crisil ier independent equity research · pdf fileour analysis is supported by inputs from our...

RESEARCH

CRISIL IER Independent Equity Research

Enhancing investment decisions

Hero MotoCorp Ltd

Detailed Report


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 – Analysis of 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).

CRISIL Fundamental Grade Assessment

CRISIL Valuation 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 (<-25% from CMP)

About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. CRISIL's majority shareholder is Standard and Poor's (S&P). Standard & Poor's, a part of McGraw Hill Financial, is the world's foremost provider of credit ratings. About CRISIL Research CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and analysis on the Indian economy, industry, capital markets and companies. We also conduct training programs to financial sector professionals on a wide array of technical issues. We are India's most credible provider of economy and industry research. Our industry research covers 86 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 5,000 primary sources, including industry experts, industry associations and trade channels. We play a key role in India's fixed income markets. We are the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country. We are also the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today the country's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the macro-economy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. Our talent pool comprises economists, sector experts, company analysts and information management specialists. CRISIL Privacy CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of McGraw Hill Financial you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view McGraw Hill Financial’s Customer Privacy Policy at http://www.mhfi.com/privacy.

Last updated: August, 2014 Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Disclaimer: This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially outside India or published or copied in whole or in part, for any purpose. As per CRISIL’s records, none of the analysts involved has any ownership / directorship in the company. However CRISIL or its associates may have commercial transactions with the company.

RESEARCH

Hero MotoCorp Ltd

Market leadership intact; volumes to revive in FY17

Fundamental Grade 5/5 (Excellent fundamentals)

Valuation Grade 4/5 (CMP has upside)

Industry Automobiles

1

April 29, 2016

Fair Value ₹3,251 CMP ₹2,897

For detailed initiating coverage report please visit: www.crisil.com CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

After a subdued 9MFY16, volumes of Hero MotoCorp Ltd (Hero) - India’s largest two-wheeler (2W) manufacturer – bounced back in the past three months. A confluence of growth impediments – subdued rural demand and competition across segments – led to 3% y-o-y decline in volumes in 9MFY16. However, successful launch of new scooters coupled with moderate uptick in demand led to 9% volume growth in Q4FY16. Going forward, expected revival in rural consumption, assuming normal monsoons, is likely to augment domestic 2W demand, particularly in the economy and executive segments. With sustained market leadership in these segments (~80% of domestic motorcycles), Hero is well poised to capitalise on industry revival. Further, low penetration of two-wheelers in rural areas spells long-term growth potential. Strong market positioning, healthy brand recall and wide rural reach are expected to enable Hero to benefit from this potential. Launch of new scooter models is likely to improve its positioning in the fast-growing segment. Nevertheless, weak positioning in the premium segment and competition across product categories are foremost challenges. We maintain the fundamental grade of 5/5. Industry growth to revive in FY17 led by uptick in rural consumption After reporting 3% y-o-y growth in FY16, the domestic 2W industry is expected to revive from H2FY17 onwards – we expect 9-11% y-o-y growth in FY17. Better farm incomes, assuming normal monsoons and sustained growth in urban consumption are seen as key growth catalysts. Lower cost of ownership due to subdued fuel prices and soft interest rates are likely to provide added impetus. In the longer run, two-wheeler volume is projected to register 8-10% CAGR over FY16-20E, with major thrust from the rural segment. Hero to ride on revival in rural demand and product launches Hero is expected to be a key beneficiary of an expected revival in rural demand on the back of its apex positioning in the economy and executive segments. Despite competition, the company maintains its competitive edge – 1) strong brands such as Splendor, Passion and Glamour, 2) wide distribution reach (~6,000+ retail points, highest amongst peers), and 3) established market positioning (72% and 48% share in the economy and executive segments, respectively) – which positions it well to capitalise on the long-term industry prospects. Positive response for the recently launched scooter brands - Maestro Edge and Duet - also augurs well for future prospects. Its domestic volume is expected to record 11.5% CAGR over FY16-18E, marginally higher than our industry forecasts. EBITDA margin expanded in FY16, limited scope for further expansion In FY16, EBITDA margin is likely to expand to 280 bps y-o-y to 15.5%, augmented by soft raw material prices (subdued input prices of steel, tyres and aluminium) and cost optimisation. While volume upturn is likely to lead to operating leverage benefits, margins have limited scope for further expansion - we project 20 bps increase over FY16-18E. Key challenges - weak positioning in the premium segment and intense competition Hero has a relatively weaker positioning in the fast growing premium segment (20% of domestic motorcycles). Emergence of new players (Royal Enfield, Mahindra & Mahindra, etc.) and successful product launches by existing players (Bajaj and TVS) have heightened competition. Thus, gaining market share in this key segment and maintaining leadership in other segments amidst intense competition remain monitorables. Fair value increased to ₹3,251 per share We have increased our revenue and earnings estimates for FY17-18. Consequently, we have revised our fair value to ₹3,251/share from ₹2,910/share. At the current market price of ₹2,897, our valuation grade is 4/5.

KEY FORECAST

(₹ mn) FY14 FY15 FY16E FY17E FY18E Operating income 2,53,135 2,75,327 2,78,298 3,16,472 3,58,054 EBITDA 35,533 34,895 43,211 50,032 56,077 Adj net income 20,743 25,209 30,639 35,617 39,637 Adj EPS (₹) 103.9 126.2 153.4 178.4 198.5 EPS growth (%) (2.1) 21.5 21.5 16.2 11.3 Dividend yield (%) 2.2 2.0 2.9 3.4 4.6 RoCE (%) 45.9 48.0 54.3 54.6 54.5 RoE (%) 39.0 41.4 43.2 43.2 42.7 PE (x) 28.4 23.4 19.2 16.5 14.9 P/BV (x) 10.5 9.0 7.7 6.6 6.1 EV/EBITDA (x) 15.6 16.1 13.0 11.2 9.9

CMP: Current market price Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICS NIFTY/SENSEX 7850/25607NSE/BSE ticker HEROMOTOCOFace value (₹ per share) 2Shares outstanding (mn) 199.7Market cap (₹ mn)/(US$ mn) 5,78,575/8,698Enterprise value (₹ mn)/(US$ mn) 5,52,858/8,31152-week range (₹)/(H/L) 3,172/2,251Beta 1.0Free float (%) 65.4%Avg daily volumes (30-days) 5,07,999Avg daily value (30-days) (₹ mn) 1,493

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-mHero MotoCorp 1% 13% 10% 22%CNX 500 4% 4% -3% -3%

