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Hero Honda (HH) reported a mixed performance during 3QFY2011, with
better-than-expected top-line growth, driven by robust volume growth; however,
adjusted net profit came in lower than our estimates, largely due to subdued
performance on the operating front on account of raw-material cost pressures.
We revise our earnings estimates marginally downwards due to lower-thanexpected
performance on the operating front and remain Neutral on the stock.
Top line in line, net profit dips on input cost pressure: For 3QFY2011, HH
registered strong 34.9% yoy and 13.5% qoq growth in net sales to `5,162cr
(`3,827cr), marginally ahead of our expectation. Growth was driven by a robust
28.5% yoy increase in volumes and a ~4.4% yoy increase in average net
realisation. During the quarter, operating profit declined by 12.8% yoy to `577cr
due to a dip in EBITDA margins, which fell substantially by 610bp yoy and 219bp
qoq on raw-material cost pressure (up 599bp yoy) and increased other
expenditure. Adjusted net profit came in at `509cr, down 5% yoy, against our
estimate of `548cr, largely due to subdued performance on the operating front.
Outlook and valuation: We broadly maintain our volume growth estimates and
model the company to record a ~14% CAGR in revenue over FY2010–12E,
aided by a ~12% CAGR in volumes during the period. We revise our OPM
estimates marginally downwards to account for margin pressures. We expect net
profit to register a moderate ~3% CAGR over FY2010–12E on account of tax
benefits availed by HH at its Uttaranchal plant. However, we believe this will not
be able to compensate for the drop in market share and leaves limited room for
earnings upgrade. We remain Neutral on the stock.
Strong top-line growth on robust volume growth: HH reported better-thanexpected
34.9% yoy and 13.5% qoq growth in its top line to `5,162cr, against
our expectation of `4,967cr. Growth was aided by robust 28.5% yoy (up 11%
qoq) growth in volumes and a ~4.4% yoy increase in average net realisation.
The top-line performance was also supported by a substantial ~245% yoy
increase in other operating income at `43.5cr (`12.6cr in 3QFY2010).
Margin contraction seen on higher input cost: HH’s EBITDA margin for 3QFY2011
came in 168bp lower than our estimate at 11.2%, a substantial drop of 610bp yoy
and 219bp qoq. Margin contraction can be attributed to a 599bp yoy increase
in raw-material cost, accounting for 74.5% (68.6%) of net sales. Further,
increased other expenditure during the quarter impacted margins. However,
improved operating leverage helped the company to save on staff cost, which
restricted the contraction in EBITDA margin to a certain extent.
Exhibit 4: EBITDA margin dips on input cost pressures...
Source: Company, Angel Research
Exhibit 5: … leading to fall in net profit margin
Source: Company, Angel Research
Adjusted net profit down 5% yoy: HH reported adjusted net profit of `509cr, down
5% yoy, as against our estimate of `548cr, largely due to subdued operating
performance. However, lower tax provision arising from the commencement of the
Haridwar plant and higher other income (mainly comprising treasury gains) for the
quarter arrested the further decline in adjusted net profit to a certain extent. During
the quarter, HH incurred an exceptional cost of `79.8cr towards provisions for
probable claims from statutory authorities, which led to a 19.9% decline in
reported net profit.
Market share rebounds in 3QFY2011; future outlook cautious: In 3QFY2011,
HH’s domestic motorcycle segment’s market share increased to ~56% from ~53%
in 2QFY2011. The company has guided that it would sustain its current growth
momentum for the rest of the year. The scooter segment recorded volume growth
of ~100% yoy in 3QFY2011, with Pleasure selling ~28,000 units per month.
