Hero Honda - 2Q FY11 Results: In Line with Estimates:: Citi

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



Hero Honda (HROH.BO)
2Q FY11 Results: In Line with Estimates

 2Q results in line with our estimates, disappoint vis-à-vis consensus — EBITDA at
cRs6.07bn was~2% below our estimate; variance was driven by cost pressures.
Gross contribution per bike dropped c4% Q/Q. We find this difficult to reconcile,
in the context of a price hike of ~Rs 500-1,000 undertaken in June’10 to offset
these cost pressures. PAT however at Rs 5.06bn was in line with estimates, as it
was buoyed by a strong beat in other income.

 Market share trends disappoint — Hero Honda has progressively lost share to
Bajaj Auto in the domestic motorcycles segment. In 2QFY11, HH’s market share
was ~53% in the domestic bike market (down c110bps Q/Q). HH’s market share
peaked at c63.5% in 4QFY09. While the new Splendor may prevent a rapid
decline, market share erosion is likely to continue with new model launches from
Suzuki, HMSI and TVS in addition to aggressive positioning by Bajaj Auto.

 Ownership issues an overhang — The question of ownership among promoters will
continue to be an overhang on the stock. The uncertainty regarding the relation
ship between Hero Group and Honda throws up questions on technology,
branding, royalty etc.— all pertinent questions from a business perspective, to
which there are no satisfactory answers at this juncture.

 We cut earnings estimates by 4%-11% over FY11/12 respectively —This reflects
both, reduction in volume estimates (2-3.5%) as well as decline in margins (120-
10bps). Our new estimates reflect implied residual volume growth of 16.5% YoY in
2HFY11 – achievable, given festive season delay this year.

 Not yet a Sell — HH’s strong free cash flow characteristics, coupled with fairly
healthy business conditions imply it’s not a sell, despite market share losses /
ownership related issues. Valuations on various parameters (P/E, EV/EBITDA and
P/Book) indicate stock trades above 5-year averages. Maintain Hold. Revise TP to
Rs1,936 from Rs1,952 as we roll forward to 15x Mar 12E EPS from Dec11 EPS.