; plans to launch Honda Xtreme 200S to

enter this category


0

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400,000

600,000

800,000

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1,400,000


in units

T V S Motor Bajaj Auto



April, 2016





April, 2016


200-250 cc -- 0.5% of total Hero’s motorcycle sales

Bajaj leads this high-end segment with its Pulsar and KTM Duke models,

which constitute nearly 98% of total sales

Yamaha is planning an entry into this segment with the YRF R25 and MT25

models.

Hero has a small presence in this segment through its Karizma model. It plans

to launch HX250R and XF3R STD in this segment to further gain market

share. Being a small segment, it is possible that a new launch may suddenly

capture a large share in a short span of time. Hero is aiming to expand its

presence in the high-end segments which are rapidly growing and would yield

high margins. In the absence of new launches by existing players, Hero has

an opportunity to capture market share in this segment.


0

50,000

100,000

150,000

200,000

250,000


in units

Bajaj Auto Hero Moto Honda



April, 2016





April, 2016


>250 cc -- Nil revenues for Hero

Eicher Motors with its Royal Enfield brand of performance bikes is the market

leader in the >250 cc category.

However, all the major players, including Hero, Honda, Bajaj, and Yamaha

have planned new launches in this segment.

Hero will make an entry into this segment with its Hastur model. However,

while this re-iterates its efforts to enter into the high end motor-cycle category,

we believe Eicher Motors will dominate this space in the near term.

Top Selling scooters: Hero has made steady progress

Scooters contributed ~13% of Hero’s total FY15 sales unit. The scooters market is

dominated by Honda’s flagship model, Activa, which continues to remain the market

leader since 2004, within three years of its launch. Hero’s Maestro is a distant

second with monthly sales of ~ 50k as compared to ~2.1L for Honda Activa. Hero’s

three models together clocked sales of ~ 88k in February 2016, steady progress

from 65k units sold in November 2014 led by the success of Hero Duet which was

launched in November 2015 and clocked sales of 31k in Feb 2016.

The scooter segment has re-gained its popularity with stylish designs and creative

advertising directed at promoting scooters as a unisex vehicle. With healthy growth

prospects, the company has lined up four launches/variants viz. Leap, Dare, ZR, and

Dash. These launches will help Hero maintain the 22% CAGR that it clocked from

FY12-15.

Scooters growth momentum may slow down

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000


in units

Honda Hero Moto T V S MotorSuzuki Motorcycle India Yamaha MahindraPiaggio



April, 2016


Strategy in a nutshell

In sum, Hero is looking to reinforce its dominance in the entry level motorcycles

segment with the launch of a variant of Splendor. It is also looking to increase its

presence in the high end category of motorcycles to diversify its portfolio and expand

margins. A spree of new scooter launches may ensure healthy growth, even as it will

largely remain a distant second in the scooters segment.

Scooters Competitive landscape



April, 2016


Capacity expansion to boost volumes

As at FY15, Hero’s combined annual capacity in its four plants viz. Dharuhera,

Gurgaon, Haridwar and Neemrana stood at 7.65 mn units. The management has

chalked out an aggressive expansion plan which will take the capacity to nearly

10mn units by end-FY18.

On the back of its planned expansions, we expect Hero’s sales volumes to increase

at a 3 year CAGR of 5% to 7.65 mn units by FY18E. We expect the effective

utilization to drop to 77% in FY18 from 87% in FY15 as we conservatively assume

that new capacities will operate at low utilizations in the initial years of

commissioning. Assuming an ASP of Rs 51,000 in FY18, we arrive at revenues of

Rs 36,751 crores (net of excise), which translate to a 3 year CAGR of 10%.

