CRISIL Research Ier Report Hero Honda Motors Q4FY13

7/28/2019 CRISIL Research Ier Report Hero Honda Motors Q4FY13

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CRISIL IER IndependentEquityResearch

Enhancing investment decisions

Hero MotoCorp Ltd

Q4FY13 Results Update


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CRISIL IER IndependentEquityResearch

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysisof Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a

five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-

point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISILFundamental Grade Assessment

CRISILValuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)3/5 Good fundamentals 3/5 Align (+-10% from CMP)2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)1/5 Poor fundamentals 1/5 Strong downside (


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Hero MotoCorp LtdTackling intense competition

Fundamental Grade 5/5 (Excellent fundamentals)

Valuation Grade 3/5 (CMP is aligned)

Industry Automobiles

1

May 02, 2013

Fair Value 1,684CMP 1,618

For detailed initiating coverage report please visit: www.ier.co.inCRISIL Independent Equity Research reports are also available on Bloomberg (CRI ) and Thomson Reuters.

Hero MotoCorps Q4FY13 earnings were in line with CRISIL Researchs expectations.

Revenues declined 1.3% q-o-q to

61 bn due to weak demand-led 3% decline in volumes.However, revenue decline was arrested by realisation growth of 1.7% q-o-q (led by higher contribution from scooters). PAT grew 17.7% q-o-q to 5.7 bn. Hero MotoCorps brand-building efforts post the Honda split, capex and intensifying competition will exert pressure onits PAT in the short term. However, we believe its fundamentals are intact given its leadershipposition, robust rural reach and brand recall. We maintain the fundamental grade of 5/5.

Two-wheeler volumes declined sequentially on weak demandHero MotoCorps volumes fell 3% q-o-q (compared to the industrys 4.5% decline) to 1.53 mntwo-wheelers in Q4 due to muted demand. Despite weak demand and intensifyingcompetition, Hero MotoCorps market share in two-wheelers rose by 60 bps q-o-q to 39.2%. Italso gained share in its core domestic motorcycle segment share up by 210 bps q-o-q to54%. However, the company lost share in two-wheelers from 40.5% in FY12 to 38.5% inFY13 owing to stiff competition largely from Honda.

EBIT margin improved on lower raw material costsEBIT margin rose by 150 bps q-o-q to 9.5% due to lower raw material costs. Raw materialcosts declined by 143 bps to 73.1% due to (i) softening of prices of key raw materials aluminium and steel and (ii) benefit of yen depreciation on imports (~10% indirect imports,half of which is yen-denominated).

Recently announced price hikeDespite stiff competition, Hero MotoCorp has hiked prices from 500 to 1,500 per vehicle onaccount of higher logistic costs. On the other hand, Honda is offering competitive prices - ithas launched Dream Yuga at a lower price of 43,000 in the executive motorcycle segment.

Inventory pile-up continues at the dealer level on poor demandHero MotoCorps inventory in books reduced from 13 days in FY12 to 11 days in FY13.However, our dealer interactions indicate that inventory at the dealer level remains high atover four weeks owing to weak demand and closing-year sales push. This indicates that

wholesale dispatches outstripped retail sales and can pressurise growth going ahead.Earnings estimates revised downwardsWe have lowered our PAT estimate for FY14 and FY15 by 9.2% and 6.5%, respectively as(i) we lower volume growth estimates for FY14 and FY15 to 7.2% and 8.4%, respectively, onweak demand and (ii) we expect EBIT margin to decline by 60 bps each in FY14 and FY15on account of stiff competition which compels the company to offer freebies.

Fair value reduced to 1,684 from 1,842 per shareWe have lowered DCF based fair value to 1,684 from 1,842 following a downward revisionin our earnings estimates. At the current market price of 1,618, the valuation grade is 3/5.

KEY FORECAST( mn) FY11 FY12 FY13# FY14E FY15E

Operating income 197,302 238,789 237,681 260,872 291,780EBITDA 26,386 36,330 32,845 35,827 40,054

Adj Net income 20,084 23,788 21,182 21,689 28,053 Adj EPS ( ) 100.6 119.1 106.1 108.6 140.5EPS growth (%) (10.1) 18.4 ( 11.0) 2.4 29.3Dividend Yield (%) 7.5 3.2 4.3 3.4 4.2RoCE (%) 68.6 69.5 45.9 45.0 49.0RoE (%) 62.6 65.7 45.6 39.1 41.1PE (x) 16.1 13.6 15.3 14.9 11.5P/BV (x) 10.9 7.5 6.5 5.3 4.3EV/EBITDA (x) 10.5 8.0 8.9 8.1 6.9

NM: Not meaningful; CMP: Current market price# Based on abridged financials

Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICSNIFTY/SENSEX 5999/19735NSE/BSE ticker HEROMOTOCOFace value ( per share) 2Shares outstanding (mn) 199.7Market cap ( mn)/(US$ mn) 323,115/5,965Enterprise value ( mn)/(US$ mn) 322,347/5,95152-week range ( )/(H/L) 2,279/1,435Beta 0.7

Free float (%) 47.8% Avg daily volumes (30-days) 454,629 Avg daily value (30-days) ( mn) 681.9

