IDBI ANALysis Hero

August 12, 2016
COMPANY
COMPANY
Hero Motocorp
REPORT
OUTLOOK
Analyst*
Pranoy Kurian, CFA
+91-22-4322 1107
pranoy.kurian@idbicapital.com
Nifty: 8,672; Sensex: 28,152
CMP
Rs3,313
Target Price
Rs3,258
Potential Upside/Downside
(2)%
Key Stock Data

Sector
Automobiles
Bloomberg/Reuters HMCL IN/HROM.BO

Shares o/s (mn)
200
Market cap. (Rsmn)
662,660
Market cap. (US$ mn)
9,911
3-m daily average vol.
27,739
Summary
Q1FY17 Results: Revenues grew a modest 7% YoY to Rs74bn (vol. growth of 6%, with motorcycle
growth of 3.4% and scooters rising 30%. Realization rose 1% YoY to Rs42K/unit. HMCLs operational
performance was excellent with EBITDA margins at 16.6% (highest since Q4FY10), with gross margins
increasing 280bps to 32.9%. PAT rose 18% to Rs8.8 bn, with a 15% increase in other income offsetting
a 12% rise in depreciation.
Near-term demand to see a recovery: Over FY17/18E, we expect HMCL to clock accelerating volume
growth of 6%/8% as 1) Normal monsoons lead to a recovery in HMCLs rural sales volumes (~50%+ of
total sales) that remained depressed (flat to negative) over the past 2 years; 2) Policies such as
7PC/scrappage incentives etc. aid consumption in H2FY17-FY18E 3) Scooters continue to outpace 2W
industry growth, with HMCL seeing traction on new model launches and 4) Implementation of a GST
at a ~18/19% rate would lead to ~5-6% price cut.
Valuation: HMCL possesses strong, balanced fundamentals a dominant share in motorcycles, a
large distribution network combined with RoEs of ~35-40%, decent margins and relatively low capex
requirements. However, rising competitive intensity, potential for a margin down-cycle and a
slowing motorcycle industry are key negatives. Given HMCLs premium valuations, we believe OEM
peers such as MSIL and Eicher that have stronger competitive profiles, superior product development
capabilities as well as higher long term growth potential offer better value. We value HMCL at 12.8x
on an FY18E EV/EBIT basis (20% discount to MSIL), yielding a target price of Rs3,258 and a HOLD
rating.
Outlook and View
Price Performance
52-week high/low
HOLD
Evolving into maturity; Return ratios the source of value
Rs3,554/2,259
-1m
-3m
-12m
Absolute (%)
12
26
Rel to Sensex (%)
23
Shareholding Pattern (%)