Market share in the scooter segment increased by 390bp yoy to ~17%.Margin contraction seen on higher input cost: HH’s EBITDA margin for 3QFY2011
came in 168bp lower than our estimate at 11.2%, a substantial drop of 610bp yoy
and 219bp qoq. Margin contraction can be attributed to a 599bp yoy increase
in raw-material cost, accounting for 74.5% (68.6%) of net sales. Further,
increased other expenditure during the quarter impacted margins. However,
improved operating leverage helped the company to save on staff cost, which
restricted the contraction in EBITDA margin to a certain extent.
Adjusted net profit down 5% yoy: HH reported adjusted net profit of `509cr, down
5% yoy, as against our estimate of `548cr, largely due to subdued operating
performance. However, lower tax provision arising from the commencement of the
Haridwar plant and higher other income (mainly comprising treasury gains) for the
quarter arrested the further decline in adjusted net profit to a certain extent. During
the quarter, HH incurred an exceptional cost of `79.8cr towards provisions for
probable claims from statutory authorities, which led to a 19.9% decline in
reported net profit.
Market share rebounds in 3QFY2011; future outlook cautious: In 3QFY2011,
HH’s domestic motorcycle segment’s market share increased to ~56% from ~53%
in 2QFY2011. The company has guided that it would sustain its current growth
momentum for the rest of the year. The scooter segment recorded volume growth
of ~100% yoy in 3QFY2011, with Pleasure selling ~28,000 units per month.
Market share in the scooter segment increased by 390bp yoy to ~17%.
Investment arguments
Demand momentum continues; base effect arrests higher growth: In view of
normal monsoons and increased penetration in rural markets, we expect
demand momentum to remain strong over FY2011. Management has also
guided for volumes to exceed 5mn units in the current fiscal, implying
12–13% yoy growth.
Haridwar plant to ramp up production: HH commenced expansion plans at its
Haridwar plant in Uttarakhand, with the first plant commissioned in April
2008 with an initial capacity of 500,000 units. The company aims to increase
its total installed capacity to 5.7mn units from 5.4mn units in 2010. This will
be done through incremental investment of `130cr at its third and newest
plant in Haridwar. This plant also avails of tax benefits, including a 100%
excise exemption for 10 years and a 100% income tax exemption for the first
five years and 30% for the next five years.
Besides the Haridwar plant, HH has two plants in Gurgaon, which enjoy tax
benefits. Due to increasing production levels at the Haridwar plant, the
company's overall tax rate for FY2010 has come down to 21.2% from 28% in
the previous fiscal and would further come down by ~2% over FY2011–12.
Outlook and valuation
Over FY2007–10, HH gained market share, benefiting from Bajaj Auto (BAL) and
TVS’s product failures and strong rural demand. However, competition is now
rising, as evident from continued strong retail demand for new launches from BAL
and Honda Motor and Scooters India Ltd. HH’s domestic market share in the
motorcycle segment dropped to 54% in FY2010 from 63% in FY2009. Further, the
economic improvement in FY2011E is likely to be led by urban demand, where
BAL has a better presence. We see HH’s motorcycle market share declining to
~50% (~53%) in FY2011. With the industry estimated to post a ~13% volume
CAGR over FY2010–12E, we believe HH’s volume growth will lag behind the
industry’s growth rate.
We broadly maintain our volume growth estimates and model the company to
record a ~14% CAGR in revenue over FY2010–12E, aided by a ~12% CAGR in
volumes during the period. We revise our OPM estimates downwards to account
for margin pressure due to increasing raw-material prices (aluminum and steel).
We expect net profit to register a moderate CAGR of ~3% over FY2010–12E on
account of tax benefits availed by HH at its new plant in Uttaranchal. (HH has
increased capacity at its Haridwar plant to 1.8mn units and targets to produce
1.7mn units there in FY2011, up from 1.3mn units in FY2010. This will mitigate the
impact of cost pressure on earnings to a certain extent.) However, we believe this
will not compensate for the drop in market share and, thus, leaves limited room
for earnings upgrade. We maintain our Neutral stand on the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda – 3QFY2011 Result Update
Angel Broking maintains a Neutral on Hero Honda.