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKETReturns

1-m 3-m 6-m 12-mHero MotoCorp 8% -11% -17% -28%NIFTY 4% 0% 6% 15%

ANALYTICAL CONTACTMohit Modi (Director) [email protected] John [email protected] Vishal Rampuria [email protected]

Client servicing desk+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

F u n

d a m e n

t a l G r a

d e

Poor Fundamentals

ExcellentFundamentals

S t r o n g

D o w n s

i d e

S t r o n g

U p s i d e

52.2% 52.2% 52.2% 52.2%

33.2% 32.3% 32.0% 30.6%

5.9% 6.7% 7.1% 8.5%8.7% 8.8% 8.7% 8.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-12 Sep-12 Dec-12 Mar-13Promoter FII DII Others


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Hero MotoCorp Ltd

3

In Q4FY13, two-wheeler industry sales volume declined by4.5% q-o-q and was largely flat y-o-y

Hero MotoCorps sales volume declined by 3% q-o-q andy-o-y

Source: SIAM, CRISIL Research Source: SIAM, CRISIL Research

Market share in two-wheelers improved marginally q-o-q Share in domestic motorcycles rose by 210 bps q-o-q


Revenues largely flat Realisations grew 1.7% q-o-q and 4.8% y-o-y

Source: Company, CRISIL Research Source: Company, CRISIL Research

3 , 4

7 6

3 , 6

9 4

3 , 9

2 2

3 , 8

7 8

3 , 8

8 9

4 , 0

4 3

3 , 7

4 0

4 , 0

7 9

3 , 8

9 7

21%18% 19%

13% 12%9%

-5%

5%

0.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

3,1003,2003,3003,4003,5003,6003,7003,8003,9004,0004,1004,200

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

('000)

Two-wheeler sales Growth y-o-y % (RHS)

1 , 4

5 4

1 , 5

3 0

1 , 5

4 4

1 , 5

8 9

1 , 5

7 2

1 , 6

4 0

1 , 3

3 3

1 , 5

7 3

1 , 5

2 7

23% 24%20%

11%8% 7%

-14%

-1% -3%

-30%

-20%

-10%

0%

10%

20%

30%

0

250

500

750

1,000

1,250

1,500

1,750

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

('000)

Hero MotoCorp Growth y-o-y % (RHS)

41.8% 41.4%39.4% 41.0% 40.4% 40.6%

35.6%38.6% 39.2%

24%26% 26% 24% 23% 24% 25% 24% 22%

12% 12% 13% 15%

16% 16%19%

17% 18%

0%

10%

20%

30%

40%

50%

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

Hero MotoCorp Bajaj Auto HondaYamaha TVS Motors

55. 9% 56. 5% 55.0% 56. 2% 56. 2% 56.5%50.0% 51.9%

54.0%

26.1% 25.3% 26.8% 25.1% 24.5% 23.5% 25.7%26.0%

22.5%

6.8% 7.3% 6.5% 8.1% 8.7%9.9% 13.1% 11.5% 12.7%

0%

10%

20%

30%

40%

50%

60%

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

Hero MotoCorp Bajaj Auto Honda

Yamaha TVS Motors

5 3

, 5 0 9

5 6

, 3 7 6

5 7

, 8 4 3

5 9

, 8 3 6

5 9

, 6 2 5

6 2

, 0 7 8

5 1

, 5 1 2

6 1

, 5 1 3

6 0

, 7 2 5

30% 31% 27%

16%11% 10%

-11%

3% 2%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

10,000

20,000

30,000

40,000

50,00060,000

70,000

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

( mn)

Revenues Growth y-o-y (RHS)

3 6

, 7 9 0

3 6

, 8 5 8

3 7

, 4 5 6

3 7

, 6 4 9

3 7

, 9 2 9

3 7

, 7 9 9

3 8

, 6 4 9

3 9

, 1 0 2

3 9

, 7 5 8

5.9%

6.7% 6.8%

5.0%

3.1%2.6%

3.2%3.9%

4.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

35,000

35,500

36,000

36,500

37,000

37,500

38,000

38,500

39,000

39,500

40,000

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

( )

Realisations Growth y-o-y (RHS)


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CRISIL IERIndependentEquityResearch

4

Raw material cost (% of sales) declined 144 bps q-o-q Raw material cost / vehicle flat q-o-q, up 3% y-o-y


Other expenses / vehicle grew 4% q-o-q and 30% y-o-y EBIT / vehicle rose 21.5% q-o-q


Effective tax rate remains flat PAT margin rose 146 bps q-o-q, down 66 bps y-o-y


73.4% 75.3% 73.0% 73.4% 74 .1% 74.1% 73.2% 74.5% 73.1%

3.1% 2.9% 3.1% 3.3% 3.2% 3.3% 3.7% 3.2% 3.7%8.7%8.1%

8.8% 8.3%8.4%

8.1%9.8% 10.2% 10.4%

0%

10%

20%

30%

40%

50%

60%

70%80%

90%

M a r -

1 1

J u n - 1

1

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1

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1

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1 2

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2

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2

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2

M a r -

1 3

Raw material costs as % of sales Employee costs as % of sales

Other expenses as % of sales

2 6

, 9 9 9

2 7

, 7 5 1

2 7

, 3 5 0

2 7

, 6 5 3

2 8

, 1 0 6

2 8

, 0 2 5

2 8

, 2 8 8

2 9

, 1 4 8

2 9

, 0 6 7

16%

12%

6%4% 4%

1%3%

5%3%

-14%

-10%

-6%

-2%

2%

6%

10%

14%18%

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,00028,000

M a r -

1 1

J u n - 1

1

S e p - 1

1

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1

M a r -

1 2

J u n - 1

2

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2

D e c - 1

2

M a r -

1 3

( )