Promoters
34.6
FIIs/NRIs/OCBs/GDR
41.3
MFs/Banks/FIs
15.3
Non Promoter Corporate
1.7
Public & Others
7.1
Relative to Sensex
150
140
130
120
110
100
90
80
Motorcycle market maturing: We reiterate our view expressed in our TVS Motors outlook - Indias
2W penetration levels (~13% now vs. ~6% in 2006) are likely to increase at a slowing pace.
Motorcycles now account for an estimated ~80% of the installed base of 2Ws. Given the shift
towards scooters on rising female workforce participation and convenience, the growth outlook for
motorcycles remains subdued. Consequently, while we expect the overall 2W industry to witness
~7-8%+ volume growth over the next decade, the growth is likely to be driven by scooters. HMCL,
with ~85% of volumes accounted for by motorcycles and a ~50% marketshare, thus has limited
avenues for growth. Exports remain a challenge, given constant volatility and competition from
well-entrenched peers. HMCLs scooters will see growth, but market share gains seem unlikely
given Hondas dominance.
Margin tapering likely: Over FY16-19E, we expect margins to trend downwards to the 14.5-15%
range as 1) Higher costs of developing proprietary technology/R&D offset royalty savings; 2) Impact
of currently higher steel/raw material costs (steel/aluminium) which would kick in from Q2 and 3)
Expiry of Haridwar tax benefit (~90-110 bps impact in FY19E, partially offset by Gujarat tax
incentives) and 4) Rising competitive intensity as HMSI and Yamaha add capacity and expand.
R&D Key to competitiveness: HMCLs recent investment of Rs8.5bn in an integrated R&D centre
(Rajasthan) has a global leadership team and ~500 engineers, and will focus on the complete
lifecycle of vehicle development. HMCL aims to retain its share in the 100-125cc segments as well
as focus on developing new products in segments such as 150cc+, scooters and exports. Execution
in these segments will be key to its long term competitiveness.
Robust return ratios compelling: HMCLs return ratios (~43% in FY16, 36% in FY18E) are well above
industry (FY16 OEM average is 21%). The companys negative working capital cycle, efficient fixed
asset turnover ratios and prudent use of cash should sustain RoEs of ~35% over the long term.
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Table: Financial snapshot
HMCL
Source: Capitaline
Sensex
(Rsmn)
Year
Revenue
EBITDA
EBITDA (%)
Adj. PAT
EPS (Rs)
RoE (%)
RoCE (%)
273,506
35,463
13.0
25,448
127.4
P/E
(x)
26.0
EV/EBITDA (x)
FY15
18.0
41.9
49.5
FY16
280,008
44,604
15.9
31,616
158.5
20.6
13.8
43.7
55.5
FY17E
304,261
47,194
15.5
32,990
165.4
19.7
12.9
38.6
49.4
FY18E
337,578
51,707
15.3
35,216
176.5
18.5
11.6
36.0
47.1
Source: Company; IDBI Capital Research*This marks the transfer of coverage from Ashish Poddar to Pranoy Kurian
Company Outlook Hero Motocorp
Outlook for motorcycles: Approaching maturity
Motorcycle segment long term growth profile low: As we noted in our Outlook note on TVS Motors (5th
Aug16), Indias 2W penetration has increased enormously over the past decade (~13% now vs ~6% in 2006).
However, while comparing penetration rates of India vs other emerging nations, there remain doubts as to the
long-term growth potential of the 2W industry. The gap between India and countries such as China, Indonesia
has narrowed considerably over the past decade. Further, motorcycles account for ~80% of installed base,
implying the growth differential between scooters and motorcycles is likely to remain significant.
Forward estimates imply growth unlikely to be supernormal: Assuming an increase in 2W volumes of ~8% a
year yields a penetration rate of 23% by 2026 -near Indonesia levels. While there exist examples of countries
with higher penetration rates at lower GDP per capita (Vietnam), there are also nations such as China, where
penetration rates have stalled at ~28-30% despite higher per capita income.
No exposure to high potential women demographic: Given that women account for half the population,
motorcycles lack of appeal to women is a key negative for the sector. Drivers like rising workforce
participation are thus not going to contributeto motorcycle growth. Instead, the motorcycle industry relies on
only half the population for growth, lowering its potential.
Scooters partially cannibalizing motorcycles: 2W growth is now driven by scooters, given their convenience,
improved mileage and popularity with a rising number of working women. Thus, even if 2Ws grow in line with
real GDP, motorcycles would continue to see a slower growth rate.
8+%+ Volume growth unlikely: Thus, for theoverall 2W/3W industry, we believe 8%+ volume growth over the
next decade would remain a challenge, giving the industry a lower long-term growth trajectory than PVs or
premium motorcycles (350cc +).
Figure: Indian 2W industry has room for growth, but

Figure:gap between peers not extraordinary
Figure: PVs highly underpenetrated, still at the

Figure:bottom of emerging market ladder
48000
47000
Japan
43000
37000
33000
28000
23000
18000
Brazil
13000
8000
China
Indonesia
India
-2000
80
180
280
2W Vehicles/Thousand People
Source: World Bank, SIAM; IDBI Capital Research
Vietnam
3000
380
GDP Per Capita in 2010 $ prices
GDP Per Capita in 2010 $ prices
38000
-20
Japan
42000
32000
South Korea
27000
22000
17000
Brazil
12000
7000
China
Russia
Indonesia
India
2000
-3000
50 100 150 200 250 300 350 400 450 500 550 600
PV Vehicles/Thousand People

Fig.: Total Registered Motor vehicles 2W have
Fig.:seen robust growth in past decade;~ 80% of base
Fig.:is motorcycles
Fig.: Growth for 2W now on a higher base compared

Fig.:to PVs; Motorcycles to be even lower
25%
160
Million Vehicles)
140
120
100
80
60
40
20
Vehicle Penetration (%)
180
20%
15%
10%
5%
March/01
March/06
Number of 4W Registered
March/11
March/16
Number of 2W Registered
0%
1996
2001
2W Penetration rate
2006
2011
2016
PV Penetration rate
Near-term motorcycle demand to see an uptick
Rural recovery/7th Pay Commission would benefit HMCL given strength in rural markets: HMCL is dominant in
rural areas (~50% of HMCLs volumes are rural), with Executive models in the 100cc segment highly popular. In
recent times, thecompany has seen flat-negative growth in the past 3 years on a weak rural economy. Thus, a
boost in farm incomes on the back of a good monsoon would aid in a recovery for the segment. Additionally,
according to government statistics, nearly 45% of government employees at the national level are residing in
rural markets an area where HMCL is dominant. The figure is higher for state government employees at
~54-56%. Thus, an increase in incomes via 7PC, followed by certain state pay hikes, could also boost near-term
rural spending.
GST could lower prices, a boost for Heros Executive 100 segment:GST implementation could lower prices by
~5-6% if the rate is at ~18-19%. Given the price sensitive nature of Heros product range (~53% of volumes are
Executive 100, ~20% are Economy segment), Hero could be the biggest beneficiary of the move.
Entrance into new export markets could provide incremental growth: Exports are a small share of volumes
only ~3% of sales. Currently, export markets in general, are seeing a slowdown, with management estimating a
10% decline in global motorcycle sales this year. However, by the end of FY17, Hero plans to enter Argentina
Ghana and Mexico via distribution partnerships. While we expect market share gains to be difficult due to the
presence of well-established players with brands, Heros low base should provide for incremental growth.
New model launch pipeline: HMCL is currently working on launch 30-35 new models/variants over the next 3
years. All these models will be launched via its new R&D centre a key test of Heros product development
capabilities. While it remains to be seen whether the new launches succeed over the long term, the near term
could see growth by way of increased product range.
Scooter capacity expanded: HMCL has expanded its capacity for scooters from ~85,000/month in FY16
(average, stood at ~100K in March FY16) to ~125,000/month presently. Given its monthly run rate of ~70-75K,
the company is well equipped to handle additional growth.

