Hero MotoCorp Q3FY12: Restricted Opportunity - HOLD - Way2Wealth Brokers

Restricted Opportunity: Yesterday's Growth is not today's Profit

HeroMotoCorp (HMCL) Q3FY12 Results have been broadly in line with expectations, albeit the margins QoQ have been impacted by 20bps on account of Raw Material easing offset by the depreciation of the Rupee & Higher than expected employee cost. Its no secret that the company has been gaining market share as against it peers and has Outperformed the market in the past 9 months. It continues to rule the roost among the 2W Economy segment with a marketshare of 74%, wherein there are inferences of proclaimed competition with Honda's entry in the 110cc market with its Dreamyuga bike.

In our view, HMSI's aggressive approach into the Indian market in terms of penetration rather than price is definitely a case to be factored upon as its targeting a 35% domestic market share by 2015 from the current 14%. But at the same time ample scale & uniqueness would be needed to outpace HMCL's brand loyalty. It is interesting to note that in 9MFY12, HMSI has been creating noise among the fast moving scooter segment, executive motorcycle segment and premium motorcycle segment, where BAL has a larger presence.

For HMCL, the flip side would be the High Base Effect amidst an environment of moderating retail demand, which has lowered 'realistically' since November 2011 on the back of inflation eating away rural disposable incomes. In order to deliver a sustainable superior performance HMCL would have to device a unique competitive strategy, else it would end up in just cannabilizing other profits. Therefore, post split R&D buildup by the company requires authetication.

VALUATION & ADVISE

A medium term trigger for the stock remains the company's Export plancard but the execution of the same cannot be factored in right now as it is on its initial stages of development.

We see Restricted Opportunity in HMCL, thereby we downgrade its P/E multiple to its long-term average of 15x from the earlier 16x. We have accounted for a 13% CAGR earnings visibility from FY11-FY13E. At our Target Multiple the stock is valued at Rs2085, its FY13E earnings of Rs139. We advise Investors a 'Hold'.

Source : Equity Bulls

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