Raw mat erial costs per vehic le Growt h y-o-y (RHS)

3 , 2 0 5

2 , 9 8 3

3 , 2 8 6

3 , 1 1 0

3 , 1 7 5

3 , 0 6 4

3 , 7 9 6

3 , 9 7 5

4 , 1 2 8

-23% -25%

-13%

-28%

-1% 3%

16%

28% 30%

-60%

-40%

-20%

0%

20%

40%

0

1,000

2,000

3,000

4,000

5,000

M a r -

1 1

J u n - 1

1

S e p - 1

1

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1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

( )

Other expenses per v ehicle Growt h y-o-y (RHS)

3 6

, 7 9 0

3 6

, 8 5 8

3 7

, 4 5 6

3 7

, 6 4 9

3 7

, 9 2 9

3 7

, 7 9 9

3 8

, 6 4 9

3 9

, 1 0 2

3 9

, 7 5 8

4 , 0

7 3

3 , 7

7 9

4 , 1

4 6

4 , 0

5 5

4 , 1

0 2

3 , 8

5 7

3 , 2

2 4

3 , 1

4 9

3 , 8

2 5

-5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

M a r -

1 1

4 0

, 6 9 5

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r -

1 3

( mn)

Realisation per vehicle EBIT per vehicle

23.9%

16.7% 16.7% 15.3%

19.2%

16.3% 16.3% 16.3% 16.3%

0%

5%

10%

15%

20%

25%

30%

M a r - 1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r - 1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r - 1 3

5 , 0

1 6

5 , 5

7 9

6 , 0

3 6

6 , 1

3 0

6 , 0

3 6

6 , 1

5 5

4 , 4

0 6

4 8 7 9

5 7 4 2

9.4%9.9%

10.4% 10.2% 10.1% 9.9%

8.5%7.9%

9.3%

0%

2%

4%

6%

8%

10%

12%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

M a r -

1 1

J u n - 1

1

S e p - 1

1

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1

M a r -

1 2

J u n - 1

2

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2

D e c - 1

2

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( mn)

Adj PAT PAT margins (RHS )


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Hero MotoCorp Ltd

5

Steel HR prices up 0.8% q-o-q and down 1.3% y-o-y Aluminium prices up 0.7% q-o-q, 9.5% y-o-y

Source: Industry, CRISIL Research Source: Industry, CRISIL Research

Share price movement Fair value movement since initiation

-Indexed to 100

Source: NSE, CRISIL Research Source: NSE, BSE, CRISIL Research

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Q 4 F Y 0 6

Q 4 F Y 0 7

Q 4 F Y 0 8

Q 4 F Y 0 9

Q 4 F Y 1 0

Q 4 F Y 1 1

Q 4 F Y 1 2

Q 4 F Y 1 3

( /tonn e)

HR price trend CR price trend

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

Q 4 F Y 0 6

Q 4 F Y 0 7

Q 4 F Y 0 8

Q 4 F Y 0 9

Q 4 F Y 1 0

Q 4 F Y 1 1

Q 4 F Y 1 2

Q 4 F Y 1 3

( /ton ne)

0

50

100

150

200

250

300

350

A p r -

0 8

J u

l - 0 8

O c

t - 0 8

J a n - 0

9

A p r -

0 9

J u

l - 0 9

O c

t - 0 9

J a n - 1

0

A p r -

1 0

J u

l - 1 0

O c

t - 1 0

J a n - 1

1

A p r -

1 1

J u

l - 1 1

O c

t - 1 1

J a n - 1

2

A p r -

1 2

J u

l - 1 2

O c

t - 1 2

J a n - 1

3

A p r -

1 3

Hero MotoCorp NIFTY

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0

500

1,000

1,500

2,000

2,500

D e c - 0

9

F e

b - 1

0

M a y - 1

0

A u g - 1

0

O c

t - 1 0

J a n - 1

1

A p r -

1 1

J u n - 1

1

S e p - 1

1

D e c - 1

1

F e

b - 1

2

M a y - 1

2

A u g - 1

2

O c

t - 1 2

J a n - 1

3

A p r -

1 3

('000)( )

Total Traded Quantit y(RHS) CRISIL F air Value

Hero MotoCorp


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6

Key Developments

Hero MotoCorp loses market share y-o-y in FY13 to Honda

Table: Two-wheeler sales volume (domestic and exports)

Sales volume (mn) Growth Market share

Player FY12 FY13 % y-o-y FY12 FY13

Bajaj Auto 3.8 3.8 -2.0 24.9% 23.8%Hero MotoCorp 6.2 6.1 -2.6 40.5% 38.5%Honda 2.1 2.8 30.7 13.7% 17.5%TVS Motors 2.2 2.0 -8.0 14.0% 12.6%Yamaha 0.5 0.5 2.8 3.2% 3.2%Total 15.4 15.8 2.5 100% 100%

Market share computations based on sales volume

Source: SIAM, CRISIL Research

Hero MotoCorps market share in two-wheeler sales volume (domestic + exports)

declined from 40.5% in FY12 to 38.5% in FY13. Within motorcycles (90% of its two-

wheelers), it lost share in the high-margin executive and premium segments to Honda

while it gained share in the low-margin economy segment f rom Bajaj Auto.