Fig: Market share more or less stable; new launches in
Fig:market driving share
50%
45%
40%
35%
30%
25%
20%
15%
10%
Q1FY14
Q4FY14
2W Market Share
Scooter Market Share
Fig: Scooter growth rebounding off new models,

Fig:Motorcycles seeing gradual pickup
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5% Q1FY14
-10%
Q3FY15
Q2FY16
Q1FY17 -15%
Motorcycle Market Share
Source: Company; IDBI Capital Research
Q4FY14
Q3FY15
Q2FY16
Q1FY17
Motorcycle Growth (6M R.A.)

Scooter Growth (6M R.A.)
Risk of Margin downcycle
R&D expenses to rise: While royalty costs will be eliminated (~20-30-bps of savings), increasing R&D spends
will limit expansion going forward. Management expects R&D expenditure to account for ~1.3% of sales, up
from ~1% of sales in FY16. Given Heros plans to launch multiple new platforms over the next 3 years, there
remains therisk of higher than expected R&D costs. Additionally, total R&D costs (including capitalized
expenditure are ~3.2% of sales. Thus, depreciation costs could rise further in FY17/18E.
Impact of currently higher steel/raw material costs (steel/aluminium): Higher steel prices, partly on account
of a global price recovery and partly due to protectionist measures by the government (MIP), would start
impacting gross margins from Q2FY17 onwards. Given Hero benefited the most in terms of gross margin
expansion (~500bps expansion in 3 years) as compared to peers, we expect gross margins to decline over FY1618 by ~60bps to ~31.5%.
Rising competitive intensity: Peers such as HMSI and Yamaha are adding capacity and expanding distribution
channels in the 2W industry, and competition from TVS and Bajaj is not likely to relent. In this kind of
environment, pricing power will remain weak.
BS-IV, Safety regulations would raise costs: By April 2018, safety features such as ABS/CBSwould be
compulsory for all vehicles and the deadline for new models would be April 2017. These features will raise the
cost of motorcycles by ~INR4,000 each initially, though costs are expected to fall gradually on greater
production. Scooters are already equipped with CBS, and the cost per vehicle is ~Rs1,000, thus would see a
lower impact. Going forward, BS-IV norms combined with safety measures are expected to increase production
costs by ~5-6%, depending on model and make. Better safety standards improve the quality of the product via
increased safety, thus in the long term this not a negative.
Expiry of Haridwar tax benefit; partial offset by Gujarat plant: This tax benefit is likely to impact Hero in FY19E,
and would have an ~90-110 bps impact depending on the level of production from the plant. Currently, we
have not factored the loss into our valuation. This benefit is likely to be partially offset by sales tax incentives
offered in its upcoming Gujarat facility which could be worth ~40-50bps.
Recent margin expansion primarily on commodity declines: As shown below, compared to peers Bajaj and
TVS, Hero has been the biggest beneficiary of recent commodity price declines.
Fig.: R&D Expensesspikes asHero adjusts to post
Fig.:Honda era
3.5%
Fig.: Hero biggest beneficiary from recent

Figucommoditydeclines as compared to peers
35
3.0%
Gross Margins (%)
33
2.5%
31
2.0%
1.5%
29
1.0%
27
0.5%
25
0.0%
FY03
FY05
FY07
FY09
Bajaj
FY11
Hero
FY13
FY13
Bajaj
TVS
FY14
FY15
Hero
FY16
TVS
Fig.: Employee Costs to rise as Hero attempts to

Fig.:improve its expertise in R&D
7.0%
FY12
FY15
Fig.: ASP spends to remain high, as competitive