Capacity expansion details

Location Date Capacity ( in mn

tonnes)

Status Projections Investment (in

Rs crore)Dharuhera, Gurgaon,

Haridwar and Neemrana

FY15 7.65 Operational Included

Neemrana FY16 0.45 Operational Included 760

Halol, Gujarat FY17 1.2 Construction in

Progress

Included

Halol, Gujarat FY18 0.6 Construction in

Progress

Included

Andhra Pradesh Not finalised 1.8 MoU singed with

AP Government

in FY14, project

in planning stage

Not included 1600

1600


Capacity and Effective Utilisation trend Volumes and average ASP trend

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40%

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100%

120%

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Total Capacity ( in mn units) Effective utilisation (RHS)

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Total Sales Volumes Avg ASP (RHS)




April, 2016


EBITDA margin to ‘LEAP’ on soft commodity prices

In May 2013, Hero launched a ‘LEAP’ drive focused on achieving operational

savings and improving margins. Among a wide gamut of areas, the drive involved:

Pricing and feature optimization

Raw material optimization

Controlling marketing expenditure to ~2.5% of sales, and

Bringing efficiencies in logistics and procurement by digitalizing operations

The ‘LEAP’ programme will help drive incremental expansions in margins

Hero’s EBITDA margin fell to 12.4% in FY15 from an average of ~13.5% in FY13-14

owing to faster growth of the low margin scooters segment. However, margins have

recovered to 15.5% in 9MFY16 helped by soft commodity prices and consequently

lower raw material costs – from 72% of sales in FY15 to 68% in 9MFY16. We expect

Hero to clock an EBIDTA margin of 15.7% in FY16 and further expand to 16.8% by

FY18 as commodity prices are expected to increase only marginally. Further,

operational efficiencies from the ‘LEAP’ drive will help offset any adverse movement

in raw material prices. PAT margin is expected to remain flat at 11% in FY18E from

9MFY16 levels, owing to higher depreciation from the newly commissioned

capacities which we have assumed will operate at low utilization rate in the initial

months.

Increasing proportion of scooters… …caused dip in margins in FY15

93%91%

89%87% 87%

7%9%

11%13% 13%

80%

85%

90%

95%

100%

FY12 FY13 FY14 FY15 9MFY16

Motorcycles Scooters

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%


EBITDA margin PAT margin




April, 2016


Exports to de-risk business model

Hero exported 2L units in FY15, an increase of 53% YoY with its major export

markets being Sri Lanka, Bangladesh, the Latin American and African belt. Overall,

it has a presence in 22 countries across the globe. The management aims to

enhance export volumes and is targeting an entry into new markets viz. Argentina,

Mexico and Nigeria in the coming fiscal. It aims to generate ~10% of revenues from

exports by FY18 as compared to 4-5% currently. Against the back-drop of a

gradually recovering domestic economy, an export presence will help de-risk the

business model to a certain extent.

Characteristics of key export markets:

i) China is the largest market for two-wheelers in the world; however the industry

dynamics are different and not conducive for Indian players to establish presence in.

ii) Latin America belt: In this market, Japanese players have a 75% share, 5-10%

is with China and the remaining with India.

iii) African belt: 65% of the market share is with Chinese players, 10-15% with

Japan and the remaining with India. Indian players are competing with their Chinese

counterparts in the global markets on the basis of quality available at a reasonable

price.

iv) Brazil has a requirement of mixing ethanol with fuel which makes it unviable for

Indian players to operate in that market.

Hero’s global presence set to expand



April, 2016


Key Monitorables Technology: Prior to 2010, Honda provided technical support to Hero in

return for a royalty, which ranged from 2.5% to maximum 5% of net sales

depending on the product sold. However, post the split, Hero set up its own

R&D centre and tied up with various technological partners. In order to regain

mindshare and market share, Hero will have to make sustained investments

in R&D to come up with new launches in the already competitive motorcycles

segment. Further, there is a probability that the technological partners could

fall through. For instance, in 2013, Hero had bought a 49% stake in Erik Buell

Racing (EBR) – a US bike maker—with an aim to enter the high end

performance bikes category. However, EBR filed for bankruptcy in 2015

which stalled certain new launches that EBR was working on for Hero – 17 of

which 12 have been completed, resulting in a delay in new launches.

