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Hero Honda's 3QFY11 results are below estimates with EBITDA margins of 10.4% (v/s our estimates 12.8%), EBITDA of
Rs5.3b (v/s our estimates Rs6.4b) and PAT of Rs4.94b (v/s our estimates Rs5.4b), impacted by higher cost push on RM
and fixed costs.
EBITDA margin for the quarter was 10.4% (v/s our estimate of 12.8%), EBITDA was Rs5.3b (v/s our estimate of
Rs6.4b) and PAT was Rs4.94b (v/s our estimate of Rs5.4b), impacted by higher cost push on raw material (RM) and
fixed costs.
Volumes grew 28.5% YoY (~11% QoQ) to 1.43m units and realization increased 4.4% YoY (2.2% QoQ) to Rs35,841/
unit (v/s our estimate of Rs35,243/unit).
EBITDA margin declined 220bp QoQ (660bp YoY), impacted by 110bp QoQ (~600bp YoY) RM cost inflation and
130bp QoQ (~80bp YoY) increase in other expenses (due to provisioning for NCCD - 55bp for 1HFY11 and 35bp for
3QFY11). Recurring PAT declined 8% YoY (~2.3% QoQ) to Rs4.94b.
We believe that the short term focus would be on to ensure smooth transition and preparing for exit of Honda, which
could result in subdued performance in the short term. We expect entire deal between Hero & Honda to be completed
by June 2011.
Valuation and view: We have downgraded our EPS estimates by 5.9% to Rs113.7 for FY12 and by 6.3% to Rs128.5
for FY13 to factor in higher RM cost push and expenses related to business transition (higher marketing and R&D
spend). The stock trades at 13.4x FY12E EPS and 11.9x FY13E EPS. Maintain Buy with target price of Rs1,799 (~14x
FY13E EPS).
Highest ever quarterly volumes drive revenue growth
Hero Honda's 3QFY11 volumes grew 28.5% YoY (~11% QoQ) to 1.43m units. Contribution
from the Haridwar plant was 31.5% (v/s 33% in 3QFY10 and 33.5% in 3QFY11) at
~450,000 units. Market share at ~40.1% was higher by 100bp QoQ (~90bp YoY decline).
Realization improved by 2.2% QoQ (4.4% YoY) to Rs35,841/unit (v/s our estimate of
Rs35,243/unit), driven by price increases taken across models (in a phased manner over
June-September 2010 and in December 2010). As a result, revenue grew 34.2% YoY
(~13.5% QoQ) to Rs51.2b (v/s our estimate of Rs50.3b).
RM cost inflation, other expenses drag margins to lowest ever
EBITDA margin declined 630bp YoY (~220bp QoQ) to 10.4% - Hero Honda's lowest
ever quarterly margin - impacted by higher RM costs and other expenses. RM cost
increased by 600bp YoY and 110bp QoQ to 74.5%. Other expenses were higher by 80bp
YoY and 130bp QoQ; the company provided for NCCD charge of ~Rs460m for Haridwar
sales (1% of Haridwar sales), of which ~Rs280m was for 1HFY11 (~55bp) and ~Rs180m
for 3QFY11 (~35bp). Adjusting for NCCD charge for 1HFY11, 3QFY11 EBITDA margins
would be ~11%.
Higher other income at Rs1.05b (v/s our estimate of Rs850m), driven by treasury income,
boosted recurring PAT to Rs4.94b (v/s our estimate of Rs5.4b), a decline of 8% YoY
(~2% QoQ). The company has also provided for NCCD charge of Rs798m for previous
years (for FY09-10), which impacted reported PAT to Rs4.29b.
NCCD and education cess could impact margins by 30-40bp
NCCD and education cess (total of 1.1% of sales) are levied on excise duty payable.
Hero Honda did not pay these duties on its sales from Haridwar, as it is excise exempted.