Fig.:pressures remain
11%
Employee Costs
6.0%
Ad/Marketing Share of Sales
9%
5.0%
7%
4.0%
3.0%
5%
2.0%
3%
1.0%
0.0%
1%
FY03
FY05
FY07
FY09
Bajaj
Hero
FY11
FY13
TVS
FY15
FY03
FY06
Bajaj
FY09
Hero
FY12
FY15
TVS
Other Challenges
Competitive profile of industry high; Additional growth levers limited
Honda a formidable competitor in Scooters: Honda remains the dominant player in scooters, with market
share essentially flat over 10 years, despite continuing attempts by TVS and Hero to gain share. Further,
motorcycle share has been flattish, with recent upticks on the back of newer launches. Hondas track record in
other Asian markets suggests that it will remain formidable in the years to come.
Slowing motorcycle sales & competitive pressures from Honda: For Q1FY17, HMCLs share of the domestic
2W market fell 269bps to 37.6%, primarily on the back of weak motorcycle sales (3% YoY growth as compared
to domestic motorcycle growth of 9%. Share in domestic motorcycles slipped 287bps to 50.6%. In contrast,
Honda Motorcycle & Scooters (Honda) and Bajaj Auto saw motorcycle volumes rise 16% and 13% YoY,
respectively. Competitive pressure, combined with a maturing motorcycle market restricts Heros long-term
growth potential.
R&D Challenge: HMCL has recently invested 8.5bn in an integrated R&D centre in Rajasthan (CIT). The
facility, with a global leadership team and ~500 engineers, will focus on the complete lifecycle of vehicle
development - product design & development, testing and validation. With these facilities, HMCL aims to
retain its share in the 100-125cc market segments as well as focus on developing new products in segments
such as 150cc+, scooters and exports. Execution in these segments will be key to its long-term
competitiveness. The ability to make inroads into more premium products will depend on its engineering and
design capabilities, and will be HMCLs biggest challenge.
Uptrading could impact HMCL: As the dominant player in the economy/mass segment of 2 wheelers, HMCL is
at risk if consumersuptrade from bike to entry-level automobiles. The companys market share in the premium
segment remainsminuscule, which is a risk if consumer trends shift towards higher value bikes.
Export inroads a challenge; Volatility another negative:Indian2W and 3W have made strong inroads in Africa
and Latin America. Heros late entry (due to earlier agreements with Honda), makes it difficult for it to
establish a brand and distribution network of sufficient scale. Players like Honda Bajaj and TVS already export
in large numbers from India. Further, macro-economic turbulence is a key risk for these markets, making them
not particularly attractive. African nations that are big markets for these exports are facing severe fiscal
pressures, as a steep fall in commodities impact government revenues. Political instability in a country like
Egypt is an additional risk. More lucrative markets such as the Philippines and Indonesia are mostly dominated
by Japanese 2-W manufacturers, making it difficult for Indian players.
Fig.: Hondas gain came at Heros loss
Fig.: Honda dominance in Scooters unchanged;

Fig.:HMCL slowly making modest headway
50%
80%
60%
30%
40%
10%
20%
Mar/11
-10%
Mar/12
Mar/13
Mar/14
Mar/15
Mar/16
Mar/07
TVS Motorcycle MS
Hero Motorcycle MS
Bajaj Motorcycle MS
Honda Motorcycle MS
Source: Company, SIAM; IDBI Capital Research, Data includes exports
0%
Mar/09
Mar/11
Mar/13
Mar/15
TVS Scooter Market Share
Others Scooter MS
Hero Scooter MS
Honda Scooter MS
Source: Company, SIAM; IDBI Capital Research, Data includes exports
Return ratios best in class; to sustain at ~35% levels

HMCLs return ratios (~43% in FY16, 36% in FY18E) are well above industry (FY16 OEM average is ~21%). We expect
RoEs to decline from the 40%+ range on the back of higher investments in R&D and product development.
The companys negative working capital cycle, efficient fixed asset turnover ratios and prudent use of cash should
sustain RoEs of ~35% over the long term.
Fig.: Peer comparison - RoEs highlight the stability in
Fig.: franchise
80
Fig: Return ratios to stabilize at ~35% levels, as higher

Fig.:investments and R&D lower asset turnover
8
RoEs (%) (3 Year Rolling AVG
6%
5%
60
6
4%
40
20
3%
2%
1%
0
FY03
FY05 FY07
Bajaj
FY09 FY11
Hero
FY13
TVS
FY15
0%
FY05 FY07 FY09 FY11 FY13 FY15 FY17E
Gross Fixed Asset Turnover (LHS)
Capex to Sales Ratio
Source: Company; IDBI Capital Research, Figures use Adjusted PAT
Fig.: Peer Comparison - RoCEs strong throughout

