Hero Honda Motors -Near term concerns addressed, Upgrade:: Emkay

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Hero Honda Motors Ltd

Near term concerns addressed, Upgrade rating to HOLD

HOLD

CMP: Rs1,679                                        Target Price: Rs1,720

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n     JV termination details has addressed near term concerns. Royalty to reduce from January 2011. Current branding to exist till June 2014 thereafter royalty outflow to cease

n     Adequate time for making alternative arrangement on R&D front. Unrestricted access to export markets once the definitive agreement is signed (in next few weeks)

n     Retain our FY11/FY12 volumes est. of 5.3/5.9mn units and EPS of Rs 107.2/122.8. Upgrade rating to HOLD from REDUCE, retain TP of Rs1,720

n     Continue to have concerns in the medium term with respect to cost of R&D, entering the export markets, brand building and competition from Honda (from FY13)

Key Highlights

Broad contours of the deal

Hero group will be the single promoter of the company post the definite agreement is

singed (in next few weeks). The transaction will take place in trenches (deal value not

disclosed). Funding will be done by debt which shall be repaid over a period of time.

Product/markets arrangement

Existing products will continue. Honda will provide with three new products till 2014.

Hero Honda will free to access any geographical market for exports.

Brand name to continue till June 2014

The ‘Honda’ brand name will continue till June 2014. However, any changes in the

products will result in early withdrawal of the brand name.

Royalty outlow

Royalty rates will not increase. Infact expect rates ot decrease from January 2011. All

the products will become royalty free by June 2014.

Technology

Hero Honda can develop its own R&D or source technology from any other player

across the globe. Management sounded confident that R&D cost will not eat into

margins.

Valuations and View

At Rs1,679, the stock trades at PER of 15.7x and 13.7x and EV/EBIDTA of 11.6x and

9.6x our FY11 and FY12 estimates respectively. We maintain our FY11 and FY12

volumes and earnings estimates. We expect company to register sales of 5.35 mn in

FY11 and 5.9 mn units in FY12. We have valued the stock at 14x PER (as compared to

15.5x for Bajaj Auto). We upgrade our rating on the stock to HOLD from REDUCE post

the correction in the stock price.