Hero Honda (HH) reported a mixed performance during 3QFY2011, with
better-than-expected top-line growth, driven by robust volume growth; however,
adjusted net profit came in lower than our estimates, largely due to subdued
performance on the operating front on account of raw-material cost pressures.
We revise our earnings estimates marginally downwards due to lower-thanexpected
performance on the operating front and remain Neutral on the stock.
Top line in line, net profit dips on input cost pressure: For 3QFY2011, HH
registered strong 34.9% yoy and 13.5% qoq growth in net sales to `5,162cr
(`3,827cr), marginally ahead of our expectation. Growth was driven by a robust
28.5% yoy increase in volumes and a ~4.4% yoy increase in average net
realisation. During the quarter, operating profit declined by 12.8% yoy to `577cr
due to a dip in EBITDA margins, which fell substantially by 610bp yoy and 219bp
qoq on raw-material cost pressure (up 599bp yoy) and increased other
expenditure. Adjusted net profit came in at `509cr, down 5% yoy, against our
estimate of `548cr, largely due to subdued performance on the operating front.
Outlook and valuation: We broadly maintain our volume growth estimates and
model the company to record a ~14% CAGR in revenue over FY2010–12E,
aided by a ~12% CAGR in volumes during the period. We revise our OPM
estimates marginally downwards to account for margin pressures. We expect net
profit to register a moderate ~3% CAGR over FY2010–12E on account of tax
benefits availed by HH at its Uttaranchal plant. However, we believe this will not
be able to compensate for the drop in market share and leaves limited room for
earnings upgrade. We remain Neutral on the stock.
Strong top-line growth on robust volume growth: HH reported better-thanexpected
34.9% yoy and 13.5% qoq growth in its top line to `5,162cr, against
our expectation of `4,967cr. Growth was aided by robust 28.5% yoy (up 11%
qoq) growth in volumes and a ~4.4% yoy increase in average net realisation.
The top-line performance was also supported by a substantial ~245% yoy
increase in other operating income at `43.5cr (`12.6cr in 3QFY2010).
Margin contraction seen on higher input cost: HH’s EBITDA margin for 3QFY2011
came in 168bp lower than our estimate at 11.2%, a substantial drop of 610bp yoy
and 219bp qoq. Margin contraction can be attributed to a 599bp yoy increase
in raw-material cost, accounting for 74.5% (68.6%) of net sales. Further,
increased other expenditure during the quarter impacted margins. However,
improved operating leverage helped the company to save on staff cost, which
restricted the contraction in EBITDA margin to a certain extent.
Exhibit 4: EBITDA margin dips on input cost pressures...
Source: Company, Angel Research
Exhibit 5: … leading to fall in net profit margin
Source: Company, Angel Research
Adjusted net profit down 5% yoy: HH reported adjusted net profit of `509cr, down
5% yoy, as against our estimate of `548cr, largely due to subdued operating
performance. However, lower tax provision arising from the commencement of the
Haridwar plant and higher other income (mainly comprising treasury gains) for the
quarter arrested the further decline in adjusted net profit to a certain extent. During
the quarter, HH incurred an exceptional cost of `79.8cr towards provisions for
probable claims from statutory authorities, which led to a 19.9% decline in
reported net profit.
Market share rebounds in 3QFY2011; future outlook cautious: In 3QFY2011,
HH’s domestic motorcycle segment’s market share increased to ~56% from ~53%
in 2QFY2011. The company has guided that it would sustain its current growth
momentum for the rest of the year. The scooter segment recorded volume growth
of ~100% yoy in 3QFY2011, with Pleasure selling ~28,000 units per month.