Hero MotoCorp gained share in economy segment driven by

CD Dawn Deluxe sales...

... but lost share in its domain - executive segment - as

Splendor sales declined


27.5% 24.9%

42.9% 53.2%

24.0%20.2%

1.5% 1.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13Bajaj Auto Hero MotoCorp TVS Motor India Yamaha Motor

20.1% 20.2%

68.7% 62.6%

9.3%14.6%

1.0% 0.6%0.2% 0.7%

0.6% 1.2%0.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13Bajaj Auto Hero MotoCorp Honda Mot orsIndia Yamaha Motor TVS Motor Suzuki Motorcyc leMahindra & M ahindra

Almost 76% of the two-wheeler

industry is dominated by

motorcycles


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Hero MotoCorp Ltd

7

Lost share in the premium segment


Domestic motorcycle segment In the executive segment, Hero MotoCorps Splendor lost market share by 622 bps y-o-y

to 36% in FY13 whereas Hondas Dream Yuga (launched in May 2012) gained share by

400 bps to 4%. Typically, any new model gains market share initially for the first six

months to one year. Bajaj Auto maintained its share in the executive segment, despite

competition, aided by the launch of variant Discover 125 ST in May 2012.

In the premium segment, Hero MotoCorp lost share by 348 bps y-o-y to 19.5% to Honda;

the share decline was arrested by the launch of Ignitor in June 2012. The latters gainwas led by higher sales of Unicorn.

In the economy segment, its share rose from 40% in FY12 to 50% in FY13 driven byhigher sales volume of CD Dawn Deluxe.

Domestic scooter segment Hero MotoCorps domestic scooter sales grew 32.7% y-o-y led by increased sales

volume of Pleasure and the launch of Maestro in April 2012.

Domestic scooter sales volume (mn)

Player FY12 FY13 % growth y-o-y

Honda 1.2 1.4 16.0%Mahindra and Mahindra 0.1 0.1 -24.5%

TVS Motors 0.5 0.4 -14.6%

Suzuki Motorcycle 0.3 0.3 13.9%

India Yamaha - 0.1 NM

Hero MotoCorp 0.4 0.5 32.7%

Total 2.6 2.9 14.2%Source: SIAM, CRISIL Research

Hero MotoCorp has been facing stiff competition from Honda. CRISIL Research believes that

the launch of new two-wheelers by strong contenders such as Honda does exert pressure on

existing players in the short term. However, we maintain our cautiously optimistic stance for

the long term for Hero MotoCorp as (i) technology may not be a constraint for Hero MotoCorp

42.1% 40.6%

19.5%16.0%

9.5% 14.3%

4.6% 7.3%

15.3% 14.1%

8.5% 7.4%

0.6% 0.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13

Bajaj Auto Hero MotoCorp Honda Motors Royal Enf ield MotorsIndia Yamaha Motor TVS Motor Suzuki Motorcycle

Competition intensifies in thetwo-wheeler industry

Hero MotoCorp grew faster y-o-ythan the industry in the domestic

scooter segment


10/20


8

for launching new models. It has its own R&D team and has tied up with major technology

partners such as Erik Buell Racing and AVL Austria for developing new engine technology for

its two-wheeler range. (ii) it has the largest distribution reach with 5,500 touch points and (iii) astrong brand recall especially in rural areas.

Our channel checks suggest that Hondas increase in share in the two-wheeler market is

driven by aggressive dealership expansion (dealer inventory stocking). Honda is also offering

competitive pricing. Further, we learnt that Hondas Dream Yuga (in the executive segment)

priced at 48,000 was perceived expensive by customers; hence, Honda recently launched

Dream Neo in the same segment at a relatively lower price of 43,000 (ex-showroom Delhi).

We expect Dream Neo to further expert pressure on Hero MotoCorps market share in the

executive segment. Also, Honda plans to more than double its two-wheeler capacity from 2.8

mn currently to 5.8 mn units by FY15.