Fig.: cycles
Fig.: Heros profitability historically stable
100
RoCEs (%) (3 Year Rolling AVG)
80
18
Adj. PAT margins (%)
16
14
12
60
10
8
40
6
4
20
2
0
0
FY03
FY05 FY07
Bajaj
FY09 FY11
Hero
FY13 FY15
TVS
Source: Company; IDBI Capital Research, Figures use Adjusted PAT
FY03
FY05
FY07
FY09
Bajaj
FY11
Hero
FY13
FY15
TVS
Estimates
Volumes/Realizations: For FY17E/18E, we expect total volumes to rise 6%/8%, respectively. While we expect
demand to pickup over FY17, the base in H2FY17 is higher than H1. We forecast motorcycle and scooter volume
CAGR growth of 6%/12% over FY16-18E. We expect a 2% growth in realizations, which could rise if gross margins
contract further and the industry takes further price increases.
Operating Estimates:We expect margins to reduce to 15.3% by FY18E, as higher raw material costs, a rise in R&D
expenses and increased advertising and selling expenses reduce margins. Post FY18E, the company could seea
further decline in margins as its Haridwar plant volumes decline (~90-110bps impact), but given the time horizon
and the offsetting Gujarat tax benefit (no sales tax on vehicles sold in Gujarat - ~40-60bps positive), we would await
further clarity before building it into our valuation.
Profitability growth to be limited: Over FY16-18E, we expect PAT growth of 6% as margin contraction along with
R&D related fixed costs restrict PAT. Tax rates are also guided to be at ~30%, slightly higher. IND-AS is likely to
result in higher other income on account of revaluation of certain investments, which is reflected in our estimates.
Table: Segmental Mix FY13-18E Scooter share inching up gradually
(%)
Sales Volumes Mix
FY13
FY14
FY15
FY16
FY17E
FY18E
Domestic motorcycles
83.3
88.3
86.9
85.6
84.5
83.9
Exports motorcycles
2.2
1.8
1.8
2.0
1.7
1.9
Domestic scooters
9.1
11.0
11.3
12.3
13.1
13.5
Exports scooters
Total
0.4
0.3
1.2
1.2
1.2
1.4
100.0
100.0
100.0
100.0
100.0
100.0
Fig: Realizations stable
Fig: Volume/Realization Growth Estimates
Million Units
37.5
38.8
40.2
41.2
42.2
43.0
44.1
45
40
35
30
25
20
15
10
6.2
6.1
6.2
6.6
FY12
FY13
FY14
FY15
6.6
7.0
7.6
15%
10%
5%
0%
FY12
Volumes (LHS)
20%
50
INR Thousands
FY16 FY17E FY18E
Avg. realisation (INR)
FY13
FY14
FY15
FY16 FY17E FY18E
-5%
Realization Growth
Volume Growth

Fig.: Margins to taper down on commodity price
Fig.:reversals and R&D spend
Fig: FY16-18E Scooter growth to moderate,

Fig.:motorcycles to see an uptick
40
18
30%
35
16
25%
30
14
20%
12
10
20
15
15%
(%)
INR BN
25
10%
5%
10
0%
0
FY13
FY14
FY15
Adjusted net profit
FY16
FY17E FY18E
EBITDA margin (%)
-5%
-10%
FY12
FY13
FY14
FY15
FY16 FY17E FY18E
Scooter Volume growth

Motorcycle Volume growth
Valuation
HMCL holds moderate long-term growth potential along with sound RoEs (35% in FY18E), market leadership status
(motorcycles) and a well-entrenched distribution network. The market for scooters should remain strong over the
medium term, while motorcycles should see modest growth given the penetration levels of the industry. However,
stiff competition from Honda remains a threat, especially in motorcycles. Margin contraction due to competitive
pressures, higher R&D spend and expiry of tax benefits are significant long-term risks to current margin levels.
Valuation: Given HMCLs premium valuations, we believe OEM peers such as MSIL and Eicherthat have stronger
competitive profiles, superior product development capabilities as well as higherlong-term growth potential
offer better value. We value HMCL at 12.8x on an FY18E EV/EBIT basis (20% discount to MSIL), yielding a target
price of Rs3,258 and a Hold rating.
Upside Risk to estimates: 1) Higher than expected margins on account of commodity declines; 2) Possibility of
tax break extension/and or new scheme and 3) Spike in motorcycle demand.
Table: Valuation method

SoTP
INR
FY18E EBIT
46,161
Target EV multiple
12.8
Target EV
590,863
FY18E Net Debt
(49,565)
Investments
10,194
Target M.Cap
650,622
1 Year Price
3,258
Upside/(downside) potential
-2%
Implied FY18E P/E at target
18.5
Table: IDBI vs Consensus