Stiff competition: The two wheeler industry is extremely competitive with

existing players entering new segments with new launches. Also, there are a

number of global players aiming to establish a presence in the high end

segment. Hero will have to innovate and launch new products to maintain its

market share, which has shrunk 600 bps YoY from FY12 to 35% currently.

Success in export markets: Chinese and Japanese players are the major

competitors in the export markets. Hero’s success in these markets is a key

monitorable; if successful it will help de-risk the business model.


April, 2016


Financial Performance

In Q3FY16, Hero reported a revenue growth of 6.7% YoY to Rs 7,295 crores backed

by ~4% realization growth and 2.5% volume growth. Volumes for Q3FY16 stood at

1.69 mn units. The EBITDA margin expanded by 360 bps YoY to 15.6% led by lower

commodity prices and benefits from the company’s ‘LEAP’ program. The PAT

margin expanded 240 bps YoY to 10.9% driven by an expansion in operating

margins.

Quarterly Financial Performance (₹ in crore)

Particulars Q3FY16 Q3FY15 FY15 FY14

Net Sales 7,294.78 6,839.25 27,538.03 25,275.47

YoY Growth 6.7% 9.0%

Total Expenditure 6,154.85 6,017.46 24,132.08 21,829.22

EBITDA 1139.9 821.8 3406.0 3446.3

Margin % 15.6% 12.0% 12.4% 13.6%

Depreciation 113.94 83.75 540.45 1,107.37

EBIT (Excl. OI) 1026.0 738.0 2865.5 2338.9

Other Income 84.17 93.6 582.89 537.04

EBIT 1110.2 831.6 3448.4 2875.9

Margin % 15.2% 12.2% 12.5% 11.4%

Finance Costs 0.55 2.42 11.7 11.82

Exceptional Income 0.0 0.0 -144.73

PBT 1109.6 829.2 3292.0 2864.1

Margin % 15.2% 12.1% 12.0% 11.3%

Tax Expense 313.8 246.24 943.45 758.17

PAT 795.8 583.0 2348.5 2105.9

Margin % 10.9% 8.5% 8.5% 8.3%

Minority Interest 1.0 0.4

Share of Associate 15.2 -3.6

Adj PAT 2362.6 2102.0



April, 2016


Financial Outlook We expect Hero’s revenues to grow at a 3 year CAGR of 10.1% to Rs 36,751 crore

in FY18E led by a pick-up in volumes. The EBITDA is expected to clock a 3 year

CAGR of 22% to Rs 6,181 crore by FY18E. EBITDA margin is expected to expand

to 16.8% by FY18E from 15.5% in 9MFY16 led by relatively soft commodity prices

and operational efficiencies from the LEAP drive. We expect the company to report a

PAT of Rs 4,047 crore which translates to a 3 year CAGR of 19.6%. PAT margin is

expected to remain flat at 11% in FY18E from 9MFY16 levels, owing to higher

depreciation from the newly commissioned capacities which we have assumed will

operate at low utilization rate in the initial months.

Revenues to grow at a steady pace EBITDA margin to expand

0%

5%

10%

15%

20%

25%

20000

22000

24000

26000

28000

30000

32000

34000

36000

38000


Rs crs

Revenues Growth YoY (RHS)

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%


EBITDA margin PAT margin



Return ratios in excess of 25% Asset turnover to moderate on new capacities

5%

15%

25%

35%

45%

55%

65%


RoE RoCE

0.1

2.1

4.1

6.1

8.1

10.1

12.1


Asset Turover




April, 2016


Hero – Peer Comparison

In Rs CrSales EBITDA PAT

EBITDA

Mgn PAT Mgn EPS

ROE

(%)

P/E

(x)

P/BV

(x)

EV/EBITD

A

(x)

