Goldman Sachs maintains ‘buy’ on Hero MotoCorp

MUMBAI: Goldman Sachs has maintained its ‘buy’ recommendation on Hero MotoCorp, but has lowered its FY13E-15E EPS target by 9 per cent, mainly on lower industry demand outlook after the company announced quarterly results.

“Hero Moto reported 2QFY13 PAT of Rs 4.4 billion, down 27 per cent YoY and 28 per cent QoQ, 2.4 per cent above our and 1 per cent below Bloomberg consensus estimates. Sales volume was the main driver of the YoY decline, down 14 per cent, which resulted in 313 bps YoY and 186bps QoQ contraction in EBITDA margin from negative operating leverage,” the post result note said.

The brokerage has cut its 12-m FY14E P/E-based target price to Rs 2,218 from Rs 2,448 earlier.

“We like Hero Moto for its industry-leading returns on capital and solid rural distribution franchise. The stock trades at 13x FY14E EPS vs 14x 10-year historical average,” the report said.

Some of the key takeaways by Goldman Sachs from the management’s conference call include:

Significant correction in systemwide inventory over the last two months, currently at 6 weeks. The company expects this to come down further in October & November.

Rural demand was affected in the second quarter due to high inflation and the delayed monsoon. The company sees initial signs of a pickup in demand with sales during the 1st eight days of Navratri festival season at 200k units.

Management continues to see strong retail sales of Splendour and Passion, in spite of rebranding of ‘Hero’.

Management expressed confidence in building in-house R&D capabilities, along with tie-ups with AVL and Engines Engineering.

The company is working on a plan to improve exports to African and other markets.