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Stock recommendation: Hero MotoCorp Ltd – ACCUMULATE – TP Rs.3473
Publish date: July 25, 2018
Result Update:
HMC’s 1QFY19 results came in slightly below expectations. Higher commodity prices and increased tax led to flat YoY net profit, despite 14% volume growth.
Key Highlights
HMC reported revenue of Rs88.1bn in 1QFY19, 10.4% growth over 1QFY18. HMC sold 2.1mn two wheelers in 1QFY19, 13.6% higher as compared with same quarter last year. EBIDTA in 1QFY19 came in at Rs13.8bn, 6.3% growth over 1QFY18 EBITDA of Rs13bn. EBITDA margin for the company was under pressure in 1QFY19 due to expiry of benefits at the Haridwar plant and commodity price increase. During the quarter, company reported PAT of Rs9.09bn, as compared with Rs9.1bn reported in 1QFY18. PAT was lower than our estimate due to 3% below estimated EBITDA, lower other income and higher tax provision.
Valuation and Outlook
HMC is expected to benefit from demand recovery in rural segment. However, aggressive stance adopted by Bajaj Auto to gain market share, could impact company’s performance in the entry level motorcycle segment. Given intense competitive pressure in the entry level motorcycle segment, margins are expected to witness contraction in FY19. We cut our volume, margin assumption and assigned PE multiple in view of aggressive pricing strategy adopted by Bajaj Auto. We downgrade the stock to ACCUMULATE (earlier BUY) with a revised price target of Rs3,473 (earlier Rs4,353).
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