Two-wheeler new model launches (excluding re-launches / variants) in FY13

Manufacturer Segment Model Month of launch Engine capacity (cc) Price (ex-showroom) (in )

Bajaj Auto Motorcycle Ninja 650 R Sep-12 650 cc 500,000Yamaha Motors Scooter Ray Sep-12 113 cc 46,000Hero MotoCorp Motorcycle Ignitor Jun-12 125 cc 58,638

Scooter Maestro Apr-12 110 cc 48,280Honda Motors Motorcycle Dream Yuga May-12 109 cc 48,028Hyosung Motorcycle GT 250R Feb-13 250cc < 3,00,000

Motorcycle GV 650 Feb-13 650 cc 500,000Suzuki Motorcycle Motorcycle Hayate May-12 110 cc 40,000TVS Motor Motorcycle Phoenix Oct-12 125 cc 51000Piaggio Scooter Vespa LX Apr-12 125 cc 66,661

Source: CRISIL Research

Two-wheeler industry sales growth expected to moderate

After a strong FY11, the Indian two-wheeler industry's dynamics changed in FY12 as

saturation and declining income growth limited motorcycle sales growth in urban areas. On

the other hand, rural demand remained buoyant aided by low penetration levels. Domestic

two-wheeler sales, which grew 26% y-o-y in FY11 and 12% y-o-y in FY12, slowed down by

2.9% to 13.8 mn two-wheelers in FY13 as lacklustre income growth (largely in rural areas)

and high fuel prices impacted sales. Exports declined 1% y-o-y in FY13 due to significant

reduction in export incentives post withdrawal of the Duty Entitlement Pass Book (DEPB)

scheme, unfavourable policy actions in key markets (for instance, 100% import duty was

imposed on two-wheelers in Sri Lanka) and higher competition in Africa.

CRISIL Research has revised its FY14 growth estimates for the two-wheeler industry from 9-

11% to 6-8%. The revision is on account of a downward revision in the GDP estimate from

6.4% to 6% and weak buyer sentiments. While motorcycle sales will be driven by rural

demand, scooters will retain their urban base as replacement demand (from motorcycles)

pushes up sales. Considering lower expected growth in two-wheelers, high competition isexpected to exert pressure on profitability of players.

In the short term, demand for

two-wheelers is expected to

continue to shift from urban to

rural areas


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Hero MotoCorp Ltd

9

High penetration, lim ited rise in addressable market to cap urban salesgrowth

At present, two-wheeler penetration in urban areas is fairly high at 55-60% of addressable

households. Hence, untapped rural markets hold the key to two-wheeler sales growth in the

long term. CRISIL Research estimates domestic two-wheeler sales to increase at a CAGR of

9-11% to 21-23 mn units by FY18 and expects the two-wheeler market to saturate by FY20.

Beyond FY20, new demand will be limited and replacement demand will be the main driver of

two-wheeler sales, albeit at a slower pace.

Competition to further intensify as players expand capacitiesTwo-wheeler players are set to aggressively expand capacities to maintain/gain share in a stiff

competitive environment. The current installed capacity of the Indian two-wheeler industry is

estimated at 21 mn units. In FY14 and FY15, an incremental capacity of 7.5 mn units is likely

to be added at a total investment of 55-60 bn. Hero MotoCorp, Honda and Bajaj Auto are

expected to expand capacity the most; Honda expected to have the largest share (40%).

Major expansion plans of players(mn units) Installed capacity

estimate(Feb 2013)

Share basedon capacity

Feb 2013

Expected capacityadditions

FY14

Expected capacityadditions

FY15

Totalcapacity

FY15

Share based oncapacity

FY15

Hero MotoCorp 7.0 34% 0.8 1.0 8.8 31%

Bajaj Auto 5.6 27% 0.0 0.8 6.4 23%

Honda Motors 2.8 13% 1.2 1.8 5.8 20%

TVS Motors 3.115%

0.3 0.2 3.613%

India Yamaha Motors 0.8 4% 0.8 0.2 1.8 6%

Mahindra & Mahindra 0.6 3% 0.0 0.2 0.8 3%

Suzuki Motorcycles 0.5 2% 0.0 0.1 0.6 2%

Royal Enfield 0.2 1% 0.1 0.0 0.3 1%

Piaggio Vehicles 0.2 1% 0.2 0.0 0.3 1%

Total 20.7 100% 3.3 4.2 28.2 100%Source: CRISIL Research

Two-wheeler capacity utilisation expected to decline


13.3 15.4 15.8 16.9 18.412.0 13.5 20.7 24.0 28.2

90% 88%

76%70%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

0

5

10

15

20

25

30

FY11 FY12 FY13E FY14E FY15E

(mn)

Two-wheeler demand Two-wheeler supply Utilisation (RHS)


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10

Key Takeaways from the Conference Call

Volume outlook Demand pressures at the industry level are expected to continue. The management has

pegged industry growth in FY14 at a high single digit.

Management has indicated improved demand for its two-wheelers in April, supported by

the five-year warranty scheme introduced recently. Hero MotoCorp has announced

warranty of five years on all its two-wheelers - five years / 70,000 km on motorcycles,

whichever is earlier. Our channel checks indicate that others such as Honda are also

offering five-year warranty schemes.

Capex plan

Hero MotoCorp has planned a c apex of 25 bn to set up the following:

The fourth plant (Rajasthan) is expected to commence operations in Q4FY14, which will

take the total capacity to 7.7 mn units in FY14. The fifth plant (Gujarat) will commence

operations by Q2FY15, taking the total capacity to 8.5 mn units. This is expected to

increase Hero MotoCorps capacity share to 31% by FY15.