However, the Excise department claimed that these duties are payable despite excise
exemption. Hero Honda has started providing for these claims as it is seeking legal advice
and filing appeals. We estimate 30-40bp impact on margins and have modelled this from
3QFY11 onwards on recurring basis.
Expect subdued performance over the next 2-3 quarters
Hero Honda has been refraining from exercising the pricing power industry enjoys. Despite
being constrained for capacity and its peers increasing prices, it has not yet increased
prices as much (Rs700-1,500/unit increase in December 2010, which only partly covers
cost push). As a result, EBITDA margin is at a historical low, despite historical high
volumes.
We believe that the company's short-term focus would be on ensuring a smooth transition
and preparing for the exit of Honda, which could result in subdued performance in the
short term. We expect the deal between Hero group and Honda to be completed by June
2011. This, coupled with investments for transition (brand, technology and developing
export markets), would ensure that EBITDA margin stays below the historical average of
15% (over the last 10 years).
Cutting EPS estimates to factor poor 3QFY11 results, transition-related
costs
We are cutting our EPS estimates by 4% to Rs99.7 for FY11, by 5.9% to Rs113.7 for
FY12 and by 6.3% to Rs128.5 for FY13, to factor in higher RM cost push and expenses
related to business transition (higher marketing and R&D spend). Our estimates factor in:
Volume growth of 12.5% in FY12 and 10% in FY13, and realization improvement of
2% each in FY12 and FY13.
RM cost savings of 60bp (~150bp over 3QFY11) in FY12 and further 50bp in FY13.
Royalty of 2.9% of sales in FY12 and 2.8% of sales in FY13.
Increase in advertising spend by 10bp each in FY12 and FY13 (~Rs1.75b increase
over FY11-13).
R&D expense of 0.3% (~Rs650m) in FY12 and 0.5% (~Rs1.2b) in FY13.
Valuation and view
With the ownership issue settled, we expect performance to be driven by business momentum
in the short run and smooth transition in the long run. While strong franchise of Splendor
and Passion as well as wide distribution reach makes Hero Honda best placed to tap
strong demand growth over next few years, short-term transitory pain over next 6-9 months
could impact performance of the stock. The stock trades at 13.4x FY12E EPS and 11.9x
FY13E EPS. Maintain Buy with a target price of Rs1,799 (~14x FY13E EPS).
Company description
Hero Honda is a JV between Honda Corporation, Japan
and the Munjal family, with both parties owning 26% each.
The company has recently announced that Honda would
be exiting the JV. Hero Honda is the market leader in the
domestic motorcycle market with ~45% market share,
benefiting from a strong dealership network with good
penetration in rural areas as well.
Key investment arguments
Volume growth is expected to remain stable, driven by
recovery in urban markets and increasing penetration
in rural markets. We estimate volume growth of 12.5%
in FY11 to 6m units.
Hero Honda would be one of the key beneficiaries (in
auto industry) of a normal monsoon, given its focus on
rural markets.
With the exit of Honda, Hero Honda would be free to
explore global markets. This could provide good longterm
opportunities.
Key investment risks
Strengthening of commodity prices would put pressure
on margins.
Honda's exit from Hero Honda would result in a
focused approach by HMSI on domestic markets.
Maintaining market share amidst increasing competitive
pressures (especially in the 100cc segment) would
restrict pricing power and impact margins.
Recent developments
Honda would be exiting Hero Honda by selling its 26%
stake to Hero group. Hero group would be signing a
new licensing agreement with Honda to ensure continuity
of operations and smooth transit by June 2014.
Valuation and view
The stock trades at 13.4x FY12E EPS and 11.9x FY13E
EPS.
Maintain Buy with target price of Rs1,799 (~14x FY13E
EPS).
Sector view
Increasing penetration in rural markets and replacement
demand from urban markets would drive demand for
motorcycles.
Despite large number of players, market share remains
concentrated amongst the top two.