ANALYTICAL CONTACT Bhaskar Bukrediwala [email protected] Hemali Dhame [email protected] Sayan Das Sharma [email protected] Client servicing desk +91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fund

amen

tal G

rade

Poor Fundamentals

ExcellentFundamentals

Stro

ngDo

wns

ide

Stro

ngU

psid

e

34.6% 34.6% 34.6% 34.6%

40.8% 38.5% 38.2% 41.9%

10.9% 13.4% 13.8%14.6%

13.7% 13.5% 13.4% 8.9%

0%10%20%30%40%50%60%70%80%90%

100%

Mar-15 Jun-15 Sep-15 Dec-15Promoter FII DII Others


2

Table 1: Hero MotoCorp - business segments Product / Segment Motorcycles Scooters Sales volume contribution (FY16)

86.5% 13.5%

Sales volume contribution (FY18E)

84.5% 15.5%

Product / service offering Key brands ■ Economy segment (100 cc) - HF Dawn and HF

Deluxe ■ Executive segment (>100 to <150 cc) – Splendor,

Passion , Glamour ■ Premium segment (150 cc and above) – Achiever,

CBZ, Hunk, Ignitor, Karizma

Pleasure, Maestro, Maestro Edge and Duet

Geographic presence Domestic and exports (Africa, Asia and Latin America) Market position ■ Largest player with 44% market share in the

motorcycle segment in FY16 ■ Strong position in the economy segment: 48%

share in FY16 ■ Market leader in the executive segment: 72% share

in FY16 ■ Weaker position in the premium segment: 6% share

in FY16 ■ Gaining foothold in exports: 8% share in FY16

Third largest player, with 17% market share as of FY16

Industry growth expectations 5% y-o-y in FY17 6-8% CAGR over FY16-20E

16-18% y-o-y in FY17 14-16% CAGR over FY16-20E

Sales growth (FY14-FY16 – 2-yr CAGR)

4.9%

Sales forecast (FY16-FY18 – 2-yr CAGR)

13.4%

Demand drivers ■ Better income and penetration in rural areas ■ Higher urban consumption ■ Softer interest rates, lower inflation and cost of

ownership

■ Continued shift in preference for scooters ■ Convenience in utility ■ New launches

Export demand to be driven by: ■ Lower penetration ■ Poor public infrastructure facilities ■ Improving per capita incomes

Key competitors Honda, Bajaj Auto, TVS Motors, Yamaha Motors among others Key monitorables / risks ■ Prolonged slowdown in consumer spending

■ Failure to ramp up presence in export markets Note: Classification by the industry body SIAM based on engine capacity in five categories. CRISIL Research classifies in three categories based on engine capacity, positioning and pricing.

Source: Company, CRISIL Research

RESEARCH

Hero MotoCorp Ltd

3

Grading Rationale

Hero beats industry headwinds to maintain market leadership, well poised to leverage on industry prospects After growing 8% y-o-y in FY15, domestic 2W volume growth moderated to 3% y-o-y in FY16.

Prolonged slowdown in rural spending led to muted domestic motorcycle volume in FY16.

Growth in scooters also moderated from FY15 levels (25% y-o-y), but remained in double

digits (12% y-o-y). Although Hero’s domestic 2W volume remained flat in FY16, it posted

strong volume growth in Q4FY16 (9% y-o-y versus a decline of 3% y-o-y in 9MFY16) and

maintained its market leadership in the domestic 2W industry. The company continues to

sustain its leadership in the economy segment with a dominant 48% share. It continues to

lead the executive segment (largest within domestic 2W industry) as well, with over 72%

share, supported by strong positioning of brands such as Splendor, Passion and Glamour.

While intense competition and weaker product positioning are posing challenges in the

premium segment of domestic motorcycles and scooters, the company is trying to combat

them by launching products (especially in scooters segment). The industry is expected to

recover in H2FY17, powered by higher consumption, both in rural areas (assuming normal

monsoon) and urban areas (where some resilience is already visible). The company is well

poised to benefit from the industry upturn owing to strong positioning in the key economy and

executive segments. Entry into newer geographies is likely to amplify growth in exports. Figure 1: Hero has sustained apex positioning in the domestic motorcycle market

Figure 2: New launches helped maintain market share in scooters

Source: Company, CRISIL Research Source: Company, CRISIL Research Structural changes to aid industry revival in H2FY17

The domestic 2W industry is expected to benefit from an upturn in structural drivers such as

urban consumption, lower inflation and softer interest rates. Lower cost of ownership,

stemming from subdued fuel prices and encouraging cues on the supply side (model launches

by OEMs and capacity expansion) should also spur growth. Higher government spending on

social infrastructure augurs well for the industry too. However, this is contingent on the

assumption of normal monsoon in FY17.

48% 48%46% 44% 45% 44%

7%

7%11%

14% 14% 12%

32% 32% 31%27% 25% 26%

8% 7%6%

6% 7%

8%

5% 5% 5%

8% 8%

9%

FY11 FY12 FY13 FY14 FY15 FY16

(%)

Hero Honda Bajaj TVS Others

17%17%

19% 19% 18%17%

43%47% 49%

53% 55% 55%

0% 0% 2%5% 5% 6%

21% 20%

15%13%

15% 15%

18%

16%16%

10% 8% 7%

0%

10%

20%

30%

40%

50%

60%


(%)

Hero Honda Yamaha TVS Others

Volume growth picked up

substantially in Q4FY16, after a

muted 9MFY16


4

Table 2: Structural factors to turn favourable in FY17 Two wheeler Impact 2014-15 2015-16E 2016-17P Overall demand F NF F Demand-side variables F NF F Rural demand NF NF F

Farm incomes NF NF F Rural wages NF NF N

Urban demand F N F Consumer confidence F N F

Cost of ownership N N F Fuel prices N F F Interest rates N N F Taxes and duties F NF N

Supply-side variables F N F New model launches F F F Capacity

expansion/constraints F N F F= favourable, N = Neutral, NF = Not favourable

Source: CRISIL Research Rural demand expected to keep the long-term story intact

Low penetration levels and expected rise in number of addressable households offer ample

scope for increasing rural offtake – also seen as a major growth driver in the long run. Table 3: Rural penetration lags urban levels

Name Rural Urban Addressable household (as a % of total household) (on the basis of a threshold income level)

~50% ~95%

Penetration (as a % of addressable household) ~42% ~67%

Source: CRISIL Research

The number of addressable households is likely to grow by 39 million in FY15-20 to reach

135-145 million. The government’s focus on driving economic activity in rural India, growth in

affordability and latent rural demand are expected to aid the rise in penetration. On the urban

side, we estimate addressable households to remain at ~97%, but penetration levels to

improve to ~80% by FY20.