It will also spend on a global centre and R&D facility near Jaipur.

It spent 4.5 bn on capex in FY13.

Exports It started exporting two-wheelers to Africa and Latin America in Q4FY13. In FY13,

exports constituted hardly 3% of total two-wheeler sales.

Others It has embarked on a cost-cutting program; the benefits will be visible over the next 8-12

quarters.

Direct imports (largely US$ denominated) constitute 5.5% of sales, while indirect imports

are 9.5% of sales of which 50% is yen denominated; 60% of indirect imports have a

quarter lag.

R&D as a percentage of sales was 0.4% in FY13; the management expects it to be 1-

1.25% going forward. It has given advances of 1.3 bn to the technology partners.

Tax rate is expected to go up to 22-24% in FY14-15 from the current 16.3% as only 30%

of the Haridwar plants profits will be exempt from tax.

Inventory at the dealer level is 4.5 weeks currently compared to 5.5 weeks as of

December 2012.

Scooter capacity is 60,000/month.

The company added 500 touch points in FY13 taking the total to 5,500 touch points (800

full-fledged dealers). It plans to add another 500 touch points in FY14.

Its captive financing arm (where Hero MotoCorp has a 40% stake) had a soft launch at

one dealership in Delhi. It expects to cover 35 dealerships by May 2013, 90 by July

2013, 190 by FY14 and 400-450 by FY15. It expects its loan book to increase to 70 bn

by FY17 (including financing of two-wheelers and SME financing). We have not factored

this in our forecast.


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Hero MotoCorp Ltd

11

Earnings Estimates Revised DownwardsFY14E FY15E

Particulars Unit Old New % change Old New % changeVolume (two-wheelers) 6,600,989 6,510,025 -1.4% 7,152,213 7,035,109 -1.6%Operating income ( mn) 264,517 260,872 -1.4% 296,637 291,780 -1.6%EBIT ( mn) 26,946 25,019 -7.2% 35,823 33,478 -6.5%EBIT margin % 10.2 9.6 -60bps 12.1 11.5 -60bpsPAT ( mn) 23,876 21,689 -9.2% 29,997 28,053 -6.5%PAT margin % 9.0 8.3 -71bps 10.1 9.6 -50bpsEPS 119.6 108.6 -9.2% 150.2 140.5 -6.5%

Source: CRISIL Research estimates

Reasons for changes in estimates

Line item FY14 FY15Revenues Lowered volume estimate to 7.2% following weak demand on

account of (i) poor consumer sentiment and (ii) downwardrevision in the GDP estimate

Realisation growth estimate unchanged at 2.4%

Lowered volume growth estimate to 8.1% from 8.4% Realisation growth estimate unchanged at 3.5%

EBIT margins We expect EBIT margin to decline by 60 bps each in FY14 and FY15 on account of stiff competition which compels thecompany to offer freebies such as warranty schemes

PAT margins Lowered following downward revision in EBIT margin estimates


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12

Valuation Grade: 3/5

We have lowered the discounted cash flow-based fair value to 1,684 from 1,842 per share

following a downward revision in earnings estimates. At the current market price of 1,618,

the valuation grade is 3/5 .

One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

P/E premium / discount to Nifty P/E movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

500

1,000

1,500

2,000

2,500

3,000

A p r -

0 7

A u g - 0

7

D e c - 0

7

A p r -

0 8

A u g - 0

8

D e c - 0

8

A p r -

0 9

A u g - 0

9

D e c - 0

9

A p r -

1 0

A u g - 1

0

D e c - 1

0

A p r -

1 1

A u g - 1

1

D e c - 1

1

A p r -

1 2

A u g - 1

2

D e c - 1

2

A p r -

1 3

( )

Hero MotoCorp 9x 12x 15x 18x 21x

0

100,000

200,000

300,000

400,000

500,000

600,000

A p r -

0 7

A u g - 0

7

D e c - 0

7

A p r -

0 8

A u g - 0

8

D e c - 0

8

A p r -

0 9

A u g - 0

9

D e c - 0

9

A p r -

1 0

A u g - 1

0

D e c - 1

0

A p r -

1 1

A u g - 1

1

D e c - 1

1

A p r -

1 2

A u g - 1

2

D e c - 1

2

A p r -

1 3

( mn)

