Classroom Exercise: Build a Financial Model

A. About Hero MotoCorp (Hero)

Hero is the world’s largest two-wheeler company since 2001 (in terms of volumes). The company has a
36.9% market share in the domestic two wheeler market and 51.1% market share in the domestic
motorcycle market. It has achieved a historic milestone of selling 70+ million units since inception.

It offers more than 27 products across 100cc, 110cc, 125cc, 150cc, 225cc and Scooter categories. Hero has
presence in all the 3 Motorcycles segments, i.e. Entry, Deluxe and Premium segments.

Company’s installed capacity as on 31st March 2018 is 9.43 mn units.

Key Facts in FY2018:

• Sold 7.59 million units of two-wheelers, clocking a turnover of ~Rs. 33,398 crores & PAT of Rs.
3697.36 crores
• 7 operational plants (5 in India and 1 each in Columbia and Bangladesh) with annual installed
capacity of 9.43 mn per units and 1 Technology Centre in India. The existing installed capacity is as
follows :
Locations Existing Installed
Capacity
Gurgaon, Haryana 2.1 mn
Dharuhera, Haryana 2.1 mn
Haridwar, Uttarakhand 2.7 mn
Neemrana, Rajasthan 1.1 mn
Vadodara, Gujarat 1.2 mn
Villa Rice, Colombia 0.08 mn
Jessore, Bangladesh (Operationalised in FY18) 0.15 mn
Total Installed Capacity 9.43 mn

• Hero MotoCorp has started construction of it’s 8th manufacturing plant in Andhra Pradesh, the
facility will have an annual installed capacity of 1.8 million units, which will be achieved in three
phases and is expected to be operational in FY 2019-20.
• Presence in 37 countries across 3 continents
• 7,500+ strong team
• 6500+Pan-India touch points

The Company’s Vision 2020 states the following:

• Surpass 100 million units in cumulative production

• Annual bike and scooter sales of 12 million units

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 • More than 20 manufacturing and assembly plants globally
• Presence in more than 50 countries
• Turnover of Rs. 60,000 crores

The company is listed on BSE & NSE.

About the Indian Two-Wheeler Industry:

India’s two-wheeler industry registered a 15% growth in FY 2017-18, compared to the previous year.. The
industry rallied back to showcase a stellar performance in FY18. Buoyed by a good monsoon season,
continuing soft interest regime and government’s continuous investment to ramp up infrastructure, the
industry grew at a healthy clip of 15% while also crossing the 2 crore unit milestone, for the first time ever,
in FY18

Industry Volumes Overall (MM) FY14 FY15 FY16 FY17 FY18

Motorcycles 12.5 13.05 12.9 13.17 15.01
Scooters 3.75 4.75 5.30 5.84 7.01
Moped 0.73 0.76 0.73 0.91 0.98
Total 16.98 18.56 18.93 19.92 23.00

Industry Volumes Domestic (MM) FY14 FY15 FY16 FY17 FY18

Motorcycles 10.48 10.76 10.70 11.14 12.61
Scooters 3.61 4.52 5.03 5.55 6.70
Moped 0.72 0.75 0.71 0.89 0.88
Total 14.81 16.03 16.44 17.58 20.19

Industry Volumes Export (MM) FY14 FY15 FY16 FY17 FY18

Motorcycles 2.02 2.29 2.20 2.03 2.4
Scooters 0.14 0.23 0.27 0.29 0.31
Moped 0.01 0.01 0.02 0.02 0.10
Total 2.17 2.53 2.49 2.34 2.81
(Source: Hero Annual Reports, SIAM) * Adapted parts

Analysts predict the industry growth for FY 2019 as follows, with a decrease in the growth at 0.2% p.a. from
FY 2020 onwards in Motorcycles and 1% in Scooters.

Industry Growth p.a.~ Worst Base Best

Motorcycles – Domestic 1% 2% 5%
Motorcycles – Exports 2% 5% 10%
Scooter – Domestic 9% 18% 25%
~Adapted

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Hero – Key Operating Indicators:

Hero Volumes (MM) 2014 2015 2016 2017 2018

Motorcycles – Domestic 5.37 5.74 5.60 5.68 6.50
Motorcycles – Exports 0.13 0.12 0.13 0.14 0.21
Scooter – Domestic 0.75 0.83 0.90 0.84 0.88
Total 6.25 6.69 6.63 6.66 7.59
Installed Capacity 7.00 7.65 8.10 9.28 9.43
(Source: Annual Reports)

New Facility (Capacity Expansion):

Management is contemplating an investment to the tune of Rs. 1,600 crores for plant in Andhra Pradesh
with a total installed capacity of 1.8 MM units per annum. The capex would be phased as 50% in FY18 and
50% in FY19. The plant is expected to be operational in FY 2019-20.
This new facility would increase the company volumes by way of increasing its market share by an additional
2% in FY2020.

The installed capacity of the company for next 7 years would be as follows:

Installed Capacity MM
March 2019 9.43
March 2020 11.23
March 2021 11.23
March 2022 15.50
March 2023 15.50
March 2024 18.00
March 2025 18.00

Market Share & Average Realization:

Hero’s existing market share is expected to vary in the range of -0.25% to +0.5% of its current market share
(domestic and exports), year on year.

The average realization prices will remain stable for the next 2 years (so as to retain and increase the market
share), with an increase of an average 2% (-1% to 4%) p.a. in prices going forward.

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Financing for New Facility:

To construct the new facility in Gujarat, the company will enter into a Capex facility commitment with ECI
bank, in which 70% of its Capex requirements will be funded through a Project Term Loan, at prevailing
interest rates. The tenure of this loan provided by ECI bank will be total of 7 years, with first two years being
moratorium period (construction period), followed by 5 years for equal repayment installments.

Financial Overview:

1. Other than FY17, Hero’s revenue has been steadily growing over last 5 years in the range of ~4-5%
2. Hero’s EBITDA margin is in 15-17% range consistently over the last few years.

Other Information: i

• Minimum Cash: Rs. 50 crores

• ECI Term Loan Rate: 11.0% p.a.
• Remaining value of Intangibles: To be left as it is since they are fully amortized
• Depreciation rate under WDV method: 15%
• Company to maintain the historical trend for the Dividend Payout Ratio.

Trading Statistics of the Company:

• Closing Price (As on 21st August 2018): 3327.95

• 52 Week Low: Rs. 3033.75
• 52 Week High: Rs.4091.95
• Shares Outstanding: 19.9711455 Crores

B. KEY DELIVERABLES FOR THE EXERCISE

• Revenue build up
• Analysis of cost categories and projections
• Profit & Loss, Balance Sheet & Cash Flow Statement

Model Assumptions: ii
• Capex financing is only for new facility and not for the routine capex
• Cash funding mechanism (such as promoter loans, working capital financing) is not required
• Advanced tax calculations are not required to be incorporated in the model

Other Schedules: Tax Assumptions:

(For reference only)
• Rate of Depreciation under Income Tax Act: 40%
• Corporate Income Tax: 30.9%

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 • Surcharge: 7.5%
• Education & Higher Education Cess: 3%
• Deferred Tax is assumed to be Nil for the projection years

References:
• Annual Reports for Hero MotoCorp
• Recentmost (Q4FY 2018) Investor Call Transcript of Hero MotoCorp
• SIAM Reports
• Broker Reports & Financials (for comparable companies)

i. Real information such as rates of depreciation, tax rates as per the relevant statutes could be different.
ii. These have been assumed for the purpose of the classroom exercise

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