RESEARCH

Hero MotoCorp Ltd

5

Table 4: Robust long-term growth potential for the 2W industry

Name Volume growth

(FY16-20E) Reasons Motorcycles 6%-8% ■ Growing rural consumption will improve demand for the economy and

executive segments

■ Improving urban consumption and newer products to drive demand for the premium segment

Scooters 14%-16% ■ Changing customers’ preferences

■ Greater convenience and utility

■ Gender neutral positioning (which has increased demand from women)

■ Enhanced product features and quality

Total 2W 8%-10%

Hero to ride on revival in economy and executive segments Hero remains the dominant player in the key economy and executive segments, together

constituting ~80% of the motorcycle category. However, slowdown in rural consumption,

following two years of sub-normal monsoons, has pulled down growth in both segments. Rural

consumption is expected to pick up in H2FY17, assuming normal rain, which bodes well for

these segments and Hero’s volume. Gaining market share in executive segment

Executive motorcycles form the largest segment of the domestic industry, despite posting

slowest pace of growth. Hero has the strongest brands – Splendor, Passion and Glamour –

and vast distribution reach, particularly in rural areas of North and East India. Notwithstanding

competitive pressure, the company has gained share in FY16 – increased to 72% in FY16

from 66% a year ago. We expect Hero to significantly draw on the growth prospects, given its

strong brands in this segment.

Figure 3: Continue to gain market share in executive segment Figure 4: Volume decline lower than that of the segment

Source: CRISIL Research Source: CRISIL Research

72.4 66.5 75.7

62.6 61.0 66.3 72.1

7.4 9.2

10.3

14.6 19.7 22.4

21.6 16.8 21.2

12.0 20.2 14.4

8.4 4.0 3.4 3.0 2.0 2.6 4.8 2.9 2.3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY16

Hero Honda Bajaj Others

22.3%

1.9%

9.6%

5.1%

-2.7%

-9.5%

12.4%

16.0%

-9.4%

2.4%

5.6%

-1.6%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


Executive segment growth Hero

Hero's growth was flat even though industry growth fell

due to its strong market

Market share improved to 72% in

FY16 from 66% in FY15


6

Strong presence in less-penetrated rural areas gives an edge

The company has a wide distribution network – over 6,300 touch points, higher than Honda

(~5,000) and TVS (~3,000). While Honda has wider footprint down South, Hero is particularly

strong in the less-penetrated rural areas of North and East India. Competition is a key challenge in the economy segment

Subdued farm income growth and product launches at attractive prices have prompted a shift

from the lower range of the executive segment (where Splendor and Passion are well-

positioned) towards the economy segment. Consequently, this segment has performed better

than the executive segment in FY16 – 17% y-o-y growth against 10% y-o-y decline in the

executive segment. Owing to the highly successful launch of CT100 by Bajaj (36% share) in

the economy segment, Hero’s segmental share slipped to 48% in FY16 from 54% in FY15.

Although the company maintains its leading position in the segment, intensifying competition

is a challenge. Table 5: New products impact market share Figure 5: Hero lost market share to Bajaj

Product Segment Price (‘000)

Market share FY15

%

Market share

FY16 % Bajaj CT 100 Economy ~₹37 NA 24.4 Platina Economy ~₹45 23.5 11.4 Hero HF Series Economy ~₹38 53.9 48.3 Splendor Executive ~₹50 38.5 42.3 Passion Executive ~₹47 20.8 19.4 Economy 19.5 22.8 Executive 61.8 56.1


Weak product positioning in premium segment to affect Hero’s volume growth and market share Even as the premium segment grew 13% y-o-y in FY16, weak product positioning and

competitive pressure dragged down Hero’s growth by 17.6%. In contrast, the industry reported

robust growth, driven by rising urban incomes and consumption. The premium segment also

garnered higher share in domestic motorcycles – 21% in FY16, up ~250bps y-o-y – owing to

better quality of products and technology, deployed by both, existing and new players.

However, Hero was unable to improve its product positioning after it split with Honda due to

lack of technological advantage and brand positioning in this segment. As a result, its market

share fell ~215 bps to 5.8% in FY16.

43.5 46.4 44.7

53.2 56.4

53.3 48.1

30.2

24.7

28.7 24.9 24.2 24.9 35.6

26.3

28.8

26.6 21.9

19.4 21.8

16.3

-

10.0

20.0

30.0

40.0

50.0

60.0

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY16

(%)

Hero Bajaj Others

RESEARCH

Hero MotoCorp Ltd

7

Figure 6: Weak positioning eroded Hero’s market share in the segment


Hero plans to launch three other versions of its motorcycles, along with HX250R. However,

the success of these models is a monitorable. ‘Technology’ is key to success in this segment – Hero taking several initiatives ■ In FY15, Hero commenced operations at its R&D Centre at Kukus, Rajasthan with

600 engineers.

■ Hero has appointed Dr. Markus Braunsperger from BMW, Germany as its chief

technology officer.

■ Despite several steps initiated towards technological development, Hero’s ability to either

build in-house technology or enter into further technological tie-ups and improve its

product acceptability would determine its success. This remains a key monitorable.

Product launches to bolster positioning in scooter segment Hero’s market share in the domestic scooters segment dropped to 19.1% in FY15 from 22.6%

in FY14, as it did not launch new products (maintained its two platforms - Maestro and

Pleasure since 2012) and due to strong competition. However, in H2FY16, Hero launched a

new platform viz. Hero Duet (developed in-house), which helped it gain market share in

Q4FY16. It also launched a new variant – Maestro Edge. Going ahead, it is expected to

launch new models such as Dare (125cc), ZIR (150cc) and Leap Hybrid (124cc petrol unit)

during FY17 and FY18. Further, there are plans of launching other premium scooters as well.

Product launches are likely to help Hero revive its aging product portfolio. It gained market

share (20% in Q4FY16 from 12% in Q2FY16; FY16 market share of 17%) after the launch of

new products during the festive season. While the positive consumer response is

encouraging, sustenance of this momentum in the coming quarters is a monitorable. We

expect the scooter segment to record 20% CAGR over FY16-18E.