EV 8x 10x 12x 14x

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

A p r -

0 7

A u g - 0

7

D e c - 0

7

A p r -

0 8

A u g - 0

8

D e c - 0

8

A p r -

0 9

A u g - 0

9

D e c - 0

9

A p r -

1 0

A u g - 1

0

D e c - 1

0

A p r -

1 1

A u g - 1

1

D e c - 1

1

A p r -

1 2

A u g - 1

2

D e c - 1

2

A p r -

1 3

Premium/Discount to NIFTY Median premium/discount to NIFTY

0

5

10

15

20

25

A p r -

0 7

A u g - 0

7

D e c - 0

7

A p r -

0 8

A u g - 0

8

D e c - 0

8

A p r -

0 9

A u g - 0

9

D e c - 0

9

A p r -

1 0

A u g - 1

0

D e c - 1

0

A p r -

1 1

A u g - 1

1

D e c - 1

1

A p r -

1 2

A u g - 1

2

D e c - 1

2

A p r -

1 3

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev


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Hero MotoCorp Ltd

13

CRISIL IER reports released on Hero MotoCorp Ltd

Date Nature of report

Fundamental

grade Fair value

Valuation

grade

CMP

(on the date of report)03-Dec-09 Initiating coverage 5/5 1,747 3/5 1,693

28-Jan-10 Q3FY10 result update 5/5 1,775 4/5 1,565

21-Apr-10 Q4FY10 result update 5/5 1,937 3/5 1,852

10- Aug-10 Q1FY11 result update 5/5 1,910 3/5 1,865

09- Nov-10 Q2FY11 result update 5/5 1,893 3/5 1,829

25-Feb-11 Q3FY11 result update 5/5 1,893 5/5 1,505

05-May-11 Q4FY11 result update 5/5 1,797 4/5 1,598

22-Jul-11 Q1FY12 result update 5/5 1,797 3/5 1,789

20-Sep-11 Detailed Report 5/5 1,797 2/5 2,201

25-Oct-11 Q2FY12 result update 5/5 1,797 2/5 2,071



20-Jul-12 Q1FY13 result update 5/5 2,023 3/5 2,082

25-Oct-12 Q2FY13 result update 5/5 1,939 3/5 1,838




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14

Annexure: Financials

# abridged financials

Source: CRISIL Research

Income statement Balance Sheet

( mn) FY11 FY12 FY13# FY14E FY15E ( mn) FY11 FY12 FY13# FY14E FY15EOperating income 197,302 238,789 237,681 260,872 291,780 LiabilitiesEBITDA 26,386 36,330 32,845 35,827 40,054 Equity share capital 399 399 399 399 399 EBITDA margin 13.4% 15.2% 13.8% 13.7% 13.7% Reserves 29,161 42,499 49,663 60,503 75,090 Depreciation 4,024 10,973 11,418 10,808 6,575 Minorities - - - - - EBIT 22,362 25,357 21,427 25,019 33,478 Net worth 29,561 42,898 50,062 60,902 75,490 Interest 254 213 119 117 117 Convertible debt - - Operating PBT 22,108 25,144 21,308 24,902 33,362 Other debt 327 165 165 165 165 Other income 2,744 3,510 3,984 3,265 3,070 Total debt 327 165 165 165 165 Exceptional inc/(exp) (805) (7) - - - Deferred tax liability (net) &PBT 24,048 28,647 25,292 28,168 36,432 def erred payment credit 17,052 19,226 4,482 2,083 2,083 Tax provision 4,769 4,866 4,110 6,479 8,379 Total liabilities 46,940 62,289 54,710 63,150 77,738 Minority interest - - - - - AssetsPAT (Reported) 19,279 23,781 21,182 21,689 28,053 Net fixed assets 16,255 17,431 21,931 22,027 29,223 Less: Exceptionals (805) (7) - - - Capital WIP 1,251 1,940 - 14,940 10,440 Adjusted PAT 20,084 23,788 21,182 21,689 28,053 Total fixed assets 17,507 19,371 21,931 36,967 39,662

Investments 6,520 6,145 6,145 6,145 6,145 Ratios Current assets

FY11 FY12 FY13# FY14E FY15E Inventory 5,249 6,756 6,368 7,647 8,554 Growth Sundry debtors 1,306 3,923 6,650 7,029 7,861 Operating income (%) 20.1 21.0 (0.5) 9.8 11.8 Loans and advances 7,575 8,005 13,655 14,348 16,048 EBITDA (%) (5.0) 37.7 (9.6) 9.1 11.8 Cash & bank balance 715 337 1,810 1,778 17,163

Adj PAT (%) (10.1) 18.4 (11.0) 2.4 29.3 Marketable securities 44,968 33,929 30,458 30,458 30,458 Adj EPS (%) (10.1) 18.4 (11.0) 2.4 29.3 Total current assets 59,814 52,950 58,941 61,260 80,084

Total current liabilities 61,448 36,600 41,707 43,536 48,698 Profitability Net current assets (1,634) 16,350 17,234 17,724 31,387 EBITDA margin (%) 13.4 15.2 13.8 13.7 13.7 Intangibles/Misc. expenditure 24,548 20,424 9,399 2,316 545 EBIT margin (%) 11.3 10.6 9.0 9.6 11.5 Total assets 46,940 62,289 54,710 63,150 77,738

Adj PAT Margin (%) 10.2 10.0 8.9 8.3 9.6 RoE (%) 62.6 65.7 45.6 39.1 41.1 Cash flowRoCE (%) 68.6 69.5 45.9 45.0 49.0 ( mn) FY11 FY12 FY13# FY14E FY15ERoIC (%) 140.9 92.9 64.1 52.5 59.2 Pre-tax profit 24,852 28,654 25,292 28,168 36,432

