Hero MotoCorp (HMCL)s 2QFY2016 results have come in ahead of our
estimates with the company positively surprising on the operating margin front.
Revenues declined by 1% yoy to Rs6,837cr, although they are marginally ahead of
our estimate of Rs6,657cr. While volumes declined by 7% yoy, the
realization/vehicle grew 6% yoy on account of price hikes, better product mix and
higher spare sales. Despite the subdued top-line, the company’s margins
improved by 230bp yoy to 15.8% (better than our estimate of 14.7%). Soft
commodity prices and cost control initiatives undertaken by the company under
the “Leap” program led to an improvement in margins. Given the strong
operating performance, the net profit for the quarter came in at Rs772cr, beating
our expectation of Rs726cr.
Outlook and valuation: HMCL’s volumes are likely to be subdued in the near
term, given the poor sentiments in rural areas, which account for about half of the
company’s sales. Deficient rainfall for a second consecutive year, and only a
moderate increase in the MSPs, have impacted rural income levels, and in turn
rural demand. Given the demand weakness, the company has also delayed its
capacity expansion plans by two quarters. We believe, in the domestic twowheeler
universe, HMCL is likely to be most impacted by the rural slowdown,
given that rural demand accounts for a higher proportion of HMCL’s overall
sales, vis-a- vis competition. Also, the margins are likely to decline in 2HFY2016,
given the increase in advertising and branding expenses. We have broadly
retained our earnings estimates for both FY2016 and FY2017. We continue to
maintain a Neutral view on the stock.

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