19.6 20.4 19.4 16.0

11.0 7.9 5.8

46.0 48.2

42.1 40.6 37.1

35.0 35.2

4.1 3.2 4.6 7.3

11.5

16.2

22.2

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY16

(%)

Hero Honda Bajaj Royal Enfield TVS Others

Royal Enfield continues to gain

market share in the premium

segment from Bajaj, Honda and

Hero

Gained market share in the scooter

segment after the launch of Duet

and Maestro Edge models


8

Figure 7: Scooter segment to see traction in growth Figure 8: Hero’s share up after the launch of new products


Entry into new markets to bolster export growth Despite India’s 2W exports increasing 18% y-o-y in FY15, Hero’s share remained ~9%.

Growth was muted in FY16 due to industry slowdown. Yet, over the long term, Hero has a

focused strategy on exports. While it currently caters to demand from ~22 countries, it plans to

strengthen its positioning in the existing markets and enter new markets. Setting up manufacturing facilities in attractive markets ■ Hero has set up a manufacturing facility with a capacity of 150,000 units in Bangladesh.

It holds a 55% stake (JV with Niloy Group) and has invested $40 mn.

■ Hero has invested $70 mn on a subsidiary in Colombia. It has an installed capacity of

78,000 units, which could scale up to 150,000 units. While the subsidiary serves existing

markets via 120 outlets, eventually it could cater to other markets in Latin America.

■ Hero also plans to set up assembly units in Kenya, Tanzania, and Uganda in East Africa.

We expect such expansions to help Hero optimise costs and drive product differentiation for

local customers.

Going ahead, demand from key target markets - Africa, Latin America and South-East Asia -

is a monitorable. While we forecast ~12-14% CAGR for Indian 2W exports over FY16E-20E,

Hero’s exports are estimated to grow marginally faster at ~15%.

687 752 819 901 1,009

23%

9%8%

10%12%

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

FY14 FY15 FY16 FY17E FY18E

('000)

Scooter Growth (RHS)

12% 13%

20%17%

23%21% 20% 19%

57% 57%

51% 52% 50%54% 53% 54%

32% 30% 29% 31%27% 26% 27% 26%

0%

10%

20%

30%

40%

50%

60%

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16Hero Honda Other

RESEARCH

Hero MotoCorp Ltd

9

Figure 9: Hero’s export growth highly sensitive to industry trends

Figure 10: Bajaj leads in exports; potential for Hero to improve share

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

34.3%29.0%

-0.9%6.5%

17.9% 5.1%

36.2%44.5%

-16.3% -18.8%

53.0%

1.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


Industry growth Hero growth

8.3 7.8 8.1 8.2 6.3 8.1 8.1

65.7 65.9 67.7 66.1 63.5 61.9 58.9

25.9 26.3 24.2 25.7 30.2 30.0

33.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY16

(%)

Hero Bajaj others


10

Key Risks Prolonged slowdown in rural consumption The economy and executive segments (largely driven by rural growth) form ~85% of Hero’s

revenue. If poor monsoons in FY17 dent growth in farm incomes, it could have an adverse

impact on demand for Hero’s products. Failure to maintain momentum in scooter sales Our assumptions hinge on growth traction in Hero’s scooter segment. The company’s inability

to scale up sales, due to competitive factors or lack of product acceptability, would adversely

impact its growth potential.

RESEARCH

Hero MotoCorp Ltd

11

Financial Outlook Revenue to record 13% CAGR over FY16E-18E Revenue is expected to grow at a CAGR of 13.4% over FY16-18E driven by volume growth of

11.5%. The motorcycle segment is expected to log a CAGR of 15%. Scooter sales are

expected to post ~11% CAGR, fuelled by product launches and better acceptability. Exports

are expected to grow ~17% in compounded terms. Figure 11: Revenue to record CAGR of ~13% over FY16-FY18E

Figure 12: New products to drive volume growth over the next few years

Source: CRISIL Research Source: CRISIL Research Figure 13: Growth in blended realisation to remain tepid Figure 14: Motorcycle segment to be major contributor


253 275 278 316 358

5.6%

8.8%

1.1%

13.7% 13.1%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-

50

100

150

200

250

300

350

FY14 FY15 FY16E FY17E FY18E

(₹ bn)

Operating Income Growth (RHS)

6.25 6.63 6.63 7.41 8.25

2.8%

6.2%

0.0%

11.8% 11.3%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00


(mn units)

Volumes Growth (RHS)

40,092 40,396 40,638 41,654 42,607

2.5%

0.8% 0.6%

2.5% 2.3%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

38,500

39,000

39,500

40,000

40,500

41,000

41,500

42,000

42,500

43,000


(₹)

Realisation Growth (RHS)

17% 17% 17% 17% 18%

67% 66% 65% 64% 63%

3% 2% 2% 2% 2%

11% 11% 12% 13% 14%

2% 3% 3% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16E FY17E FY18EEconomy Executive Premium Scooters Export


12

EBITDA margin to improve ~20 bps over FY16E-18E We expect EBITDA to increase at ~13% CAGR over FY16-18E and margin to improve by ~20

bps to 15.7% in FY18E. Operating margins are expected to expand 180 bps y-o-y to 15.5%

driven by soft material prices, and benefits of cost optimisation programme. While we expect

material prices to remain benign, we see limited scope for further expansion in margins going

ahead. Figure 15: EBITDA improved on cost optimising program Figure 16: EBITDA margins have been expanding

*Improvement in EBITDA margin in FY16 includes benefits of lower raw material cost


PAT to increase ~14% over FY16E-18E Growth in EBITDA is likely to drive 14% CAGR in PAT over FY16-18E. However, lower other

income is likely to limit this expansion. Figure 17: PAT and PAT margin trend

Source: Company, CRISIL Research

35,533 34,895 43,211 50,032 56,077

14.0%12.7%

15.5% 15.8% 15.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

10,000

20,000

30,000

40,000

50,000

60,000


(₹ mn)

EBITDA EBITDA margin (RHS)

9,348 8,218 8,384 10,479 10,834 11,399

13.5%12.0% 12.3%

15.1%15.8% 15.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

(₹ mn)


20,743 25,209 30,639 35,617 39,637

8.2%9.2%

11.0% 11.3% 11.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000


(₹ mn)

Adj PAT Adj PAT margin (RHS)

RESEARCH

Hero MotoCorp Ltd

13

Management Overview CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Strong and experienced management Owned by the Munjal Group, Hero MotoCorp is one of the the largest 2W companies. The top

management, highly experienced in the industry, includes –

■ Pawan Munjal, Chairman, Managing Director and CEO, is responsible for growth and

strategic planning for the entire group. He has managed to achieve technological

excellence in the company's operations. He is also on the board of Indian Institute of

Management, Lucknow and Indian School of Business.

