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Hero Honda Motors Ltd.
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Margins disappoint again, lower rating to REDUCE
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REDUCE
CMP: Rs 1,523 Target Price: Rs 1,540
n EBIDTA margin disappoints at 11.2% (est. of 14.2%) due to sharp increase in RM to sales (73.9% vs est. of 72.1%) and other exp. to sales (11.9% vs est. of 10.7%)
n APAT at Rs 5.1bn was below our est of Rs 5.8bn. Presume that higher RM to sales has the impact of cess on sales from the Haridwar (tax free) plant
n Maintain FY12E vol est. of 5.9mn units. Lower FY12E EPS by 11% to Rs 109.8. On 16/12/10, we upgraded rating to HOLD due to price correction and clarity on strategy post Honda
n However, in light of sharp erosion in margins we again downgrade our rating to REDUCE with a TP of Rs 1540, valuing the company at 14x FY12E PER
Net Sales – above estimate
Net sales at Rs 51.6bn was above est. of Rs 49.9bn due to better average selling price (ASP). ASP stood at Rs 36,146 (up 5% YoY and 3.8% QoQ) against expectation of Rs 34,952.
EBIDTA margins nosedive (11.2% against est. 14.2%)
EBIDTA at Rs 5.8bn was significantly below our est. of Rs 7.1bn, despite above est saes. EBIDTA margins continue to disappoint. Margins stood at 11.2% against our est. of 14.2%. Margins came under pressure on account of higher RM cost (73.9% of sale against est. 72.1%) and higher other expenses (11.9% of sale against est. of 10.7%). We presume that higher RM to Sales is also provision of cess (excise) in the P&L for the quarter.
APAT was below expectation due to poor operating performance
APAT at Rs 5.1bn was below our est. of Rs 5.8 bn, primarily on account of poor operating performance. HH has provided Rs 798mn toward probable claims arising out of litigation/disputes with statutory/regulatory authorities.
Valuations and View
At CMP of Rs 1,523, the stock trades at PER of 13.8x and EV/EBIDTA of 9.2x our FY12 estimates. We have revised our FY12 EPS estimate downward by 10.6% each to Rs 109.8 due to lower margin assumption. We have valued the stock at PER of 14x of FY12 estimates. We downgrade our rating to REDUCE from HOLD, with a revised TP of Rs 1,540 (down 10.5%). On 16/12/10, we had upgraded rating to HOLD due to clarity on the strategy post Honda and price correction. However, in light of sharp erosion in margins we again downgrade our rating to REDUCE
Net sales at Rs 51.6bn was above est. of Rs 49.9bn due to better average selling price (ASP). ASP stood at Rs 36,146 (up 5% YoY and 3.8% QoQ) against expectation of Rs 34,952.
EBIDTA margins nosedive (11.2% against est. 14.2%)
EBIDTA at Rs 5.8bn was significantly below our est. of Rs 7.1bn, despite above est saes. EBIDTA margins continue to disappoint. Margins stood at 11.2% against our est. of 14.2%. Margins came under pressure on account of higher RM cost (73.9% of sale against est. 72.1%) and higher other expenses (11.9% of sale against est. of 10.7%). We presume that higher RM to Sales is also provision of cess (excise) in the P&L for the quarter.
APAT was below expectation due to poor operating performance
APAT at Rs 5.1bn was below our est. of Rs 5.8 bn, primarily on account of poor operating performance. HH has provided Rs 798mn toward probable claims arising out of litigation/disputes with statutory/regulatory authorities.
Valuations and View
At CMP of Rs 1,523, the stock trades at PER of 13.8x and EV/EBIDTA of 9.2x our FY12 estimates. We have revised our FY12 EPS estimate downward by 10.6% each to Rs 109.8 due to lower margin assumption. We have valued the stock at PER of 14x of FY12 estimates. We downgrade our rating to REDUCE from HOLD, with a revised TP of Rs 1,540 (down 10.5%). On 16/12/10, we had upgraded rating to HOLD due to clarity on the strategy post Honda and price correction. However, in light of sharp erosion in margins we again downgrade our rating to REDUCE
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