Financial Estimates (INR Bn)
Revenue
EBITDA
Bloom Consensus
Deviance from Consensus
338
356
-5%
52
56
-7%
EBITDAMargin (%)
15.3
15.6
(29)bps
EPS (Rs)
177
198
-11%
Source: Bloomberg Consensus; IDBI Capital Research
10
IDBI Estimate FY18E
Relative Valuation
Table: OEM Comparison on fundamentals
Growth(%)
OPM(%)
OPM(%)
RoE (%)
RoE(%)
FY16-18E
FY16
FY18E
FY16
FY18E
HERO
9.9
15.9
15.3
43.7
36.0
TVS
13.3
6.7
7.8
24.1
24.7
MARUTI
15.5
15.9
14.8
18.0
20.3
TATA
11.0
13.3
14.9
17.7
17.8
M&M
14.2
11.6
12.4
15.1
16.7
BAJAJ
12.5
20.6
20.8
28.9
29.1
EICHER
23.0
17.3
20.1
35.0
38.9
Ashok Leyland
13.0
11.5
11.2
20.9
21.9
Median
13.6
14.6
14.8
19.5
21.1
Company
Source: Bloomberg Consensus; IDBI Capital Research Estimates - Maruti, Ashok Leyland, TVS, Hero
Fundamentals of high quality: While we are not optimistic on Heros long-termgrowth trajectory, the companies
return ratios remain better than the competition. Margin levels of 15% are also decent for an OEM.
Figure: RoEs vs. Growth vs. EBITDA Margins (size of bubble) Hero RoEs well above average
EICHER
40
HERO
35
RoEs FY18E (%)
BAJAJ
30
TVS
25
Ashok Leyland
MARUTI
20
TATA
M&M
15
10
10
15
20
25
Growth (%) FY16-18E

Source: Bloomberg Consensus; IDBI Capital Research
11
Table: Valuations not immodest In line with sector

Company
M.CAP
Net Debt/Equity
PE(x)
PE (x)
EV/EBIT(x)
EV/EBIT(x)
EV/EBITDA(X)
(INR bn)
FY16
FY16
FY18E
FY16
FY18E
FY18E
18.5
20.8
15.4
13.0
11.7
24.8
15.4
11.3
22.3
21.2
15.2
10.7
HERO
664
-0.4
TVS
142
0.1
20.7
31.8
MARUTI
1,436
-0.7
32.5
TATA
1,658
0.2
13.7
8.9
9.3
6.9
3.7
M&M
899
1.0
29.1
20.2
21.6
14.4
13.6
BAJAJ
829
-0.1
23.8
17.7
17.0
11.5
10.5
EICHER
607
-0.3
56.1
27.8
32.2
19.1
17.4
Ashok Leyland
274
0.1
20.6
14.8
13.5
9.7
7.7
MEDIAN
864
0.0
26.4
18.9
19.1
13.0
12.2
Bloomberg Consensus; IDBI Capital Research Estimates - Maruti, Ashok Leyland, TVS, Hero
Valuations - Middle of the OEM pack; fair given balance sheet strength: Hero is trading at a slight premium to key
rival Bajaj, which we believe is fair given the exposure to scooters along with better return ratios.
Figure: PE vs. EV/EBIT Valuations middle of the pack Good financials offset growth challenges
32
EICHER
P/E FY18E (%)
27
MARUTI
22
HERO
BAJAJ
M&M
17
Ashok Leyland
12
TATA MOTORS
7
10
12
14
EV/EBIT (%) FY18E
Source: Bloomberg consensus; IDBI Capital Research, Size of sphere signifies EV/EBITDA (FY18E)
12
16
18
20
Trading above historical growth range

Figure: 2 Year Forward P/E above 1 standard Deviation relative to its 10 Y median
3,500
3,000
2,500
2,000
1,500
1,000
500
Price (Rs.)
Source: Bloomberg; IDBI Capital Research
(-1) SD
Jul-16
Mar-16
Jul-15
Nov-15
Mar-15
Jul-14
Nov-14
Mar-14
Jul-13
10 Year Median
Nov-13
Nov-12
Mar-13
Jul-12
Mar-12
Jul-11
Nov-11
Mar-11
Jul-10
Nov-10
Nov-09
Mar-10
Jul-09
Mar-09
Jul-08
Nov-08
Mar-08
Jul-07
Nov-07
Mar-07
+'1 SD
Source: Bloomberg; IDBI Capital Research
13
Q1FY17 Strong operational performance

Table: Quarterly Snapshot
Q1FY17
Q1FY16
% YoY
Q4FY16
% QoQ
Two wheelers sales
17,45,389
16,45,867
6.0
17,22,000
1.4
Avg. realisation (Rs)
41,554
41,347
0.5
42,845
(3.0)
72,896
68,051
7.1
73,779
(1.2)
Volume analysis (Nos)
Financial analysis (Rsmn)