■ Sunil Kant Munjal was appointed Joint Managing Director effective August 2011. He is

also on the Board of Indian School of Business, Hyderabad and visiting faculty at various

business schools and corporates.

The long-standing association of top management members with the company fosters

continuity and depth of management and institutionalised knowledge.

A professional set-up and a strong second line Hero’s management has adopted a professional approach by inducting various professionals

from the industry, at senior and mid-management levels to steer the company to the next level

of growth. The second line of management also has a long association with the company. A

fair degree of autonomy in decision making at the respective business unit level, provides

significant operational flexibility.

Led by strong, experienced top

management and aptly supported

by a professional second line


14

Corporate Governance CRISIL’s fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses the

shareholding structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a company’s corporate governance.

Overall, corporate governance at Hero meets the statutory requirements, supported by

reasonably good board practices and involvement of an independent board. Board composition - complying with listing norms

Hero’s board has 11 members, with seven independent directors, which meets the

requirements under clause 49 of SEBI’s listing guidelines. The board brings to the table sector

expertise relevant to the business and diversified technical, business and administrative

experience. Independent directors of repute

The well-rounded board includes independent directors across various fields such as

corporate affairs, finance, public service, entrepreneurship, technology, amongst others.

Independent directors have vast experience in their respective domains. Some of the directors

are M Damodaran (former head of SEBI), Pradeep Dinodia, Ravi Nath (Supreme Court

advocate), Dr. Anand Burman (Chairman – Dabur Ltd), Shobhana Kaminee (Entrepreneur –

Director at Apollo Hospital). Good quality of earnings; satisfactory disclosure levels ■ Hero’s quality of earnings is good, based on the following factors:

– The company has generated positive operating cash flows in the past eight years despite incurring capex.

– Debtor and inventory days rose slightly, while creditor days fell due to business requirements.

■ The company has consistently paid dividends over the past few years – dividend payout

has been higher than 50% in the past five years.

■ In our opinion, disclosure levels are satisfactory based on publicly available information

such as quarterly analyst presentations, annual reports, content on website, quarterly

conference calls and other public documents.

Hero has good corporate

governance practices

RESEARCH

Hero MotoCorp Ltd

15

Valuation Grade: 4/5 We have revised our earnings forecasts for FY16-18 and raised our fair value to ₹3,251 per

share from ₹2,910 per share. The fair value implies P/E multiples of 18.2x and 16.4x in FY17E

and FY18E, respectively. At the current market price of ₹2,897, our valuation grade is 4/5.

Key DCF assumptions We have considered the discounted value of the firm’s estimated free cash flow from FY17E

to FY26E. We have assumed a terminal growth rate of 3% beyond the explicit forecast period

until FY26. WACC computation

FY17E-26E Terminal value Cost of equity 12.1% 12.1% Cost of debt (post tax) 7.3% 6.7% WACC 12.8% 12.8% Terminal growth rate 3.0%

Sensitivity analysis to terminal year EBITDA margin and terminal growth rate

Terminal growth rate

Term

inal

yea

r EB

ITD

A

mar

gin

1% 2% 3% 4% 5%

14.3% 2,820 2,933 3,069 3,236 3,447

15.3% 2,895 3,015 3,160 3,338 3,561

16.3% 2,971 3,098 3,251 3,439 3,676

17.3% 3,046 3,181 3,342 3,541 3,790

18.3% 3,122 3,263 3,433 3,642 3,905

Source: CRISIL Research estimates One-year forward P/E band One-year forward EV/EBITDA band

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

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

Jan-

12M

ar-1

2Ju

n-12

Aug-

12N

ov-1

2Ja

n-13

Apr

-13

Jul-1

3Se

p-13

Dec

-13

Feb

-14

May

-14

Jul-1

4O

ct-1

4D

ec-1

4M

ar-1

5Ju

n-15

Aug-

15N

ov-1

5Ja

n-16

Apr

-16

(₹)

Hero MotoCorp 12x 15x18x 21x 24x

0

2,00,000

4,00,000

6,00,000

8,00,000

10,00,000

12,00,000

Jan-

12M

ar-1

2Ju

n-12

Aug-

12N

ov-1

2Ja

n-13

Apr

-13

Jul-1

3Se

p-13

Dec

-13

Feb

-14

May

-14

Jul-1

4O

ct-1

4D

ec-1

4M

ar-1

5Ju

n-15

Aug-

15N

ov-1

5Ja

n-16

Apr

-16

(₹ mn)

EV 8x 12x 16x 20x

Fair value revised to ₹3,251

per share


16

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

Source: NSE, CRISIL Research Source: NSE, CRISIL Research Share price movement Fair value movement since initiation

-Indexed to 100

Source: NSE, CRISIL Research Source: NSE, BSE, CRISIL Research Peer comparison

M. cap (₹ mn)

Price earnings ratio (P/E) Price to book ratio (P/B) RoE EV/EBITDA

Company FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18EHero MotoCorp Ltd 492,919 15.9 14.1 12.7 6.3 5.3 4.5 41.8 39.5 37.6 11.0 9.7 8.8 Bajaj Auto Ltd 677,119 17.8 15.7 13.7 5.2 4.4 3.8 32.1 30.6 29.7 12.6 11.0 9.9 TVS Motor Co Ltd 136,683 30.9 20.3 15.1 8.1 6.0 4.5 29.4 34.3 33.9 17.8 13.0 10.4 Median 17.8 15.7 13.7 5.2 4.4 3.8 29.4 30.6 29.7 12.6 11.0 9.9

