Hero Honda- Lower-than-expected PAT:: Kotak Sec

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Hero Honda (HH)
Automobiles
Lower-than-expected PAT on account of higher raw material cost. Hero Honda
reported a PAT of Rs5.1 bn, which was 7% below estimates. The downside was driven
by a 150 bps qoq increase in raw material costs in a quarter where most auto
companies saw a sequential decline. We lowered our margin estimate by 50 bps for
FY2011E but continue to model a 2H recovery that might not come through. Our
FY2011E estimates also incorporate 21% volume growth for 2HFY11E. Downside risks
to our estimates keeps us at a REDUCE.


Hero Honda disappoints in 2QFY11 on higher-than-expected raw material costs
Hero Honda reported a PAT of Rs5.1 bn for 2QFY11, down 15% yoy and up 3% qoq. The results
were 9% lower than our PAT estimate of Rs5.6 bn. The downside was largely driven by lowerthan-
expected EBITDA (Rs700 mn) partly offset by higher-than-expected financial income (Rs184
mn). EBITDA margin for the quarter came in at 13.4%, down 60 bps from 1QFY11 and 500 bps
yoy. The sequential decline in EBITDA margins was largely driven by higher raw material costs. Raw
material as a percentage of sales increased 150 bps qoq, driven by increases in steel, aluminum
and rubber prices. Lower other expenses as a percentage of sales acted as an offset.
Revenue for the quarter totaled Rs45.5 bn, up 12% yoy and 6% from 1QFY11. Realizations for
the quarter were up 3% yoy and 1.7% qoq. The sequential increase was driven by price increase
taken during the quarter.

Lowering our estimates to reflect lower margins for the rest of the year and 2QFY11 miss
We are lowering our FY2011E EPS estimate to Rs109 from Rs115 prior to reflect lower EBITDA
margins of 14% compared to 14.5% prior. We could be still be aggressive on the margin front as
we have modeled EBITDA margins increasing to 14.3% in 2HFY11E from 13.7% reported in
1HFY11. Margins could decline further if commodity prices continue recent trends. On the volume
front, we continue to model a 15% growth for the year, implying 21% yoy growth and 10%
sequential growth in 2HFY11E.
For FY2012E, we lower our EPS estimate to Rs127 from Rs130. Our current estimate is based on
15% volume growth and flat margins.


Lowering target to Rs1,775 on lower earnings, further downside potential keeps us cautious
We lower our target to Rs1,775 from Rs1,800 prior and the TP is based on 14X our FY2012E EPS
estimate of Rs127. We believe there could be further downside to our estimates from higher
commodity costs that could be difficult to pass through in a competitive environment.