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Hero Honda Motors
Operational fears addressed, fairly valued; maintain Sell
Management providing better clarity on some operational
aspects post Honda Motor’s proposed exit from the Hero Honda
Motors’ (HHML) joint venture, near-term operational concerns
were addressed satisfactorily. Financial details of Honda’s exit
are, however, not available. We maintain Sell on fair valuations
and medium- and long-term competitive pressures.
Current status. As of now, the MoU has been cleared by the
Board. The next step would be the signing of a Definitive
Agreement in 2-4 weeks, to address operational intricacies and the
future relationship between the JV partners.
Positives highlighted...No significant increase in royalty,
opening up of new exports markets and potential for value
engineering to reduce costs are some positives for HHML.
...but concerns outweigh. Rise in competitive intensity with the
separation of the JV partners, lack of adequate clarity about the
intra-promoter final deal structure, possibility of higher R&D
expense (which would nullify the benefit from future diminishing
of royalty payment) and need for brand re-building lead to
concerns overriding the positives in the medium-to-long term.
Valuation and risks. We raise our estimates 3.4% to factor in
higher exports and slightly better margins. We raise our target
price to `1,844 from `1,783 based on 13.5x FY12e core EPS
(~15% discount to the past 5-year core PE average). Maintain Sell.
Risks: Better-than-expected demand and lower commodity prices.
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