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Net profit, at INR 5.2 bn, below our estimate
Hero Honda Motors’ (HH) Q3FY11 adjusted net profit, at INR 5.22 bn (down
2.5% Y-o-Y and up 3% Q-o-Q), was 9% and 7% below our and the Street’s
expectations, respectively. The variance was on account of a steep rise in other
expenses and higher-than-expected raw material costs.
EBITDA margins disappoint, down 160bps Q-o-Q
Net sales, at INR 51.2 bn (up 34% Y-o-Y and 14% Q-o-Q), led by volume growth
(up 29% Y-o-Y, 11% Q-o-Q) were strong with realisations per vehicle (up 2% Qo-
Q) partially benefitting from a price hike taken in December.
However, adjusted EBITDA margins disappointed at 11.8% (down 550bps Y-o-Y
and 160bps Q-o-Q). Reported other expenses (up 27% Q-o-Q) were higherthan–
expected on account of marketing costs related to the Commonwealth
Games (amounting to INR 380 mn) and statutory expenses related to previous
quarters (INR 300 mn). Excluding these, EBITDA margins would have been
12.5% (100bps and 150bps below consensus and our estimates, respectively).
Increase in raw material expenses (up 120bps Q-o-Q) was higher than expected.
Capacity to expand; cautious on near-term margins
Management exhibited confidence in maintaining positive volume growth
trajectory. To gear up for future demand, the company is likely to shortly
announce setting up of the fourth manufacturing plant. Last quarter, HH was
increased its market share by 260bps sequentially (to 55.6%). On EBITDA
margins however the management remained cautious.
Outlook and valuations: Uncertainty prevails; maintain ‘BUY’
The current quarter has been disappointing and short-term pressures are likely
to persist due to stronger raw material costs and elevated marketing expenses
(HH is a global sponsor of the cricketing world cup). We marginally revise down
our earnings estimates by 2% and 6% for FY11 and FY12, respectively.
However, the current valuation (~12.5x FY12 EPS) factor in these concerns.
Further, with a change in the ownership structure, we believe that over the
medium term, HH will benefit from: (a) cost competitive sourcing of
components; and (b) potential benefits from accessing export markets. We
maintain ‘BUY’/Sector Outperformer’ with a target price of INR 1,700,
implying 14x FY12E (in line with historical averages).
Company Description
HH is the world’s largest two-wheeler company (in volume terms). It has a production
capacity of 5.5 mn two wheelers at its two manufacturing facilities at Gurgaon and
Dharuhera in Haryana and one at Uttaranchal. The company offers motorcycles in all the
three major segments—CD Dawn and CD Deluxe in entry; Splendour, Passion, and
Glamour in executive; and Hunk, Achiever, CBZ and Karizma in premium. It also sells
Pleasure in the ungeared scooter segment.
Investment Theme
Hero Honda continues to dominate the two wheeler space in the fast growing Indian
market. It has strong brands, which it has continuously revamped over the years. Its
distribution network deep into the hinterland is a key strategic advantage. The company
market share seems to have stabilized in the last few quarters. Incrementally, there are
potential upsides from higher exports as well as cost effective procurement.
Key Risks
Competitive intensity increasing
HH remains exposed to the executive bike segment, which is likely to see extensive
competition in the coming year, particularly from HMSI. The rising raw material costs are
a cause of concern although we believe the benign competitive environment in the two
wheeler space allows for potential price hikes.
Further details of the deal awaited
We await further details on the agreement between the Hero Group and Honda. While
most critical concerns seem to have been allayed, we would still await the final
agreement.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Net profit, at INR 5.2 bn, below our estimate
Hero Honda Motors’ (HH) Q3FY11 adjusted net profit, at INR 5.22 bn (down
2.5% Y-o-Y and up 3% Q-o-Q), was 9% and 7% below our and the Street’s
expectations, respectively. The variance was on account of a steep rise in other
expenses and higher-than-expected raw material costs.
EBITDA margins disappoint, down 160bps Q-o-Q
Net sales, at INR 51.2 bn (up 34% Y-o-Y and 14% Q-o-Q), led by volume growth
(up 29% Y-o-Y, 11% Q-o-Q) were strong with realisations per vehicle (up 2% Qo-
Q) partially benefitting from a price hike taken in December.
However, adjusted EBITDA margins disappointed at 11.8% (down 550bps Y-o-Y
and 160bps Q-o-Q). Reported other expenses (up 27% Q-o-Q) were higherthan–
expected on account of marketing costs related to the Commonwealth
Games (amounting to INR 380 mn) and statutory expenses related to previous
quarters (INR 300 mn). Excluding these, EBITDA margins would have been
12.5% (100bps and 150bps below consensus and our estimates, respectively).
Increase in raw material expenses (up 120bps Q-o-Q) was higher than expected.
Capacity to expand; cautious on near-term margins
Management exhibited confidence in maintaining positive volume growth
trajectory. To gear up for future demand, the company is likely to shortly
announce setting up of the fourth manufacturing plant. Last quarter, HH was
increased its market share by 260bps sequentially (to 55.6%). On EBITDA
margins however the management remained cautious.
Outlook and valuations: Uncertainty prevails; maintain ‘BUY’
The current quarter has been disappointing and short-term pressures are likely
to persist due to stronger raw material costs and elevated marketing expenses
(HH is a global sponsor of the cricketing world cup). We marginally revise down
our earnings estimates by 2% and 6% for FY11 and FY12, respectively.
However, the current valuation (~12.5x FY12 EPS) factor in these concerns.
Further, with a change in the ownership structure, we believe that over the
medium term, HH will benefit from: (a) cost competitive sourcing of
components; and (b) potential benefits from accessing export markets. We
maintain ‘BUY’/Sector Outperformer’ with a target price of INR 1,700,
implying 14x FY12E (in line with historical averages).
Company Description
HH is the world’s largest two-wheeler company (in volume terms). It has a production
capacity of 5.5 mn two wheelers at its two manufacturing facilities at Gurgaon and
Dharuhera in Haryana and one at Uttaranchal. The company offers motorcycles in all the
three major segments—CD Dawn and CD Deluxe in entry; Splendour, Passion, and
Glamour in executive; and Hunk, Achiever, CBZ and Karizma in premium. It also sells
Pleasure in the ungeared scooter segment.
Investment Theme
Hero Honda continues to dominate the two wheeler space in the fast growing Indian
market. It has strong brands, which it has continuously revamped over the years. Its
distribution network deep into the hinterland is a key strategic advantage. The company
market share seems to have stabilized in the last few quarters. Incrementally, there are
potential upsides from higher exports as well as cost effective procurement.
Key Risks
Competitive intensity increasing
HH remains exposed to the executive bike segment, which is likely to see extensive
competition in the coming year, particularly from HMSI. The rising raw material costs are
a cause of concern although we believe the benign competitive environment in the two
wheeler space allows for potential price hikes.
Further details of the deal awaited
We await further details on the agreement between the Hero Group and Honda. While
most critical concerns seem to have been allayed, we would still await the final
agreement.
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