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HERO HONDA MOTORS (HH)
RECOMMENDATION: REDUCE
TARGET PRICE: RS.1576
FY12E P/E: 13.5X
q Hero Honda's (HH) 3QFY11 revenues were in line with our expectations.
However sharp spike in the other expenses led to lower than expected
margins and profitability.
q Furthermore exceptional item to the tune of Rs798mn also dented the
company profitability during the quarter.
q As anticipated, rising raw material prices kept the margins under pressure
and the same is expected to continue in 4QFY11.
q In view of rising commodity prices, we are lowering our FY11 and FY12
margin estimates for the company. Based on that, our revised EPS for HH
now stands at Rs99.7 (earlier Rs102.8) for FY11E and Rs112.6 (earlier
Rs120.8) for FY12E.
q Given the company's skewed product mix towards the deluxe motorcycle
segment, we believe HH will find it relatively difficult to combat operating
margins pressures as compared to Bajaj Auto. We therefore lower
our target multiple from 15x to 14x (discount to Bajaj Auto).
q We revise our price target downward to Rs1,576 (from Rs1,812) and continue
to maintain REDUCE rating on the stock
n HH reported revenues of Rs.51,617 mn for the quarter as against revenues of
Rs.38,270 mn reported during corresponding quarter previous year, translating
into an increase of 34.9%.
n Revenues were driven by 28.5% jump in volumes and 4.4% improvement in
realization due to price hikes taken in the past one year.
n Revenues were in-line with our expectation of Rs.50,997 mn.
n Sequentially revenues were up by 13.4% helped by 11% higher volumes and
2.2% increased realization per unit.
n On the EBITDA front, the company disappointed with EBIDTA of Rs.5,766 mn
witnessing 12.8% YoY downfall despite impressive revenue growth.
n EBITDA was lower than our expectation of Rs.6,831 mn primarily due to sharp
spike in other expenses during the quarter.
n Other expenses during the quarter were up by 48.2% YoY and 26.8% QoQ to
Rs. 6,141mn.
n In absolute terms other expenses was up by Rs1,299mn over 2QFY11 and that
was the only reason for EBITDA falling short by Rs.1,065mn against our estimates.
n Higher other expenses led to fall in sequential margins from 13.4% to 11.2%.
n However YoY, apart from increase in other expenses, sharp rise in input cost was
prime reason for such a steep fall in margins from 17.3% to 11.2%.
n During the quarter the company provided for Rs.790 mn towards probable claims
arising out of litigations and disputes pending with the statutory authorities.
n Effective tax rate for the quarter at 15.6% was lower than 3QFY10 and 2QFY11
tax rate of 20.4% and 19.4% respectively.
n HH reported net profit of Rs.4,290 mn as against Rs5,853 mn reported during
similar quarter last year.
n Despite various rounds of price increase, the realizations has not been able to
keep pace with increase in input cost. Furthermore, even with volume growth
the company has be unable to gain in terms of operating leverage due to sharp
increase in other expenses. Both these factors have led to a sharp fall in the
EBITDA per vehicle from Rs.5,833 per vehicle in 3QFY10 to Rs. 3,733 per vehicle
in 3QFY11, a drop of 36%. Even if we were to ignore the impact of sharp rise in
other expenses in 3QFY11 and take 2QFY11 into consideration, the drop in
EBITDA per vehicle has been 24% since 3QFY10. This in our view clearly indicates
that apart from price hikes, the company has limited levers to offset the
impact of increasing input cost pressures.
n Going forward, moderating industry volumes expectations will reduce the scope
for further price increase. We therefore expect HH's margins will remain under
pressure until we see some softness in the commodity prices.
Outlook and valuations
n HH's 3QFY11 results were below our and street expectations. While rising input
cost has kept the company's margins under pressure, higher other expenses further
dented the company's margins during the quarter.
n We are increasing our volume estimates by 3.5-4% for FY11 and FY12 to
5.36mn units and 6mn units respectively. However we are revising EBITDA margin
estimates downward to factor in the impact of increase in raw material
prices.
n Based on the above mentioned changes, our revised EPS for HH now stands at
Rs99.7 (earlier Rs102.8) for FY11E and Rs112.6 (earlier Rs120.8) for FY12E.
n Given the company's skewed product mix towards the deluxe motorcycle segment,
we believe HH will find it relatively difficult to combat operating margins
pressures as compared to Bajaj Auto. We therefore lower our target multiple
from 15x to 14x (discount to Bajaj Auto).
n We revise our price target downward to Rs1,576 (from Rs1,812) and continue to
maintain REDUCE rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HERO HONDA MOTORS (HH)
RECOMMENDATION: REDUCE
TARGET PRICE: RS.1576
FY12E P/E: 13.5X
q Hero Honda's (HH) 3QFY11 revenues were in line with our expectations.