Indian Peers

Hero Moto Corp2015 27538 3406 2363 12.4% 8.6% 118.4 36.1 24.7 8.9 16.4

2016E 28331 4461 3118 15.7% 11.0% 156.1 37.3 18.7 7.0 12.4

2017E 32900 5385 3618 16.4% 11.0% 181.2 33.9 16.1 5.5 10.2

2018E 36751 6181 4047 16.8% 11.0% 202.7 30.3 14.4 4.4 8.7

Bajaj Auto2015 21569.1 4307.2 3316.4 20.0% 15.4% 114.8 31.4 21.3 6.2 16.1

2016E 22565.0 4755.7 3773.1 21.1% 16.7% 130.4 31.9 18.8 5.6 13.8

2017E 25109.0 5214.2 4173.8 20.8% 16.6% 144.3 30.3 17.0 4.8 12.3

2018E 27931.9 5771.3 4711.0 20.7% 16.9% 162.8 29.3 15.0 4.1 10.7

TVS Motors2015 10181.6 629.1 359.2 6.2% 3.5% 7.5 23.2 43.1 9.3 24.9

2016E 11397.5 800.4 452.3 7.0% 4.0% 9.5 24.9 33.9 7.8 20.1

2017E 13531.5 1111.2 673.0 8.2% 5.0% 14.2 30.1 22.8 6.3 14.2

2018E 15022.2 1341.9 839.2 8.9% 5.6% 17.7 33.3 18.3 5.0 11.4

Eicher Motors2015 11541.3 1674.2 924.8 14.5% 8.0% 336.3 31.9 55.6 15.7 30.2

2016E 15459.9 2457.1 1347.7 15.9% 8.7% 469.0 38.2 39.8 13.7 20.5

2017E 17224.3 2963.4 1669.2 17.2% 9.7% 612.9 36.5 30.5 10.0 16.6

2018E 20484.6 3647.5 2106.5 17.8% 10.3% 773.3 34.4 24.2 7.8 13.2



April, 2016


Valuation We initiate coverage on Hero as a BUY with a Price Objective of ₹4054,

representing a potential upside of 36% over a period of 18 months. We have

arrived at our target price by assigning a PE of 20x to FY18E EPS of ₹203.

The assigned PE is at premium of ~15% to its 5 year median forward multiple

of ~17.5x. The premium assigned is in account of:

i) We expect Hero to maintain its leadership position with a market share of

~45% in FY18E on the back of capacity expansion and new launches.

ii) Anticipated expansion in margins on the back of soft commodity prices and

operational efficiencies from the LEAP drive.

iii) Superior return ratios – RoE in the range of 30-35% and RoCE 45-50%.

iv) Despite expansions, the company will continue to maintain its near debt

free status on the back of ample internal accruals.

v) Negative working capital cycle which ensures sustenance of healthy cash

flow generation.

Hero has traded at a 5 year median forward PE of 17.5x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

CMP 14X 16X 18X 20X 22X



April, 2016


Hero’s P/B trend Hero’s EV/EBITDA trend

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

CMP 5X 6X 7X 8X 9X

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

Mar-

14

Ap

r-14

May-1

4

Ju

n-1

4

Ju

l-14

Au

g-1

4

Sep

-14

Oct-

14

No

v-1

4

Dec-1

4

Jan

-15

Feb

-15

Mar-

15

Ap

r-15

May-1

5

Ju

n-1

5

Ju

l-15

Au

g-1

5

Sep

-15

Oct-

15

No

v-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

EV 9X 10X 11X 12X 13X




April, 2016


Financials and Projections

Y/E March, Fig in ` Cr FY15 FY16E FY17E FY18E Y/E March, Fig in ` Cr FY15 FY16E FY17E FY18E

Profit & Loss Statement Per Share Data (Rs)

