Hero MotoCorp Share price: Jefferies retains HOLD rating, target price Rs 3130

Hero MotoCorp 4QFY21 volumes were 12% below 4QFY19, but EBITDA/PAT were 10-18% higher (8-10% above Jefferies estimate). EBITDA margin contracted just 50bps QoQ despite sharp input cost inflation. Indian 2W demand has weakened amid Covid spike, but Jefferies still expects a cyclical recovery in FY22-23. Commodity pressures will continue in 1HFY22 but price hikes and internal cost controls should limit further margin impact. Jefferies cut FY22-23 EPS by 4% and retained Hold with revised Rs 3130 price target.

Hero MotoCorp said that the 2-wheeler segment had lagged in the demand recovery in recent months and Mar-Q registrations were 15% below 2019. The recent spike in Covid has impacted demand further with April registrations falling 35% versus 2019. Notwithstanding the near-term pressures, we believe 2Ws are ripe for a cyclical rebound after already suffering the worst slowdown in four decades. HMCL's 2W wholesale market share rose 130bps YoY to 37% in FY21 led by favorable demand profile (higher share of sub-125cc bikes in industry volumes) and gains in scooters and premium bikes. It has historically struggled in these segments, but any sustainable market share gains would improve its long-term growth outlook.

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Hero MotoCorp is following a three-pronged approach for electric vehicles (EVs): its own R&D, strategic investment in start-up Ather Energy and the recent tie-up with Taiwan's Gogoro for battery swapping technology. Hero MotoCorp is planning to launch one of its EV products in FY22 and more, including from Gogoro alliance, in CY22. Hero MotoCorp has started distribution of Harley-Davidson (H-D) motorcycles and the two OEMs are collaborating to launch new products, which could provide Hero an entry into the high-priced cruiser segment; Hero MotoCorp didn't provide any timeline for these launches though.

The sharp rise in metal prices is pushing up input costs for autos; however, Hero MotoCorp has managed the cost inflation well though price hikes and internal cost savings. Hero MotoCorp sees another about 4ppt commodity cost headwind in FY22 but expects to largely offset these price hikes and internal cost cuts.

Jefferies cut FY22-23E EPS by 4% but still sees 19% EPS CAGR over FY21-23. The stock is already trading at 14x FY23E PE versus the long-term average of 16x, which limits upside potential, in Jefferies view. Jefferies says it has retained Hold rating with a Rs 3130 price target based on 15x FY23E PE.