Hero MotoCorp - 2QFY2016 Result Update - Angel Broking

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 Rs. 6,837cr, although they are marginally ahead of our estimate of Rs. 6,657cr. 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 Rs. 772cr, beating our expectation of Rs. 726cr.

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.

Shares of HERO MOTOCORP LTD. was last trading in BSE at Rs.2594.95 as compared to the previous close of Rs. 2619.05. The total number of shares traded during the day was 16499 in over 1165 trades.

The stock hit an intraday high of Rs. 2644.35 and intraday low of 2581. The net turnover during the day was Rs. 43078776.

Source : Equity Bulls

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