-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%

Jan-

12M

ar-1

2Ju

n-12

Aug-

12N

ov-1

2Ja

n-13

Apr

-13

Jul-1

3Se

p-13

Dec

-13

Feb

-14

May

-14

Jul-1

4O

ct-1

4D

ec-1

4M

ar-1

5Ju

n-15

Aug-

15N

ov-1

5Ja

n-16

Apr

-16

Premium/Discount to CNX 500Median premium/discount to CNX 500

0

5

10

15

20

25

Jan-

12M

ar-1

2Ju

n-12

Aug-

12N

ov-1

2Ja

n-13

Apr-1

3Ju

l-13

Sep-

13D

ec-1

3F

eb-1

4M

ay-1

4Ju

l-14

Oct

-14

Dec

-14

Mar

-15

Jun-

15Au

g-15

Nov

-15

Jan-

16Ap

r-16

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev

0

50

100

150

200

250

300

350

400

450

500

Jan-

10

May

-10

Oct

-10

Mar

-11

Aug

-11

Dec

-11

May

-12

Oct

-12

Mar

-13

Jul-1

3

Dec

-13

May

-14

Sep

-14

Feb

-15

Jul-1

5

Dec

-15

Apr

-16

Hero MotoCorp NIFTY 500

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan-

10

May

-10

Oct

-10

Mar

-11

Aug

-11

Dec

-11

May

-12

Oct

-12

Mar

-13

Jul-1

3

Dec

-13

May

-14

Sep

-14

Feb

-15

Jul-1

5

Dec

-15

Apr

-16

('000)(₹)

TTQ (RHS) CRISIL Fair Value Hero MotoCorp

RESEARCH

Hero MotoCorp Ltd

17

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



01-Aug-13 Q1FY14 result update 5/5 ₹1,733 3/5 ₹1,820

24-Oct-13 Detailed Report 5/5 ₹1,882 3/5 ₹2,085


02-Jun-14 Q4FY14 result update 5/5 ₹2,033 2/5 ₹2,391

08-Aug-14 Q1FY15 result update 5/5 ₹2,433 3/5 ₹2,592

03-Nov-14 Q2FY15 result update 5/5 ₹3,090 3/5 ₹3,011



01-Sep-15 Q1FY16 result update 5/5 ₹2,729 3/5 ₹2,384

03-Nov-15 Q2FY16 result update 5/5 ₹2,729 3/5 ₹2,583

07-Mar-16 Q3FY16 result update 5/5 ₹2,910 3/5 ₹2,836

29-Apr-16 Detailed report 5/5 ₹3,251 4/5 ₹2,897


18

Company Overview Incorporated in 1984, Hero Honda (now known as Hero MotoCorp) was promoted through a

joint venture between India’s Hero Group and Japan’s Honda Motor Company. Under that

arrangement, Honda provided technical support to Hero MotoCorp in return for royalty. In

January 2011, Honda transferred its entire 26% stake in Hero to the promoters, thereby

terminating the joint venture. With effect from April 2011, Hero Honda Motors has been

renamed Hero MotoCorp Ltd. In FY16, it sold 6.6 mn two-wheelers. Manufacturing unit

The company has four manufacturing facilities - Haryana (Dharuhera and Gurgaon, set up in

1985 and 1997, respectively), Uttarakhand (Haridwar, set up in 2008) and Rajasthan

(Neemrana set up in 2015). Its total annual manufacturing capacity is 8 mn as of FY16. It

plans to set up the fifth plant in Gujarat and one in Andhra Pradesh subsequently. It has

commenced operations at Global Parts Center in Neemrana and R&D center in Kukus,

Rajashtan. Internationally, it plans to set up manufacturing facilities in Bangladesh and

Columbia.

Product profile

Motorcycles and scooters constitute 86.5% and 13.5%, respectively, of the company’s overall

sales volume in FY16.

Segment Motorcycles 100 cc HF Dawn, HF Deluxe, Splendor Plus, Splendor, Passion, Passion Pro and variants 125 cc Glamour, Super Splendor and variants 150 cc & above Premium brands – Hunk, CBZ Xtreme, Karizma, Impulsor, Ignitor Segment Scooters 100 cc Pleasure 110 cc Maestro, Duet

Distribution network Hero has a very strong distribution network, with ~6,000 customer touch points - a mix of

dealers and service centres across India. Milestones

1983 Signed joint collaboration agreement with Honda Motor Co. Ltd of Japan

1984 Hero Honda Motors Ltd incorporated

1985 First motorcycle - CD 100 - rolled out

1994 New motorcycle model - Splendor - introduced; 1,000,000th motorcycle produced

1997 Hero MotoCorp's second manufacturing plant in Gurgaon inaugurated

2003 Became the first Indian company to cross the cumulative 7 mn sales mark

2004 Renewed joint technical agreement with Honda Motors Company, Japan

2005 First scooter model from Hero MotoCorp - Pleasure – introduced

Received ‘India's most preferred two-wheeler brand’ award from CNBC Awaaz in the automobiles category

2006 One of the eight Indian companies to enter Forbes’ top-200 list of world's most reputed companies

2009 Received 'Two Wheeler Manufacturer of the Year' award from NDTV Profit Car & Bike Awards 2009

RESEARCH

Hero MotoCorp Ltd

19

2010 Awarded ‘Company of the Year" by ET awards for corporate excellence

Awarded 'Two Wheeler Manufacturer of the Year’ by NDTV Profit Car & Bike Awards 2010

2011 Honda transferred its entire 26% stake in Hero MotoCorp to Munjals, bringing an end to the joint venture. After this, the company was renamed Hero MotoCorp Ltd

2012 Entered into a strategic partnership with US sportbikes maker EBR

Entered into an alliance with AVL, Austria for engine design and development

2013 Entered into an alliance with Engines Engineering, Italy for engine design

2014 Entered Africa and Central America, Bangladesh and Turkey

Investment of 49% in strategic technological partner Erik Buell Racing for $25mn

Launched retail arm - Hero Fincorp Ltd

Initiated cost-cutting measure – Leap 20 - to bring high level of innovation

Formed a JV in partnership with Magnetti Marelli to develop next gen 2W fuelling system

2015 Commenced operations at fourth plant and Global parts center at Neemrana, Rajashtan; R&D Center at Kukus, Rajasthan

Technological partner – EBR - declared bankrupcy


20

Annexure: Financials


Income statement Balance Sheet(₹ mn) FY14 FY15 FY16E FY17E FY18E (₹ mn) FY14 FY15 FY16E FY17E FY18EOperating income 2,53,135 2,75,327 2,78,298 3,16,472 3,58,054 # LiabilitiesEBITDA 35,533 34,895 43,211 50,032 56,077 Equity share capital 399 399 399 399 399 EBITDA margin 14.0% 12.7% 15.5% 15.8% 15.7% Reserves 55,836 65,186 75,910 88,376 96,303 Depreciation 11,076 5,405 4,285 4,805 5,512 Minorities - - - - - EBIT 24,458 29,490 38,926 45,227 50,565 Net worth 56,235 65,585 76,309 88,775 96,703 Interest 118 117 28 - - Convertible debt - - - Operating PBT 24,339 29,373 38,898 45,227 50,565 Other debt - 1,000 492 - - Other income 4,266 5,152 3,834 4,242 4,487 Total debt - 1,000 492 - - Exceptional inc/(exp) 276 (1,803) - - - Deferred tax liability (net) (1,060) (735) (735) (735) (735) PBT 28,881 32,722 42,732 49,469 55,052 Total liabilities 55,175 65,850 76,066 88,040 95,967 Tax provision 7,862 9,316 12,093 13,851 15,414 AssetsMinority interest - - - - - Net f ixed assets 18,974 28,509 34,998 42,693 47,422 PAT (Reported) 21,019 23,406 30,639 35,617 39,637 Capital WIP 7,159 5,275 5,500 7,000 3,241 Less: Exceptionals 276 (1,803) - - - Total fixed assets 26,133 33,784 40,498 49,693 50,663 Adjusted PAT 20,743 25,209 30,639 35,617 39,637 Investments 6,536 6,627 6,627 6,627 6,627