Industry dynamics remain favorable, with focus on
profitability rather than market share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda's 3QFY11 results are below estimates with EBITDA margins of 10.4% (v/s our estimates 12.8%), EBITDA of
Rs5.3b (v/s our estimates Rs6.4b) and PAT of Rs4.94b (v/s our estimates Rs5.4b), impacted by higher cost push on RM
and fixed costs.
EBITDA margin for the quarter was 10.4% (v/s our estimate of 12.8%), EBITDA was Rs5.3b (v/s our estimate of
Rs6.4b) and PAT was Rs4.94b (v/s our estimate of Rs5.4b), impacted by higher cost push on raw material (RM) and
fixed costs.
Volumes grew 28.5% YoY (~11% QoQ) to 1.43m units and realization increased 4.4% YoY (2.2% QoQ) to Rs35,841/
unit (v/s our estimate of Rs35,243/unit).
EBITDA margin declined 220bp QoQ (660bp YoY), impacted by 110bp QoQ (~600bp YoY) RM cost inflation and
130bp QoQ (~80bp YoY) increase in other expenses (due to provisioning for NCCD - 55bp for 1HFY11 and 35bp for
3QFY11). Recurring PAT declined 8% YoY (~2.3% QoQ) to Rs4.94b.
We believe that the short term focus would be on to ensure smooth transition and preparing for exit of Honda, which
could result in subdued performance in the short term. We expect entire deal between Hero & Honda to be completed
by June 2011.
Valuation and view: We have downgraded our EPS estimates by 5.9% to Rs113.7 for FY12 and by 6.3% to Rs128.5
for FY13 to factor in higher RM cost push and expenses related to business transition (higher marketing and R&D
spend). The stock trades at 13.4x FY12E EPS and 11.9x FY13E EPS. Maintain Buy with target price of Rs1,799 (~14x
FY13E EPS).
Highest ever quarterly volumes drive revenue growth
Hero Honda's 3QFY11 volumes grew 28.5% YoY (~11% QoQ) to 1.43m units. Contribution
from the Haridwar plant was 31.5% (v/s 33% in 3QFY10 and 33.5% in 3QFY11) at
~450,000 units. Market share at ~40.1% was higher by 100bp QoQ (~90bp YoY decline).
Realization improved by 2.2% QoQ (4.4% YoY) to Rs35,841/unit (v/s our estimate of
Rs35,243/unit), driven by price increases taken across models (in a phased manner over
June-September 2010 and in December 2010). As a result, revenue grew 34.2% YoY
(~13.5% QoQ) to Rs51.2b (v/s our estimate of Rs50.3b).
RM cost inflation, other expenses drag margins to lowest ever
EBITDA margin declined 630bp YoY (~220bp QoQ) to 10.4% - Hero Honda's lowest
ever quarterly margin - impacted by higher RM costs and other expenses. RM cost
increased by 600bp YoY and 110bp QoQ to 74.5%. Other expenses were higher by 80bp
YoY and 130bp QoQ; the company provided for NCCD charge of ~Rs460m for Haridwar
sales (1% of Haridwar sales), of which ~Rs280m was for 1HFY11 (~55bp) and ~Rs180m
for 3QFY11 (~35bp). Adjusting for NCCD charge for 1HFY11, 3QFY11 EBITDA margins
would be ~11%.
Higher other income at Rs1.05b (v/s our estimate of Rs850m), driven by treasury income,
boosted recurring PAT to Rs4.94b (v/s our estimate of Rs5.4b), a decline of 8% YoY
(~2% QoQ). The company has also provided for NCCD charge of Rs798m for previous
years (for FY09-10), which impacted reported PAT to Rs4.29b.
NCCD and education cess could impact margins by 30-40bp
NCCD and education cess (total of 1.1% of sales) are levied on excise duty payable.
Hero Honda did not pay these duties on its sales from Haridwar, as it is excise exempted.