Market share in the scooter segment increased by 390bp yoy to ~17%.Margin contraction seen on higher input cost: HH’s EBITDA margin for 3QFY2011
came in 168bp lower than our estimate at 11.2%, a substantial drop of 610bp yoy
and 219bp qoq. Margin contraction can be attributed to a 599bp yoy increase
in raw-material cost, accounting for 74.5% (68.6%) of net sales. Further,
increased other expenditure during the quarter impacted margins. However,
improved operating leverage helped the company to save on staff cost, which
restricted the contraction in EBITDA margin to a certain extent.
Adjusted net profit down 5% yoy: HH reported adjusted net profit of `509cr, down
5% yoy, as against our estimate of `548cr, largely due to subdued operating
performance. However, lower tax provision arising from the commencement of the
Haridwar plant and higher other income (mainly comprising treasury gains) for the
quarter arrested the further decline in adjusted net profit to a certain extent. During
the quarter, HH incurred an exceptional cost of `79.8cr towards provisions for
probable claims from statutory authorities, which led to a 19.9% decline in
reported net profit.
Market share rebounds in 3QFY2011; future outlook cautious: In 3QFY2011,
HH’s domestic motorcycle segment’s market share increased to ~56% from ~53%
in 2QFY2011. The company has guided that it would sustain its current growth
momentum for the rest of the year. The scooter segment recorded volume growth
of ~100% yoy in 3QFY2011, with Pleasure selling ~28,000 units per month.
Market share in the scooter segment increased by 390bp yoy to ~17%.
Investment arguments
Demand momentum continues; base effect arrests higher growth: In view of
normal monsoons and increased penetration in rural markets, we expect
demand momentum to remain strong over FY2011. Management has also
guided for volumes to exceed 5mn units in the current fiscal, implying
12–13% yoy growth.
Haridwar plant to ramp up production: HH commenced expansion plans at its
Haridwar plant in Uttarakhand, with the first plant commissioned in April
2008 with an initial capacity of 500,000 units. The company aims to increase
its total installed capacity to 5.7mn units from 5.4mn units in 2010. This will
be done through incremental investment of `130cr at its third and newest
plant in Haridwar. This plant also avails of tax benefits, including a 100%
excise exemption for 10 years and a 100% income tax exemption for the first
five years and 30% for the next five years.
Besides the Haridwar plant, HH has two plants in Gurgaon, which enjoy tax
benefits. Due to increasing production levels at the Haridwar plant, the
company's overall tax rate for FY2010 has come down to 21.2% from 28% in
the previous fiscal and would further come down by ~2% over FY2011–12.
Outlook and valuation
Over FY2007–10, HH gained market share, benefiting from Bajaj Auto (BAL) and
TVS’s product failures and strong rural demand. However, competition is now
rising, as evident from continued strong retail demand for new launches from BAL
and Honda Motor and Scooters India Ltd. HH’s domestic market share in the
motorcycle segment dropped to 54% in FY2010 from 63% in FY2009. Further, the
economic improvement in FY2011E is likely to be led by urban demand, where
BAL has a better presence. We see HH’s motorcycle market share declining to
~50% (~53%) in FY2011. With the industry estimated to post a ~13% volume
CAGR over FY2010–12E, we believe HH’s volume growth will lag behind the
industry’s growth rate.
We broadly maintain our volume growth estimates and model the company to
record a ~14% CAGR in revenue over FY2010–12E, aided by a ~12% CAGR in
volumes during the period. We revise our OPM estimates downwards to account
for margin pressure due to increasing raw-material prices (aluminum and steel).
We expect net profit to register a moderate CAGR of ~3% over FY2010–12E on
account of tax benefits availed by HH at its new plant in Uttaranchal. (HH has
increased capacity at its Haridwar plant to 1.8mn units and targets to produce
1.7mn units there in FY2011, up from 1.3mn units in FY2010. This will mitigate the
impact of cost pressure on earnings to a certain extent.) However, we believe this
will not compensate for the drop in market share and, thus, leaves limited room
for earnings upgrade. We maintain our Neutral stand on the company.
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