Current assetsRatios Inventory 6,696 8,614 9,912 11,272 12,753

FY14 FY15 FY16E FY17E FY18E Sundry debtors 11,406 13,718 15,249 17,341 19,619 Growth Loans and advances 7,121 11,292 11,414 13,450 15,217 Operating income (%) 5.6 8.8 1.1 13.7 13.1 Cash & bank balance 687 1,545 2,138 4,096 10,807 EBITDA (%) 7.9 (1.8) 23.8 15.8 12.1 Marketable securities 35,034 25,171 25,171 25,171 25,171 Adj PAT (%) (2.1) 21.5 21.5 16.2 11.3 Total current assets 60,944 60,341 63,884 71,330 83,568 Adj EPS (%) (2.1) 21.5 21.5 16.2 11.3 Total current liabilities 44,824 39,956 34,943 39,610 44,891

Net current assets 16,120 20,385 28,941 31,720 38,677 Profitability Intangibles/Misc. expenditure 6,386 5,055 - - - EBITDA margin (%) 14.0 12.7 15.5 15.8 15.7 Total assets 55,175 65,850 76,066 88,040 95,967 EBIT margin (%) 9.7 10.7 14.0 14.3 14.1 Adj PAT Margin (%) 8.2 9.2 11.0 11.3 11.1 RoE (%) 39.0 41.4 43.2 43.2 42.7 Cash flowRoCE (%) 45.9 48.0 54.3 54.6 54.5 (₹ mn) FY14 FY15 FY16E FY17E FY18ERoIC (%) 54.2 56.7 54.6 54.6 56.1 Pre-tax profit 28,605 34,525 42,732 49,469 55,052

Total tax paid (10,246) (8,992) (12,093) (13,851) (15,414) Valuations Depreciation 11,076 5,405 4,285 4,805 5,512 Price-earnings (x) 28.4 23.4 19.2 16.5 14.9 Working capital changes (734) (13,270) (7,964) (821) (246) Price-book (x) 10.5 9.0 7.7 6.6 6.1 Net cash from operations 28,702 17,668 26,961 39,602 44,903 EV/EBITDA (x) 15.6 16.1 13.0 11.2 9.9 Cash from investmentsEV/Sales (x) 2.2 2.1 2.0 1.8 1.6 Capital expenditure (9,712) (11,725) (5,945) (14,000) (6,482) Dividend payout ratio (%) 61.8 51.2 55.6 55.6 68.4 Investments and others (4,871) 9,773 - - - Dividend yield (%) 2.2 2.0 2.9 3.4 4.6 Net cash from investments (14,583) (1,952) (5,945) (14,000) (6,482)

Cash from financingB/S ratios Equity raised/(repaid) - - - - - Inventory days 12 15 17 17 17 Debt raised/(repaid) (210) 1,000 (508) (492) - Creditors days 49 49 42 42 42 Dividend (incl. tax) (15,199) (14,219) (19,915) (23,151) (31,710) Debtor days 15 17 19 19 19 Others (incl extraordinaries) 628 (1,639) - 0 0 Working capital days (29) (17) (3) 2 3 Net cash from financing (14,781) (14,858) (20,423) (23,644) (31,710) Gross asset turnover (x) 7.6 6.8 5.4 5.0 4.8 Change in cash position (662) 858 593 1,958 6,712 Net asset turnover (x) 13.4 11.6 8.8 8.1 7.9 Closing cash 687 1,545 2,138 4,096 10,807 Sales/operating assets (x) 10.5 9.2 7.5 7.0 7.1 Current ratio (x) 1.4 1.5 1.8 1.8 1.9 Debt-equity (x) 0.0 0.0 0.0 0.0 0.0 Quarterly financialsNet debt/equity (x) (0.6) (0.4) (0.4) (0.3) (0.4) (₹ mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16Interest coverage (EBIT/ Interest) 207 252 1,399 - - Operating Income 68,393 67,939 69,553 68,371 72,948Interest coverage (EBITDA/Interest) 301 298 1,553 - - Change (q-o-q) -1.1% -0.7% 2.4% -1.7% 6.7%

EBIT 7,380 7,486 9,449 9,744 10,260Per share Change (q-o-q) -14.2% 1.4% 26.2% 3.1% 5.3%

FY14 FY15 FY16E FY17E FY18E EBIT margin 10.8% 11.0% 13.6% 14.3% 14.1%Adj EPS (₹) 103.9 126.2 153.4 178.4 198.5 Reported PAT 5,830 4,765 7,503 7,721 7,959 CEPS 159.3 153.3 174.9 202.4 226.1 Adj PAT 5,830 6,316 7,503 7,721 7,959 Book value 281.6 328.4 382.1 444.5 484.2 Change (q-o-q) -23.6% 8.3% 18.8% 2.9% 3.1%Dividend (₹) 65.1 60.0 85.2 99.1 135.7 Adj PAT margin 8.5% 9.3% 10.8% 11.3% 10.9%Actual o/s shares (mn) 199.7 199.7 199.7 199.7 199.7 Adj EPS 29.2 31.6 37.6 38.7 39.9

RESEARCH

Hero MotoCorp Ltd

21

Focus Charts Leadership position in motorcycles Revenue to grow ~14% CAGR over FY16E-18E

Source: CRISIL Research Source: CRISIL Research EBITDA margin to remain rangebound Return ratios to expand further

Source: Company, CRISIL Research Fair value movement since initiation Share price movement

-Indexed to 100

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

48% 48%46% 44% 45% 44%

7%

7%11%

14% 14% 12%

32% 32% 31%27% 25% 26%

8% 7%6%

6% 7%

8%

5% 5% 5%

8% 8%

9%


(%)

