Hero Honda Motors: 2Q results:: Standard Chartered Research,

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Hero Honda Motors Ltd
UNDERPERFORM (unchanged) Price target: Rs1,875



2Q results
Hero Honda’s 2Q FY11 operating performance marked a divergence from other automobile companies by EBITDA
margin falling 500bps yoy and 60bps qoq to 13.4% against our expectation of 15.1%. Revenue increased 12.1%,
EBITDA and net profit declined 18.3% yoy and 15.3% yoy respectively. We lower our EPS estimate by 5.4% FY11E
to Rs110.5 and 4.5% FY12E to Rs128.2 and revise price target to Rs1,875 (Rs1,901 earlier). Reiterate Underperform.




Results: Key points
Net sales grow 12% yoy - Total income grew in line with our expectations by 12% yoy and 6%
qoq to Rs45.5bn, driven by volume growth of 8.7% yoy and 4.2% qoq. Realisation increased 1%
yoy on improvement in product mix, but declined 0.5% qoq.
EBITDA margin lowest in last eight quarters - EBITDA margin fell 500bps to 13.4%, the lowest
in last six quarters. The yoy decline was due to higher raw material to sales ratio at 72.7%
(+460bps yoy and +150bps qoq). The sequential increase in RM cost comes as a surprise, as
most of the other auto companies have reported a sequential decline to flat RM/sales ratios.
Net profit declines15%yoy - Adjusted PAT declined sharply by 15% yoy but increased 2.8%qoq
to Rs5.1b, 12% below our expectation.
Revising EPS estimate - We lower our EBITDA margin estimates to 14% FY11E (14.8% earlier)
and 14% FY12E (14.7% earlier) and based on that we lower the EPS estimate to Rs110.5 FY11E
(Rs116.8 earlier) and Rs128.2 FY12E (Rs134.3 earlier).
Valuation - HH is trading at 14.6x FY12E. We expect the stock to underperform the rest of the
auto sector till the time more clarity comes on the JV between Hero and Honda. Given the decline
in profitability, market share losses and slower earnings growth over FY10-12E, we lower our
price target to Rs1,875 (Rs1,901 earlier). Reiterate Underperform.