Hero Honda Motors- Margins disappoints, lower to REDUCE :Emkay

Visit http://indiaer.blogspot.com/ for complete details �� ��

Hero Honda Motors Ltd.

Margins disappoints, lower rating to REDUCE

REDUCE

CMP: Rs 1,866                                       Target Price: Rs 1,720

---

n     EBIDTA margin disappoints at 13.4% (est. of 15.2%). APAT at Rs 5.1bn was 10% below our est. of Rs 5.7bn. Margins suffer due to higher RM cost and other expenses

n     H2FY11 margin est. of 14.4% at risk in absence of price hikes. Excise (cess) demand notice for Haridwar plant, would further impact margins by 1 %, currently unaccounted in P&L

n     Maintain FY11E/FY12E volumes est. of 5.3mn/5.9mn units.  Downgrade FY11E/FY12E EPS by 11 each to Rs 107.2/122.8

n     Downgrade rating to REDUCE from HOLD, revise TP to Rs1,720 (down 11%) - 14x FY12 EPS. Continue to prefer Bajaj Auto over Hero Honda

Net Sales – In line with expectation

Net sales at Rs 45.2bn was in line with expectation of Rs 45.4bn. Volume grew by 8.7%

YoY and 4.2% QoQ. Avg. realization per vehicle stood at Rs 35,398 (up 3.2% YoY and

1.7% QoQ) against expectation of Rs 35,337.

EBIDTA margins nosedive (13.4% against est. 15.2%)

EBIDTA at Rs 6.1bn was 12% below our est. of Rs 6.9bn, despite in line net sales.

EBIDTA margins continue to disappoint. Margins stood at 13.4% against our est. of

15.2%. Margins came under pressure on account of higher RM cost (72.7% of sale

against est. 71.8%) and higher other expenses (10.6% of sale against est. of 9.7%)

APAT was below expectation due to poor operating performance

Net profits at Rs 5.1bn was below our est. of Rs 5.7 bn, primarily on account of poor

operating performance. However, other income at Rs 784mn was ahead of est. of Rs

650mn.

Valuations and View

At CMP of Rs 1,866, the stock trades at PER of 17.4x and 15.2x and EV/EBIDTA of 13.0x

and 10.9x our FY11 and FY12 estimates respectively. We have revised our EPS estimate

downward by 11% each to Rs 107.2 and Rs 122.8 for FY11 and FY12 respectively due to

lower margin assumption. We have valued the stock at PER of 14x of FY12 estimates. We

downgrade our rating to REDUCE from HOLD, with a revised TP of Rs 1,720 (down 11%)