However, the Excise department claimed that these duties are payable despite excise
exemption. Hero Honda has started providing for these claims as it is seeking legal advice
and filing appeals. We estimate 30-40bp impact on margins and have modelled this from
3QFY11 onwards on recurring basis.
Expect subdued performance over the next 2-3 quarters
Hero Honda has been refraining from exercising the pricing power industry enjoys. Despite
being constrained for capacity and its peers increasing prices, it has not yet increased
prices as much (Rs700-1,500/unit increase in December 2010, which only partly covers
cost push). As a result, EBITDA margin is at a historical low, despite historical high
volumes.
We believe that the company's short-term focus would be on ensuring a smooth transition
and preparing for the exit of Honda, which could result in subdued performance in the
short term. We expect the deal between Hero group and Honda to be completed by June
2011. This, coupled with investments for transition (brand, technology and developing
export markets), would ensure that EBITDA margin stays below the historical average of
15% (over the last 10 years).
Cutting EPS estimates to factor poor 3QFY11 results, transition-related
costs
We are cutting our EPS estimates by 4% to Rs99.7 for FY11, by 5.9% to Rs113.7 for
FY12 and by 6.3% to Rs128.5 for FY13, to factor in higher RM cost push and expenses
related to business transition (higher marketing and R&D spend). Our estimates factor in:
Volume growth of 12.5% in FY12 and 10% in FY13, and realization improvement of
2% each in FY12 and FY13.
RM cost savings of 60bp (~150bp over 3QFY11) in FY12 and further 50bp in FY13.
Royalty of 2.9% of sales in FY12 and 2.8% of sales in FY13.
Increase in advertising spend by 10bp each in FY12 and FY13 (~Rs1.75b increase
over FY11-13).
R&D expense of 0.3% (~Rs650m) in FY12 and 0.5% (~Rs1.2b) in FY13.
Valuation and view
With the ownership issue settled, we expect performance to be driven by business momentum
in the short run and smooth transition in the long run. While strong franchise of Splendor
and Passion as well as wide distribution reach makes Hero Honda best placed to tap
strong demand growth over next few years, short-term transitory pain over next 6-9 months
could impact performance of the stock. The stock trades at 13.4x FY12E EPS and 11.9x
FY13E EPS. Maintain Buy with a target price of Rs1,799 (~14x FY13E EPS).
Company description
Hero Honda is a JV between Honda Corporation, Japan
and the Munjal family, with both parties owning 26% each.
The company has recently announced that Honda would
be exiting the JV. Hero Honda is the market leader in the
domestic motorcycle market with ~45% market share,
benefiting from a strong dealership network with good
penetration in rural areas as well.
Key investment arguments
Volume growth is expected to remain stable, driven by
recovery in urban markets and increasing penetration
in rural markets. We estimate volume growth of 12.5%
in FY11 to 6m units.
Hero Honda would be one of the key beneficiaries (in
auto industry) of a normal monsoon, given its focus on
rural markets.
With the exit of Honda, Hero Honda would be free to
explore global markets. This could provide good longterm
opportunities.
Key investment risks
Strengthening of commodity prices would put pressure
on margins.
Honda's exit from Hero Honda would result in a
focused approach by HMSI on domestic markets.
Maintaining market share amidst increasing competitive
pressures (especially in the 100cc segment) would
restrict pricing power and impact margins.
Recent developments
Honda would be exiting Hero Honda by selling its 26%
stake to Hero group. Hero group would be signing a
new licensing agreement with Honda to ensure continuity
of operations and smooth transit by June 2014.
Valuation and view
The stock trades at 13.4x FY12E EPS and 11.9x FY13E
EPS.
Maintain Buy with target price of Rs1,799 (~14x FY13E
EPS).
Sector view
Increasing penetration in rural markets and replacement
demand from urban markets would drive demand for
motorcycles.
Despite large number of players, market share remains
concentrated amongst the top two.
Industry dynamics remain favorable, with focus on
profitability rather than market share.
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