Expect a muted quarter for Hero MotoCorp: Ashwin Patil, Auto – LKP

In a chat with ET Now, Ashwin Patil, Research Analyst, Auto – LKP, shares his views on Hero MotoCorp. Excerpts:

ET Now: How do you think will Hero MotoCorp's numbers turn out?

Ashwin Patil: It will be a flattish quarter both in terms of revenue as well as EBITDA. Talking of revenue, we are expecting about Rs 6,513 crore, which is almost zero percent growth on YoY basis. It is a decline of about 4.5% on quarter on quarter basis.

At the sales level, we are expecting a muted quarter for Hero. In EBITDA terms too, it will be a flattish quarter for them. We are not expecting any great decline in EBITDA. We see about 13.5% EBITDA margins on YoY basis.

It will in fact be a remarkable improvement on a sequential basis as they had incurred some one-time advertising expenses last quarter. So, it will be an improvement on the EBITDA margin levels. However, at absolute EBITDA as well as sales levels, it is going to be a flattish quarter only.

ET Now: How are you looking at the the stock? If it turns out to be an in-line performance, what will the recommendation be?

Ashwin Patil: This is the third quarter since the royalty to Honda went out. So, depreciation and amortisation charges will be lower. It will be pushing up the net profits. That is why we are expecting about 16% growth in net profits at about Rs 645 crore.

But for the royalty factor, it would have been a flattish quarter at that level as well. We are actually reducing volume expectations for this year. We have cut down the volumes from about 8.5% to close to 4.5%-5% for FY16. We are factoring in growth at about 7-odd percent for FY17.

Based on that, we are maintaining a buy rating on the stock. But we are cutting our target price from about Rs 2,900 to close to Rs 2,700. We are expecting some softness in the volumes in coming quarters based on the unseasonal rains that have happened over the past few months.

But we think that the company is well poised for improvement in margins considering its cost-cutting initiatives over the past few quarters. Also, their localisation efforts on the raw material side will yield good results.

Besides, they are improving their product mix. As we know, that there will be some softness in the rural markets and the low-end motorcycles will face some pressure, but at the same time the urban market is going well.

ET Now: The HeroMotoCorp stock has done 25% from the recent high. Do you think all the bad news is in the price?

Ashwin Patil: There is definitely value in the stock at this level. That is why we are maintaining a buy rating on the stock.

In the short term, there may be about Rs 100-150 fall in the stock from these levels. But on one-year to long-term perspective, we are still maintaining a buy rating on the stock.