Net revenues
Other operating income
1,093
996
9.7
1,273
(14.1)
Total revenues
73,989
69,048
7.2
75,052
(1.4)
Raw material
49,654
48,105
3.2
49,549
0.2
Staff costs
3,362
3,130
7.4
3,494
(3.8)
Other expenses
8,672
7,393
17.3
10,090
(14.0)
12,301
10,420
18.0
11,919
3.2
1,152
1,030
11.9
1,155
(0.2)
EBITDA
Dep. and amortisation
Interest costs
15
12
24.0
12
24.0
Other income
1,204
1,044
15.3
1,168
3.1
PBT
12,337
10,422
18.4
11,920
3.5
Tax
3,506
2,947
19.0
3,574
(1.9)
Adj. net profit
8,831
7,475
18.1
8,347
5.8
E/o expenses (income)
10
8,821
7,466
18.1
8,337
5.8
Adj. EPS (Rs)
44.2
37.4
18.1
41.8
5.8
As % of total revenues
67.2
69.7
-247
66.0
118
Reported net profit
Raw Material
4.5
4.5
4.7
-11
Staff costs
12.5
10.7
179
13.4
-94
Other expenses
32.8
30.3
247
34.0
-118
Gross margin
16.6
15.1
153
15.9
74
EBITDA margin
11.9
10.8
111
11.1
81
Adj. net margin
28.0
28.3
-27
30.0
-198
14
Fair performance on the revenue front: Revenues grew a modest 7% YoY to Rs74bn (vol. growth of 6%, with
motorcycle growth of 3.4% and scooters rising 30%. Realization rose 1% YoY to Rs42K/unit.
Margins surprise: HMCLs operational performance was excellent with EBITDA margins at 16.6% (highest since
Q4FY10), with gross margins increasing 280bps to 32.9%. PAT rose 18% to Rs8.8 bn, with a 15% increase in
other income offsetting a 12% rise in depreciation.
However, IND-AS standards impacted results, lowering revenue and expenses, thus providing a slight boost to
margins.
Financial summary
Profit & Loss Account
(Rsmn)
Year-end: March
Net sales
FY15
FY16
FY17E
FY18E
273,506
280,008
304,261
337,578
Pre-tax profit
Depreciation
Growth (%)
Operating expenses
EBITDA
Cash Flow Statement
8.9
2.4
8.7
11.0
(240,390)
(239,823)
(262,113)
(291,675)
35,463
44,604
47,194
51,707
Growth (%)
0.2
25.8
5.8
9.6
Depreciation
(5,400)
(4,414)
(5,008)
(5,545)
EBIT
30,063
40,190
42,186
46,161
Year-end: March
5,008
5,545
(13,690)
(14,973)
(12,888)
2,297
40
1,526
(16)
(16)
(17)
(18)
18,268
41,324
38,135
42,390
Capital expenditure
(10,679)
(12,583)
(10,000)
(11,500)
Chg in investments
(509)
(1,556)
Chg in working capital

Other operating activities
CF from operations (a)
(40)
Other income
4,927
4,229
4,652
4,187
Pre-tax profit
34,880
44,370
46,794
50,308
Tax
(9,432)
(12,754)
(13,804)
(15,093)
27.0
28.7
29.5
30.0
Net profit
25,448
31,616
32,990
35,216
Adjusted net profit
25,448
31,616
32,990
35,216
Growth (%)
20.7
24.2
4.3
6.7
CF from financing (c)
Shares o/s (mnnos)
200
200
200
200
Net chg in cash (a+b+c)
Net fixed assets
(1,332)
(23,706)
(15,000)
(20,500)
Equity raised/(repaid)
(0)
Debt raised/(repaid)
Dividend (incl. tax)
(14,019)
(17,506)
(21,007)
(22,174)
Chg in minorities
Other financing activities
(14,019)
(17,507)
(21,007)
(22,174)
2,918
112
2,127
(285)
Financial Ratios
FY17E
FY18E
Year-end: March
FY15
FY16
FY17E
FY18E
36,252
44,421
49,414
55,368
Adj EPS (Rs)
127.4
158.5
165.4
176.5
20.7
24.4
4.3
6.7
8,638
10,194
10,194
10,194
Adj EPS growth (%)
735
(2,278)
(2,392)
(2,511)
EBITDA margin (%)
13.0
15.9
15.5
15.3
Pre-tax margin (%)
12.8
15.8
15.4
14.9
RoE (%)
41.9
43.7
38.6
36.0
RoCE (%)
49.5
55.5
49.4
47.1
Asset turnover
2.7
2.5
2.4
2.3
Leverage factor
1.7
1.6
1.5
1.5
Net margin (%)
9.3
11.3
10.8
10.4
Net Debt/Equity
(0.4)
(0.4)
(0.4)
(0.5)
Inventory days
11
10
10
Receivable days
19
17
16
16
Payable days
43
42
41
42
59,591
68,792
77,592
91,040
8,155
6,730
8,025
9,006
Inventories
13,896
Cash and Bank
12,828
12,957
14,600
1,593
1,314
3,411
3,095
Marketable Securities
22,903
32,470
37,470
46,470
Loans and advances
11,845
13,919
14,151
16,240
105,217
121,129
134,807
154,090
Total assets
CF from investing (b)
FY16
Other non-curr assets
Sundry Debtors
Other investing activities
FY15
Investments
Current assets
FY18E
50,308
4,414
(44)
Year-end: March
FY17E
46,794
(9,741)
(49)
(Rsmn)
FY16
44,370
5,400
(111)
Balance Sheet
FY15
34,880
(9,107)
Tax paid
Interest paid
Effective tax rate (%)
(Rsmn)
Turnover & Leverage ratios (x)
Working Capital & Liquidity ratios

