Hero Honda:: Q2 likely trough; Neutral : BofA ML

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Hero Honda
Q2 likely trough; Neutral


􀂄 Below par performance, tweak forecasts/PO
Q2 profit at Rs5.1bn was lower than expectations, reflected in 460bps yoy decline
in EBITDA margins at 13.4% (est 14%). EBITDA declined 18% yoy to Rs6.1bn,
despite inline sales at Rs45.5bn (up 12% yoy). We believe this performance is a
trough on volumes and margins, and only tweak forecasts and PO. Rate Neutral.



Margins disappoint, but could be trough
Q2 margin was impacted by higher input and emission related costs, as the
company held on to prices in a relatively lean season. With competition already
having raised prices of select models, we expect pricing action sometime soon.
Still, we cut margins by 80/50bps to 14%/14.2% over FY11-12E.

We expect stronger two wheeler sales
H1 volumes grew 9.5% yoy, well behind industry at 28.6%. We however expect
growth to catch up from H2, thanks to new launches across segments i.e. 100cc
Splendor Pro, 125cc Splendor Pro and 150cc Hunk. Raise volume assumptions
slightly to 5.25mn in FY11E (up 14% yoy) and 5.98mn in FY12E (up 13.5%).

Still Neutral, but prefer over Bajaj Auto
We believe company’s operations have bottomed, on market share as well as
growth trajectory. Following 64% stock underperformance relative to peers this
year we switch preference to Hero Honda over Bajaj Auto on differential
valuations (5% discount on FY12E EPS) and superior franchise.