Hero MotoCorp Q3 Results Review - Underlying ICE Margins Continues To Be Healthy: Yes Securities

Yes Securities Report

Hero MotoCorp Ltd.’s Q3 FY24 reported results were in-line with our/street estimates as Ebitda margins expanded 250 basis points YoY (-10 bp QoQ) at 14%. However, underlying ICE margins were healthy at 16% (versus ~15% QoQ and ~12.2% YoY), supported by higher spare sales (SPAM) at Rs 14.6 billion (versus Rs 13.5 billion in Q2 and Rs 12.2 billion in Q1).

Gross margins surprised at 32.7% (+210 bp YoY/ +130 bp QoQ), was partially offset by higher other expense at Rs 12.1 billion (+11% QoQ, estimate Rs 11.2 billion) due to increased festive advertising and promotion spends.

The management indicated lead demand indicators from the rural remain positive with,

1. higher contribution (more than 3%) versus urban and

2. improving inquiry mix from 40-45% two-three quarters back to 50-55% currently.

Going ahead while the management remain hopeful of broad-based volumes recovery within two-wheelers, Hero MotoCorp is aiming at market share expansion led by new product launches.

The key strategic focus post leadership changes such as margins recovery and premium focus seems to be on-track while the meaningful ramp-up in scooters/exports yet to kick in.

The intended new product launches in the scooter (125cc and 160cc) Should help improve positioning and market share gains. However, customer response to recent product launches (especially for Xtreme 125R) would be the key catalyst to watch for.

Maintain 'Add' with revised target price of Rs 5,577 (versus Rs 5,021) based on ~20 times March-26 standalone EPS plus Rs 133 for Hero FinCorp.

We have raised FY25E/26E EPS by 2.4%/5.5% to factor in healthy ICE margins.

Management’s action to overhaul brand strategy supported by Ather’s continued brand acceptance provide an additional lever for the stock.

We build in revenue/Ebitda/adjusted profit after tax compound annual growth rate of 10.7%/15.1%/13.7% over FY24-26E.

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