Hero Honda Bajaj TVS Others

253 275 278 316 358

5.6%

8.8%

1.1%

13.7% 13.1%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-

50

100

150

200

250

300

350


(₹ bn)

Operating Income Growth (RHS)

35,533 34,895 43,211 50,032 56,077

14.0%12.7%

15.5% 15.8% 15.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

10,000

20,000

30,000

40,000

50,000

60,000


(₹ mn)


39.0 41.4 42.4 41.8 41.0

45.9 48.0 51.3 51.6 50.8

-

10.0

20.0

30.0

40.0

50.0

60.0


(%)

RoE (%) RoCE (%)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan-

10

May

-10

Oct

-10

Mar

-11

Aug

-11

Dec

-11

May

-12

Oct

-12

Mar

-13

Jul-1

3

Dec

-13

May

-14

Sep

-14

Feb

-15

Jul-1

5

Dec

-15

Apr

-16

('000)(₹)

TTQ (RHS) CRISIL Fair Value Hero MotoCorp

0

50

100

150

200

250

300

350

400

450

500

Jan-

10

May

-10

Oct

-10

Mar

-11

Aug

-11

Dec

-11

May

-12

Oct

-12

Mar

-13

Jul-1

3

Dec

-13

May

-14

Sep

-14

Feb

-15

Jul-1

5

Dec

-15

Apr-1

6

Hero MotoCorp NIFTY 500


This page is intentionally left blank

RESEARCH

This page is intentionally left blank


CRISIL Research Team

Senior Director

Manish Jaiswal CRISIL Research +91 22 3342 8290 [email protected]

Analytical Contacts

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 Damle Director, Customised Research +91 22 3342 3342 [email protected]

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

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

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

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

Bhaskar S. Bukrediwala Director +91 22 3342 1983 [email protected]

Miren Lodha Director +91 22 3342 1977 [email protected]

Business Development

Prosenjit Ghosh Director, Industry & Customised Research +91 99206 56299 [email protected]

Megha Agrawal Associate Director +91 98673 90805 [email protected]

Neeta Muliyil Associate Director +91 99201 99973 [email protected]

Dharmendra Sharma Associate Director (North) +91 98189 05544 [email protected]

Ankesh Baghel Regional Manager (West) +91 98191 21510 [email protected]

Sonal Srivastava Regional Manager (West) +91 98204 53187 [email protected]

Sarrthak Sayal Regional Manager (North) +91 95828 06789 [email protected]

Priyanka Murarka Regional Manager (East) +91 99030 60685 [email protected]

Sanjay Krishnaa Regional Manager (Tamil Nadu & AP) +91 98848 06606 [email protected]

RESEARCH

Our Capabilities

Making Markets Function Better

Economy and Industry Research ■ Largest team of economy and industry research analysts in India

■ Acknowledged premium, high quality research provider with track record spanning two decades

■ 95% of India’s commercial banking industry by asset base uses our industry research for credit decisions

■ Coverage on 86 industries: We provide analysis and forecast on key industry parameters including demand, supply,prices, investments and profitability, along with insightful opinions on emerging trends and impact of key events

■ Research on sectors and clusters dominated by small and medium enterprises covering analysis of relative attractiveness,growth prospects and financial performance

■ High-end customised research for many leading Indian and global corporates in areas such as market sizing, demandforecasting, project feasibility and entry strategy

Funds and Fixed Income Research ■ Largest and most comprehensive database on India’s debt market, covering more than 18,000 securities

■ Largest provider of fixed income valuations in India

■ Provide valuation for more than ₹81 trillion (US$ 1,275 billion) of Indian debt securities

■ Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain 37 standardindices and over 100 customised indices

■ Ranking of Indian mutual fund schemes covering 75% of assets under management and ₹9 trillion (US$ 144 billion)by value

■ Business review consultants to The Employees’ Provident Fund Organisation (EPFO) and The National Pension System(NPS) Trust in monitoring performance of their fund managers

Equity and Company Research ■ Assigned the first IPO grade in India; graded more than 100 IPOs till date

■ Due Diligence and Valuation services across sectors; executed close to 100 valuation assignments

■ Due Diligence, IPO Grading and Independent Equity Research for SME companies planning to list or already listed in NSEEmerge platform

■ First research house to release exchange-commissioned equity research reports in India; covered 1,488 firms listed andtraded on the National Stock Exchange

Executive Training ■ Conducted 1200+ training programs on a wide spectrum of topics including credit, risk, retail finance, treasury, and

corporate advisory; trained more than 24,000 professionals till date

■ Training programs being conducted in India, Sri Lanka and Bangladesh through an extensive network of well-qualifiedfinancial professionals

Our Office

Ahmedabad 706, Venus Atlantis Nr. Reliance Petrol Pump Prahladnagar, Ahmedabad, India Phone: +91 79 4024 4500 Fax: +91 79 2755 9863

Hyderabad 3rd Floor, Uma Chambers Plot No. 9&10, Nagarjuna Hills, (Near Punjagutta Cross Road) Hyderabad - 500 482, India Phone: +91 40 2335 8103/05 Fax: +91 40 2335 7507

Bengaluru W-101, Sunrise Chambers, 22, Ulsoor Road, Bengaluru - 560 042, India Phone: +91 80 2558 0899

+91 80 2559 4802 Fax: +91 80 2559 4801

Kolkata Horizon, Block 'B', 4th Floor 57 Chowringhee Road Kolkata - 700 071, India Phone: +91 33 2289 1949/50 Fax: +91 33 2283 0597

Chennai Thapar House, 43/44, Montieth Road, Egmore, Chennai - 600 008, India Phone: +91 44 2854 6205/06

+91 44 2854 6093 Fax: +91 44 2854 7531

Pune 1187/17, Ghole Road, Shivaji Nagar, Pune - 411 005, India Phone: +91 20 2553 9064/67 Fax: +91 20 4018 1930

Gurgaon Plot No. 46 Sector 44 Opp. PF Office Gurgaon - 122 003, India Phone: +91 124 6722 000

Stay Connected | CRISIL Website | Twitter | LinkedIn |

YouTube | Facebook

CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai – 400076. India Phone: +91 22 3342 3000 | Fax: +91 22 3342 8088 www.crisil.com

CRISIL Ltd is a Standard & Poor's company

crisil ier independent equity research · pdf fileour analysis is supported by inputs from our...

Documents