Shareholders' funds
65,413
Share capital
79,447
91,430
104,471
399
399
399
399
65,014
79,048
91,031
104,072
Total Debt
Secured loans
Unsecured loans
Year-end: March
FY15
FY16
FY17E
FY18E
Reserves & surplus
Valuations
Other liabilities
PER (x)
26.0
20.6
19.7
18.5
CurrLiab&prov
39,804
41,682
43,377
49,618
Price/Book value (x)
10.1
8.2
7.1
6.2
Current liabilities
31,807
32,850
34,068
39,200
PCE (x)
21.4
18.1
17.1
16.0
2.3
2.2
2.0
1.8
18.0
13.8
12.9
11.6
7,997
8,832
9,309
10,418
EV/Net sales (x)
39,804
41,682
43,377
49,618
EV/EBITDA (x)
105,217
121,129
134,807
154,090
Provisions
Total liabilities
Total equity & liabilities
Book Value (Rs)
328
398
458
524
Dividend Yield (%)

EV/EBIT (x)
EBIT/EV Yield (%)
1.8
2.3
2.7
2.9
21.2
15.4
14.5
13.0
4.7
6.5
6.9
7.7
15
Notes
Dealing
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Stocks:
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Key Stock Data

Bloomberg/Reuters HMCL IN/HROM.BO

Market cap. (Rsmn)

Market cap. (US$ mn)

3-m daily average vol.

Outlook and View

Evolving into maturity; Return ratios the source of value

Rel to Sensex (%)

Shareholding Pattern (%)

Non Promoter Corporate

Public & Others

Table: Financial snapshot

Company Outlook Hero Motocorp

Outlook for motorcycles: Approaching maturity

Figure: Indian 2W industry has room for growth, but

Figure: PVs highly underpenetrated, still at the

Source: World Bank, SIAM; IDBI Capital Research

GDP Per Capita in 2010 $ prices

GDP Per Capita in 2010 $ prices

Source: World Bank, SIAM; IDBI Capital Research

Company Outlook Hero Motocorp

Fig.: Growth for 2W now on a higher base compared

Vehicle Penetration (%)

Source: World Bank, SIAM; IDBI Capital Research

Source: World Bank, SIAM; IDBI Capital Research

Near-term motorcycle demand to see an uptick

Company Outlook Hero Motocorp

Fig: Scooter growth rebounding off new models,

Source: Company; IDBI Capital Research

Motorcycle Growth (6M R.A.)

Source: Company; IDBI Capital Research

Risk of Margin downcycle

Company Outlook Hero Motocorp

Fig.: Hero biggest beneficiary from recent

Gross Margins (%)

Source: Company; IDBI Capital Research

Source: Company; IDBI Capital Research

Fig.: Employee Costs to rise as Hero attempts to

Fig.: ASP spends to remain high, as competitive

Ad/Marketing Share of Sales

Source: Company; IDBI Capital Research

Company Outlook Hero Motocorp

Fig.: Honda dominance in Scooters unchanged;

Source: Company, SIAM; IDBI Capital Research, Data includes exports

TVS Scooter Market Share

Source: Company, SIAM; IDBI Capital Research, Data includes exports

Company Outlook Hero Motocorp

Return ratios best in class; to sustain at ~35% levels

Fig: Return ratios to stabilize at ~35% levels, as higher

RoEs (%) (3 Year Rolling AVG

Source: Company; IDBI Capital Research, Figures use Adjusted PAT

Source: Company; IDBI Capital Research

Fig.: Peer Comparison - RoCEs strong throughout

Fig.: Heros profitability historically stable

RoCEs (%) (3 Year Rolling AVG)

Adj. PAT margins (%)

Source: Company; IDBI Capital Research, Figures use Adjusted PAT

Source: Company; IDBI Capital Research

Company Outlook Hero Motocorp

Sales Volumes Mix

Source: Company; IDBI Capital Research

Fig: Realizations stable

Fig: Volume/Realization Growth Estimates