Net Sales 27538.0 28331.4 32900.0 36751.4 Adj. EPS 118.4 156.1 181.2 202.7

% Chg. 2.9 16.1 11.7 Cash EPS 145.4 180.2 217.7 249.5

Total Expenditure 24132.1 23870.2 27514.6 30570.1 DPS 60.0 65.0 66.0 68.0

% Chg. -1.1 15.3 11.1 Book Value 327.5 418.6 533.8 668.5

EBDITA 3405.9 4461.3 5385.4 6181.2 Capital, Liquidity, Returns Ratio

EBDITA Margin % 12.4 15.7 16.4 16.8 Debt / Equity (x) 0.0 0.0 0.0 0.0

Other Income 582.9 385.0 400.0 400.0 Current Ratio (x) 1.3 1.5 1.5 1.9

PBDIT 3988.8 4846.3 5785.4 6581.2 ROE (%) 36.1 37.3 33.9 30.3

Depreciation 540.5 480.2 728.6 934.1 ROCE (%) 51.9 52.1 47.3 42.2

Interest 11.7 3.0 3.0 3.0 Dividend Yield (%) 2.1 2.2 2.3 2.3

Exceptional items -144.7 0.0 0.0 0.0 Valuation Ratio (x)

PBT 3292.0 4363.1 5053.8 5644.2 P/E 24.7 18.7 16.1 14.4

Tax Provisions 943.5 1265.3 1465.6 1636.8 P/BV 8.9 7.0 5.5 4.4

Reported PAT 2348.5 3097.8 3588.2 4007.4 EV/Sales 2.0 2.0 1.7 1.5

Minority Interest 1.0 0.0 0.0 0.0 EV/EBIDTA 16.4 12.4 10.2 8.7

Share of Associate 15 20 30 40 Efficiency Ratio (x)

PAT 2362.6 3117.8 3618.2 4047.4 Inventory (days) 10 12 12 13

PAT Margin (%) 8.6 11.0 11.0 11.0 Debtors (days) 15 16 16 16

RM / Sales (%) 71.9 68.8 68.5 68.8 Creditors (days) 34 30 30 30

Balance Sheet Cash Flow Statement

Share Capital 40.6 40.6 40.6 40.6 Profit Before Tax 3292.0 4363.1 5053.8 5644.2

Reserves & Surplus 6499.4 8319.2 10619.4 13308.9 Depreciation 540.5 480.2 728.6 934.1

Minority Interest 18.5 25.0 30.0 35.0 Working Capital Changes -355.3 -312.8 -199.2 -494.6

Long Term Borrowings 12.0 12.0 12.0 12.0 Others -1291.6 -1647.3 -2134.1 -2326.0

Deferred Tax Liability -73.5 56.9 128.3 220.5 Operating Cash Flow 2185.5 2883.2 3449.2 3757.7

Other Non Current Liabilities 97.5 94.1 101.9 119.9 Capital Expenditure -33.3 -2181.5 -2022.0 -2308.0

Total Liabilities 6595 8548 10932 13737 Other Investment Activities 64.7 385.0 400.0 400.0

Gross Block 8158.0 10008.0 11758.0 12358.0 Cash Flow from Investing 31.4 -1796.5 -1622.0 -1908.0

Less: Acc. Depreciation 5205.8 5686.0 5686.0 5686.0 Changes in Share Capital 0.0 0.0 0.0 0.0

Net Block 2952.3 4322.1 6072.1 6672.1 Changes in Borrowings 100.0 0.0 0.0 0.0

Capital Work in Progress 719.2 600.0 700.0 800.0 Dividend and Interest -2231.1 -990.9 -1777.7 -1800.1

Other Non Current Assets 881.8 979.1 1088.4 1211.4 Cash Flow from Financing -2131.1 -990.9 -1777.7 -1800.1

Net Current Assets 1393.6 1946.5 2271.5 4153.5 Net Change in Cash 85.8 95.9 49.5 49.6

Long term Loans & Advances 647.8 700.0 800.0 900.0 Opening Cash Balance 69 155 250 300

Total Assets 6595 8548 10932 13737 Closing Cash Balance 155 250 300 350


April, 2016


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