India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda: Growth All Around!!! HOLD
Company:
Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers,
based in India. The company is a joint venture between India's Hero Group and
Honda Motor Company, Japan that began in 1984. Hero Honda is a world leader
because of its excellent manpower, proven management, extensive dealer
network, efficient supply chain and world-class products with cutting edge
technology from Honda Motor Company, Japan. The teamwork and commitment
are manifested in the highest level of customer satisfaction, and this goes a long
way towards reinforcing its leadership status.
Key Rationale:
Continuously Improving Performance: Hero Honda has posted its strongest
sales volumes of all time. It achieved sales of 5 lakh plus units twice in this fiscal.
This has come at a time when the company was entangled in major controversies.
The Q3FY11 performance has been the best quarter in terms of sales volumes
Smooth separation: The promoters of the company have announced their split
wherein the Hero group will buyout Honda’s stake in the company. This is a major
positive for the company in many aspects like exposure to export market and
gradual decline then nil payment of royalty. The Hero group had been in talks
with Honda from a long time since the earlier agreement had restricted Hero
Honda motors from exporting in markets where Honda had a presence.
Exports to Boost volumes: When the buyout is complete and agreement
signed, Hero Honda will have access to export markets which it didn’t have
earlier. Currently Hero Honda exports only to South Asia and some part of Latin
America. Export will start adding only in the long term after detail analysis of
potential markets. but the company’s competition views this as a major threat
and have already started to make plans to aggressively market their products in
the export markets.
Valuations & Views: With festive season buying and adding clarity over the
termination of JV issue the outlook for Hero Honda remains positive. At the CMP
of Rs 1804, Hero Honda is trading at 18x its FY11E EPS of Rs 100 and at 14.7x its
FY12E EPS of Rs 122. With the target price at Rs. 1988 using target multiple of
16.3xFY12E, we recommend “Hold” on the stock.
Highlights of New MoU Signed Between the Promoters:
Existing Products to Continue: Hero Honda will retain its existing product portfolio till the end of the JV i.e. till 2014.
This means that the Hero Group will continue to sell their blockbuster products like Passion and Splendor, which to date
contribute about 70%-80% of the company’s sales.
Freedom To Export: Under the new understanding hero Honda will be able to export its products to other countries of
interest. Earlier hero Honda was restricted to not export its products where Honda had a presence. Currently Hero Honda
exports its products to South America and South-East Asia. Henceforth the company will be able to sell its products in its
potential export markets. but exports will only begin after detailed study and understanding of different markets.
Independence to set Up Own R&D: Hero Honda will have the freedom to set up its own R&D facilities to develop new
products. It will also be able to buy technology from others which it cannot right now. Currently it only gets technology
and products that Honda supplies under the original agreement. Whether it will set up its own R&D centre or buy
technology and design from others it still unknown.
Brand Name to Change Over Time: According to the new MoU, Hero Honda will be branded by a separate by a
different name in years to come. But the approximate time frame is still very unclear.
Royalty Payments to subside then end: Royalty payment to Honda will reduce from the coming quarter onwards. This
was made clear after many had speculated that the royalty payments to Honda would increase to around 6%-8% from
the current 2%-3%. The management also stated that royalty payments will stop very soon without specifying any
particular timeframe.
Other Key Rationales:
Volume Growth To Continue: Significant growth has been observed sales volumes and this is likely to continue since
most of the concerns that customer were facing due to a foggy image that they had about the JV have all been cleared by
the management. With Hero Honda continuing to get products and technology from Honda as well as the clause that will
allow Hero Honda to purchase technology form other technology suppliers also the option to set up its own R&D facility
only means more options and choices for the customers.
To Remain Market Leader: Hero Honda will remain the market leader in the two wheeler segment even after the Hero
group buys out its partner’s stake in the JV. The buyout will not affect the company’s sales in near terms. But Hero
Honda’s R&D has always been the key cause of concern for most investor. Thus by making it clear that the company will
be able to purchase technology from other supplier as well the company has placed itself in a safe position.
No comments:
Post a Comment