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Hero Honda
Underweight
HROH.BO, HH IN
3QFY11 PAT of Rs.4.3B down 20% yoy on lower operating margins and provisioning costs
• Hero Honda’s 3Q reported PAT at Rs.4.3B (-20% yoy) was significantly
below our 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 and higher ad spends. Further,
provisioning costs (of Rs.798m) relate to National Calamity Contingency Duty
(NCCD) claims for FY09-10. We reiterate our UW stance on the company
given rising competitive intensity and margin pressures.
• Conference call takeaways: Volume outlook: While volume growth is likely to
remain healthy, growth rates are likely to moderate to 15% (given a base effect)
over FY12E. Margin outlook: management expects margins to remain weak
over the near term given that i. commodity prices are on an uptrend - the
company will partially offset the same through recent price hikes ii R&D
expenses – management expects that R&D costs should amount to c.1-1.5% of
sales as the company develops in house expertise. iii. Ad spends are likely to
remain elevated given that Hero Honda is sponsoring the upcoming cricket
world cup. However over the medium term, management is targeting
normalized margins of c.14-15% Agreement with Honda: The ‘Hero Group’
owns the rights to the leading brand names - Splendor, Passion, Pleasure, etc. –
however, Honda owns the brand names CBZ and CD. Thus, post the split Hero
will need to adjust their portfolio accordingly. While the technology agreement
with Honda will continue till 2014 for existing models, the company will not be
able to make modifications to these products. The new models that Honda
supplies to Hero will bear a higher royalty rate (from the current 2.7%). The
technology agreement for the new models will be valid till Jun 2017. Capacity
expansion the company is close to finalizing the location for their fourth plant
and they will be de bottlenecking capacity at the existing plants.
• Price target: We are lowering our estimates by c.12% to factor in the weak
margin outlook over the near term. We are reducing our Mar 11 price target to
Rs.1,508 to factor in the lower earnings forecasts. We continue to value the
company at 14x forward earnings – inline with mid cycle multiples (unchanged
from our earlier valuation methodology). Key upside risks: higher than
anticipated industry growth rates and market share gains for Hero Honda. We
await further clarity on the terms between Hero and Honda.
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 of Rs.4.3B down 20% yoy on lower operating margins and provisioning costs
• Hero Honda’s 3Q reported PAT at Rs.4.3B (-20% yoy) was significantly
below our 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 and higher ad spends. Further,
provisioning costs (of Rs.798m) relate to National Calamity Contingency Duty
(NCCD) claims for FY09-10. We reiterate our UW stance on the company
given rising competitive intensity and margin pressures.
• Conference call takeaways: Volume outlook: While volume growth is likely to
remain healthy, growth rates are likely to moderate to 15% (given a base effect)
over FY12E. Margin outlook: management expects margins to remain weak
over the near term given that i. commodity prices are on an uptrend - the
company will partially offset the same through recent price hikes ii R&D
expenses – management expects that R&D costs should amount to c.1-1.5% of
sales as the company develops in house expertise. iii. Ad spends are likely to
remain elevated given that Hero Honda is sponsoring the upcoming cricket
world cup. However over the medium term, management is targeting
normalized margins of c.14-15% Agreement with Honda: The ‘Hero Group’
owns the rights to the leading brand names - Splendor, Passion, Pleasure, etc. –
however, Honda owns the brand names CBZ and CD. Thus, post the split Hero
will need to adjust their portfolio accordingly. While the technology agreement
with Honda will continue till 2014 for existing models, the company will not be
able to make modifications to these products. The new models that Honda
supplies to Hero will bear a higher royalty rate (from the current 2.7%). The
technology agreement for the new models will be valid till Jun 2017. Capacity
expansion the company is close to finalizing the location for their fourth plant
and they will be de bottlenecking capacity at the existing plants.
• Price target: We are lowering our estimates by c.12% to factor in the weak
margin outlook over the near term. We are reducing our Mar 11 price target to
Rs.1,508 to factor in the lower earnings forecasts. We continue to value the
company at 14x forward earnings – inline with mid cycle multiples (unchanged
from our earlier valuation methodology). Key upside risks: higher than
anticipated industry growth rates and market share gains for Hero Honda. We
await further clarity on the terms between Hero and Honda.
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