Total tax paid 10,756 (2,693) (18,854) (8,878) (8,379) Valuations Depreciation 4,024 10,973 11,418 10,808 6,575 Price-earnings (x) 16.4 13.8 15.5 15.1 11.7 Working capital changes 8,757 (29,401) (2,882) (522) 1,723 Price-book (x) 11.1 7.7 6.6 5.4 4.4 Ne t cas h fr om ope rations 48,389 7,534 14,973 29,576 36,351 EV/EBITDA (x) 10.7 8.1 9.0 8.3 7.0 Cash from investm entsEV/Sales (x) 1.4 1.2 1.3 1.1 1.0 Capital expenditure (29,009) (8,714) (2,954) (18,760) (7,500) Div idend pa you t r atio (%) 126.4 43.9 66.2 50.0 48.0 Investments and others (12,230) 11,414 3,471 - - Dividend yield (%) 7.4 3.2 4.3 3.3 4.1 Net cash from investments (41,239) 2,700 517 (18,760) (7,500)

Cash from financingB/S ratios Equity raised/(repaid) - - - - - Inventory days 12 13 11 14 14 Debt raised/(repaid) (333) (162) 0 (0) - Creditors days 78 46 49 51 51 Dividend (incl. tax) (24,369) (10,444) (16,060) (12,420) (15,422) Debtor days 2 6 10 10 10 Others (incl extraordinaries) (804) (6) 2,042 1,571 1,957 Working capital days (79) (50) (25) (21) (19) Net cash from financing (25,506) (10,612) (14,018) (10,849) (13,465) Gross asset turnover ( x) 7.6 8.5 9.3 8.2 6.2 Change in cash position (18,357) (378) 1,473 (33) 15,386 Net asset turnover (x) 12.2 14.2 12.1 11.9 11.4 Closing cash 715 337 1,810 1,778 17,163 Sales /operating as set s (x) 11.6 13.0 11.5 8.9 7.6 Current ratio (x) 1.0 1.4 1.4 1.4 1.6 Quarterly financialsDebt-equity (x) 0.0 0.0 0.0 0.0 0.0 ( mn) Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13Net debt/equity (x) (1.5) (0.8) (0.6) (0.5) (0.6) Operating Income 60,349 62,473 51,874 61,876 61,458 Interest coverage 87.9 - - - - Change (q-o-q) 0.1% 3.5% -17.0% 19.3% -0.7%

EBIT 6,448 6,334 4,297 4,954 5,843 Per share Change (q-o-q) 0.1% -1.8% -32.2% 15.3% 17.9%

FY11 FY12 FY13# FY14E FY15E EBIT margin 10.7% 10.1% 8.3% 8.0% 9.5% Adj EPS ( ) 100.6 119.1 106.1 108.6 140.5 PAT 6,036 6,155 4,406 4,879 5,742 CEPS 120.7 174.1 163.2 162.7 173.4 Adj PAT 6,036 6,155 4,406 4,879 5,742 Book value 148.0 214.8 250.7 305.0 378.0 Change (q-o-q) -1.5% 2.0% -28.4% 10.7% 17.7%Dividend ( ) 122.0 52.3 70.2 54.3 67.4 Adj PAT margin 10.0% 9.9% 8.5% 7.9% 9.3%

Actual o/s shares (mn) 199.7 199.7 199.7 199.7 199.7 Adj EPS 30.2 30.8 22.1 24.4 28.8


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CRISIL Research Team

President

Mukesh Agarwal CRISIL Research +91 22 3342 3035 [email protected]

Analytical Contacts

Sandeep Sabharwal Senior Director, Capital Market +91 22 4097 8052 [email protected]

Prasad Koparkar Senior Director, Industry & Customised Research +91 22 3342 3137 [email protected]

Binaifer Jehani Director, Customised Research +91 22 3342 4091 [email protected]

Manoj Mohta Director, Customised Research +91 22 3342 3554 [email protected]

Sudhir Nair Director, Customised Research +91 22 3342 3526 [email protected]

Mohit Modi Director, Equity Research +91 22 4254 2860 [email protected]

Jiju Vidyadharan Director, Funds & Fixed Income Research +91 22 3342 8091 [email protected]

Ajay D'Souza Director, Industry Research +91 22 3342 3567 [email protected]

Ajay Srinivasan Director, Industry Research +91 22 3342 3530 [email protected]

Rahul Prithiani Director, Industry Research +91 22 3342 3574 [email protected]

Business Development

Hani Jalan Director, Capital Market +91 22 3342 3077 [email protected]

Prosenjit Ghosh Director, Industry & Customised Research +91 22 3342 8008 [email protected]

Deepak Mittal Associate Director, Funds & Fixed Income Research +91 22 3342 8031 [email protected]

Business Development Equity Research

Ahmedabad / MumbaiVishal Shah Regional Manager, Business DevelopmentEmail : [email protected] I Phone : +91 9820598908

Bengaluru / Chennai / HyderabadShweta Adukia Regional Manager, Business DevelopmentEmail : [email protected] I Phone : +91 9987855771

Delhi / Mumbai Arjun Gopalkrishnan Regional Manager, Business DevelopmentEmail : [email protected] I Phone : +91 9833364422

KolkataPriyanka Murarka Regional Manager, Business DevelopmentEmail : [email protected] I Phone : +91 9903060685


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CRISIL Research Ier Report Hero Honda Motors Q4FY13

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