Downgrade Hero MotoCorp to Underperform - Weak sales unlikely to change during festival season - CSEC Research

We downgrade Hero MotoCorp to underperform as in the June 2012 earnings call, Hero MotoCorp mentioned that they are building inventory at the plant and dealer end in anticipation of healthy sales during the festive season of Dussera & Diwali in October & November, respectively. This was based on their experience in the previous years. However, based on retail sales numbers & the prevailing mood, we opine that things are unlikely to change materially during the festival season.

Though monsoons picked up towards the end, the spatial and temporal distribution was not healthy with some key states getting poor rainfall and the Kharif crop is estimated to be 10% lower. This is likely to result in lower rural sales especially in areas of deficient rainfall. Our channel checks indicate that the slowdown which manifested in the urban areas initially, has now spread to the rural areas also, across all two wheeler brands. There is no waiting period for any brand, including HMSI's Dream Yuga 110cc motorcycle, though new products tend to have novelty value. We feel that apart from the poor monsoon spatial & temporal spread, the broad based economic slowdown in the last few quarters is manifesting itself in the consumer discretionary space.

Recommendation: The stock is trading at 13.5X FY14E consensus estimates with an EPS CAGR of 9%, which is likely to be revised downwards. Given the slow down for the industry, long lead time for exports with associated financial implications, uncertainties and the long term technology risks, we downgrade the stock to Underperform & will be sellers at every rise. Though consensus estimates have largely factored in the slowdown, the long term technology concerns, heightened competition and the lack of triggers will act as a deterrent for stock performance.

Source : Equity Bulls

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