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Costs outpace ASPs
Hero Honda’s (HH) 3Q net profit declined 10% YoY and EBITDA margins
slipped 220bps QoQ as costs outpaces ASP increases due to diminishing
pricing power. While supply constraints should theoretically improve HH’s
pricing power in FY12, we are sceptical given the structural change that the
2W industry is going through. We cut FY11-13 EPS estimates 5-10% factoring
in 6-8% higher volumes but much lower margins. Maintain U-PF.
Sharp margin drop in 3Q
Hero Honda’s 3Q EBITDA at Rs5.8bn dropped 13% YoY and came in 17% below
estimates. EBITDA margins slipped a sharp 220bps QoQ to 11.2% driven mainly
by rising raw material costs, insufficient price increases and higher other
expenditure showing that the stabilization of market share in recent months has
come at a price. HH’s EBITDA per vehicle is now back to FY08 levels. Recurring
net profit (excl prior period provisions for ‘National Calamity Contingency Duty’ on
Haridwar sales) at Rs4.8bn declined 10% YoY and came in 18% below estimates.
We don’t expect a material improvement in margins in FY12
HH is likely to announce its 4th plant soon but the plant will come up only by
FY13. In FY12, HH’s plants will have to run at 100%+ utilization levels. This
should theoretically improve HH’s pricing power. However, two factors make us
sceptical – 1) The experience of Maruti in FY11 when pricing power remained
subdued despite capacity constraints due to competition pressures; and 2) We
believe that HH will be much more market share focused in FY12 than in the last
two years as it will not want to be seen to be losing market share immediately
post the Honda split in order to maintain morale of vendors, dealers and
employees. We build in EBITDA margins of 11.8-12.4% over FY12-13.
Cutting estimates 5-10%; maintain U-PF
We upgrade our volume assumptions by 6-8% over FY11-13. Our FY12-13 volume
numbers assume 11-12% industry growth with stable market share and there
could be downside to both assumptions. We assume margins to improve to 12.4%
in FY12 due to operating leverage benefits but build in a drop to 11.8% in FY13
due to rising competition from HMSI and higher fixed costs post start of the 4th
plant, Overall, our FY11-13 EPS estimates drop by 5-10%. We believe that HH will
trade at below historical average multiples given the structural change in the 2W
industry around the corner. We value HH at Rs1650/sh – 13x FY13 P/E (10%
below historical average) and maintain U-PF on the stock. Also – given that Bajaj
has now moved its margin guidance from an absolute level (20%) to a relative
one (6-7% above competition), we wonder if there is more downside to our Bajaj
margin assumptions as well. We remain underweight on the 2W space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Costs outpace ASPs
Hero Honda’s (HH) 3Q net profit declined 10% YoY and EBITDA margins
slipped 220bps QoQ as costs outpaces ASP increases due to diminishing
pricing power. While supply constraints should theoretically improve HH’s
pricing power in FY12, we are sceptical given the structural change that the
2W industry is going through. We cut FY11-13 EPS estimates 5-10% factoring
in 6-8% higher volumes but much lower margins. Maintain U-PF.
Sharp margin drop in 3Q
Hero Honda’s 3Q EBITDA at Rs5.8bn dropped 13% YoY and came in 17% below
estimates. EBITDA margins slipped a sharp 220bps QoQ to 11.2% driven mainly
by rising raw material costs, insufficient price increases and higher other
expenditure showing that the stabilization of market share in recent months has
come at a price. HH’s EBITDA per vehicle is now back to FY08 levels. Recurring
net profit (excl prior period provisions for ‘National Calamity Contingency Duty’ on
Haridwar sales) at Rs4.8bn declined 10% YoY and came in 18% below estimates.
We don’t expect a material improvement in margins in FY12
HH is likely to announce its 4th plant soon but the plant will come up only by
FY13. In FY12, HH’s plants will have to run at 100%+ utilization levels. This
should theoretically improve HH’s pricing power. However, two factors make us
sceptical – 1) The experience of Maruti in FY11 when pricing power remained
subdued despite capacity constraints due to competition pressures; and 2) We
believe that HH will be much more market share focused in FY12 than in the last
two years as it will not want to be seen to be losing market share immediately
post the Honda split in order to maintain morale of vendors, dealers and
employees. We build in EBITDA margins of 11.8-12.4% over FY12-13.
Cutting estimates 5-10%; maintain U-PF
We upgrade our volume assumptions by 6-8% over FY11-13. Our FY12-13 volume
numbers assume 11-12% industry growth with stable market share and there
could be downside to both assumptions. We assume margins to improve to 12.4%
in FY12 due to operating leverage benefits but build in a drop to 11.8% in FY13
due to rising competition from HMSI and higher fixed costs post start of the 4th
plant, Overall, our FY11-13 EPS estimates drop by 5-10%. We believe that HH will
trade at below historical average multiples given the structural change in the 2W
industry around the corner. We value HH at Rs1650/sh – 13x FY13 P/E (10%
below historical average) and maintain U-PF on the stock. Also – given that Bajaj
has now moved its margin guidance from an absolute level (20%) to a relative
one (6-7% above competition), we wonder if there is more downside to our Bajaj
margin assumptions as well. We remain underweight on the 2W space.
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