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Hero Honda Underweight
HROH.BO, HH IN
3QFY11 PAT decline -20% yoy surprises on margin pressures and provisioning cost
• Hero Honda’s 3Q reported PAT at Rs.4.3B (-20% yoy) was
significantly below ours and street estimates. The variance was driven
by weak margins as well as provisioning charges. EBITDA margins
came in at 11.2% (-610bp yoy and -220bp qoq) given rising input
costs. Further, provisioning costs relate to probable claims arising out
of litigations / disputes pending with statutory authorities.
• Outlook - margins to remain under pressure over the short term,
to announce new plant details: Management in its press release has
stated that while the industry growth is likely to remain healthy, they
foresee margins to remain under pressure in the short term. Further, the
company is close to finalizing the location for their fourth plant and
they will be de bottlenecking capacity at its existing plants.
• Healthy sales growth: Hero Honda reported healthy sales growth at
Rs.51.6B (+35% yoy), driven by 28% yoy volume growth as well as a
5% increase in realizations (given price hikes taken over the year).
Volume growth was driven by strong sales of scooters (+107% yoy)
and healthy sales of motorbikes (+25% yoy).
• EBITDA margin declines: The company reported weak margins at
11.2% (-610bp yoy & -220bp qoq) given rising cost pressures. The raw
material cost ratio increased +560bp yoy & +120bp qoq, given rising
input costs. Further, other expenses ratio increased +110bp yoy.
• The company made a provision of Rs.798m relating to probable claims
arsising out of litigations / disputes pending with statutory authorities
• Over the quarter, Hero and Honda announced that they are parting
ways. We believe that while the transition for Hero Honda will be
gradual (royalty rates to remain inline, Honda brand name could be
used till 2014); the local group will face challenges relating to a) R&D
scale up & incremental costs therein, b) branding challenges in new
export markets, and c) rising competition in the local markets, which
could entail higher brand spends (please see our note dated 20 Dec,
2010 – Hero Honda conference call takeaways)
• Post the split, HMSI highlighted its roadmap for the motorcycle
business in India, which includes launching new products in the
executive segment, ramping up on dealer & vendor network. Also, the
company is commissioning its new plant at Rajasthan over the year.
We re-iterate our cautious stance on the two-wheeler segment. We
will revert with further details after speaking with management.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda Underweight
HROH.BO, HH IN
3QFY11 PAT decline -20% yoy surprises on margin pressures and provisioning cost
• Hero Honda’s 3Q reported PAT at Rs.4.3B (-20% yoy) was
significantly below ours and street estimates. The variance was driven
by weak margins as well as provisioning charges. EBITDA margins
came in at 11.2% (-610bp yoy and -220bp qoq) given rising input
costs. Further, provisioning costs relate to probable claims arising out
of litigations / disputes pending with statutory authorities.
• Outlook - margins to remain under pressure over the short term,
to announce new plant details: Management in its press release has
stated that while the industry growth is likely to remain healthy, they
foresee margins to remain under pressure in the short term. Further, the
company is close to finalizing the location for their fourth plant and
they will be de bottlenecking capacity at its existing plants.
• Healthy sales growth: Hero Honda reported healthy sales growth at
Rs.51.6B (+35% yoy), driven by 28% yoy volume growth as well as a
5% increase in realizations (given price hikes taken over the year).
Volume growth was driven by strong sales of scooters (+107% yoy)
and healthy sales of motorbikes (+25% yoy).
• EBITDA margin declines: The company reported weak margins at
11.2% (-610bp yoy & -220bp qoq) given rising cost pressures. The raw
material cost ratio increased +560bp yoy & +120bp qoq, given rising
input costs. Further, other expenses ratio increased +110bp yoy.
• The company made a provision of Rs.798m relating to probable claims
arsising out of litigations / disputes pending with statutory authorities
• Over the quarter, Hero and Honda announced that they are parting
ways. We believe that while the transition for Hero Honda will be
gradual (royalty rates to remain inline, Honda brand name could be
used till 2014); the local group will face challenges relating to a) R&D
scale up & incremental costs therein, b) branding challenges in new
export markets, and c) rising competition in the local markets, which
could entail higher brand spends (please see our note dated 20 Dec,
2010 – Hero Honda conference call takeaways)
• Post the split, HMSI highlighted its roadmap for the motorcycle
business in India, which includes launching new products in the
executive segment, ramping up on dealer & vendor network. Also, the
company is commissioning its new plant at Rajasthan over the year.
We re-iterate our cautious stance on the two-wheeler segment. We
will revert with further details after speaking with management.
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