However sharp spike in the other expenses led to lower than expected
margins and profitability.
q Furthermore exceptional item to the tune of Rs798mn also dented the
company profitability during the quarter.
q As anticipated, rising raw material prices kept the margins under pressure
and the same is expected to continue in 4QFY11.
q In view of rising commodity prices, we are lowering our FY11 and FY12
margin estimates for the company. Based on that, our revised EPS for HH
now stands at Rs99.7 (earlier Rs102.8) for FY11E and Rs112.6 (earlier
Rs120.8) for FY12E.
q Given the company's skewed product mix towards the deluxe motorcycle
segment, we believe HH will find it relatively difficult to combat operating
margins pressures as compared to Bajaj Auto. We therefore lower
our target multiple from 15x to 14x (discount to Bajaj Auto).
q We revise our price target downward to Rs1,576 (from Rs1,812) and continue
to maintain REDUCE rating on the stock
n HH reported revenues of Rs.51,617 mn for the quarter as against revenues of
Rs.38,270 mn reported during corresponding quarter previous year, translating
into an increase of 34.9%.
n Revenues were driven by 28.5% jump in volumes and 4.4% improvement in
realization due to price hikes taken in the past one year.
n Revenues were in-line with our expectation of Rs.50,997 mn.
n Sequentially revenues were up by 13.4% helped by 11% higher volumes and
2.2% increased realization per unit.
n On the EBITDA front, the company disappointed with EBIDTA of Rs.5,766 mn
witnessing 12.8% YoY downfall despite impressive revenue growth.
n EBITDA was lower than our expectation of Rs.6,831 mn primarily due to sharp
spike in other expenses during the quarter.
n Other expenses during the quarter were up by 48.2% YoY and 26.8% QoQ to
Rs. 6,141mn.
n In absolute terms other expenses was up by Rs1,299mn over 2QFY11 and that
was the only reason for EBITDA falling short by Rs.1,065mn against our estimates.
n Higher other expenses led to fall in sequential margins from 13.4% to 11.2%.
n However YoY, apart from increase in other expenses, sharp rise in input cost was
prime reason for such a steep fall in margins from 17.3% to 11.2%.
n During the quarter the company provided for Rs.790 mn towards probable claims
arising out of litigations and disputes pending with the statutory authorities.
n Effective tax rate for the quarter at 15.6% was lower than 3QFY10 and 2QFY11
tax rate of 20.4% and 19.4% respectively.
n HH reported net profit of Rs.4,290 mn as against Rs5,853 mn reported during
similar quarter last year.
n Despite various rounds of price increase, the realizations has not been able to
keep pace with increase in input cost. Furthermore, even with volume growth
the company has be unable to gain in terms of operating leverage due to sharp
increase in other expenses. Both these factors have led to a sharp fall in the
EBITDA per vehicle from Rs.5,833 per vehicle in 3QFY10 to Rs. 3,733 per vehicle
in 3QFY11, a drop of 36%. Even if we were to ignore the impact of sharp rise in
other expenses in 3QFY11 and take 2QFY11 into consideration, the drop in
EBITDA per vehicle has been 24% since 3QFY10. This in our view clearly indicates
that apart from price hikes, the company has limited levers to offset the
impact of increasing input cost pressures.
n Going forward, moderating industry volumes expectations will reduce the scope
for further price increase. We therefore expect HH's margins will remain under
pressure until we see some softness in the commodity prices.
Outlook and valuations
n HH's 3QFY11 results were below our and street expectations. While rising input
cost has kept the company's margins under pressure, higher other expenses further
dented the company's margins during the quarter.
n We are increasing our volume estimates by 3.5-4% for FY11 and FY12 to
5.36mn units and 6mn units respectively. However we are revising EBITDA margin
estimates downward to factor in the impact of increase in raw material
prices.
n Based on the above mentioned changes, our revised EPS for HH now stands at
Rs99.7 (earlier Rs102.8) for FY11E and Rs112.6 (earlier Rs120.8) for FY12E.
n Given the company's skewed product mix towards the deluxe motorcycle segment,
we believe HH will find it relatively difficult to combat operating margins
pressures as compared to Bajaj Auto. We therefore lower our target multiple
from 15x to 14x (discount to Bajaj Auto).
n We revise our price target downward to Rs1,576 (from Rs1,812) and continue to
maintain REDUCE rating on the stock.
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