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UBS Investment Research
Hero Honda Ltd.
Reducing earnings on margin pressure
Reducing PT and earnings on near term margin pressure
We cut our EPS estimates for FY11/12/13 from Rs 110.51/132.16/146.84 to Rs
92.15/107.19/127.15 respectively due to weaker than expected Q3FY11 margins
and likelihood of rising raw material costs in the near term. However, we retain our
Buy as believe margin pressures are largely priced in and demand outlook remains
robust. Hero Honda remains our preferred pick on strong rural demand in FY12.
Almost 2/3rd of HH sales come from rural areas and agri-linked towns. (Refer
“India Auto Sector - Macro headwinds, rural India a safe haven” dated Jan 12’ 11).
Q3FY11 Sales: Rs 51.1bn (+34% YoY); EBITDA: Rs 5.76bn (-13%YoY)
Sales increased 13% qoq driven by 11%qoq increase in volumes and 2% QoQ
increase in ASP. However, EBITDA margin declined 220bps QoQ and 610bps
YoY to 11.2% due to higher raw material costs up 110bps qoq and higher other
expenses (up 27% qoq). Co. provisioned Rs 798.4mn in the qtr relating to excise
duty dispute for Haridwar plant. As a result PAT declined 20%YoY to Rs 4.29bn
Margin pressure to persist in the near term
We believe sequential improvement in margins is unlikely given higher advertising
spend due to Cricket World Cup in Q4FY11 and further increase in RM costs due
to rising commodity prices. We however believe long term sustainable margins
will be higher as ASP increases offset higher RM cost gradually over the period.
Valuation: Maintain Buy, Reduce PT to Rs 2,000 (from Rs 2,250)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation driver using UBS’s VCAM tool, assuming a WACC of 11.3%.
Earnings Estimate Changes
We reduce our EBITDA margin for FY11/12/13E from 13.9%/14.7%/14.7%
to 12.1%/11.6%/12.4% due to rising raw material cost.
We expect raw material cost pressures to persist over the next 6 months
given increasing prices for key commodities like Steel and Aluminium.
We expect co. take gradual price increases to improve EBITDA margins
over the medium term. However, price increase in near term may not be
enough to offset raw material cost pressures due to rising commodity costs.
Valuation
We maintain our Buy rating on Hero Honda as we believe Hero Honda to be
the major beneficiary of rising rural demand. We expect rural demand to
drive 2W growth in FY12.
We reduce our price target to Rs2,000 from Rs2,250 as we cut our near term
earnings and medium term margin assumptions.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool with a WACC
of 11.3%.
Our 12-month target price implies Hero Honda will trade at 15.7x FY13 EPS
estimates.
Hero Honda Ltd.
Hero Honda, which sold 4.6m motorcycles in FY10, is the world's largest twowheeler
manufacturer, even though it is present primarily only in the motorcycle
segment of the Indian two-wheeler market. Hero Honda is a joint venture
between Honda (Japan) and Hero group (owned by the Munjal family) of India.
The joint venture agreement was renewed in June 2004 for 10 years (2014).
Statement of Risk
Key risks to our earnings estimates for auto companies are fluctuations in sales
volumes and raw material prices. Demand is linked to various factors including
the economic growth rate and interest rates in the economy. Given, the high
level of consolidation within the industry, two wheeler industry is more prone to
price wars among players.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hero Honda Ltd.
Reducing earnings on margin pressure
Reducing PT and earnings on near term margin pressure
We cut our EPS estimates for FY11/12/13 from Rs 110.51/132.16/146.84 to Rs
92.15/107.19/127.15 respectively due to weaker than expected Q3FY11 margins
and likelihood of rising raw material costs in the near term. However, we retain our
Buy as believe margin pressures are largely priced in and demand outlook remains
robust. Hero Honda remains our preferred pick on strong rural demand in FY12.
Almost 2/3rd of HH sales come from rural areas and agri-linked towns. (Refer
“India Auto Sector - Macro headwinds, rural India a safe haven” dated Jan 12’ 11).
Q3FY11 Sales: Rs 51.1bn (+34% YoY); EBITDA: Rs 5.76bn (-13%YoY)
Sales increased 13% qoq driven by 11%qoq increase in volumes and 2% QoQ
increase in ASP. However, EBITDA margin declined 220bps QoQ and 610bps
YoY to 11.2% due to higher raw material costs up 110bps qoq and higher other
expenses (up 27% qoq). Co. provisioned Rs 798.4mn in the qtr relating to excise
duty dispute for Haridwar plant. As a result PAT declined 20%YoY to Rs 4.29bn
Margin pressure to persist in the near term
We believe sequential improvement in margins is unlikely given higher advertising
spend due to Cricket World Cup in Q4FY11 and further increase in RM costs due
to rising commodity prices. We however believe long term sustainable margins
will be higher as ASP increases offset higher RM cost gradually over the period.
Valuation: Maintain Buy, Reduce PT to Rs 2,000 (from Rs 2,250)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation driver using UBS’s VCAM tool, assuming a WACC of 11.3%.
Earnings Estimate Changes
We reduce our EBITDA margin for FY11/12/13E from 13.9%/14.7%/14.7%
to 12.1%/11.6%/12.4% due to rising raw material cost.
We expect raw material cost pressures to persist over the next 6 months
given increasing prices for key commodities like Steel and Aluminium.
We expect co. take gradual price increases to improve EBITDA margins
over the medium term. However, price increase in near term may not be
enough to offset raw material cost pressures due to rising commodity costs.
Valuation
We maintain our Buy rating on Hero Honda as we believe Hero Honda to be
the major beneficiary of rising rural demand. We expect rural demand to
drive 2W growth in FY12.
We reduce our price target to Rs2,000 from Rs2,250 as we cut our near term
earnings and medium term margin assumptions.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool with a WACC
of 11.3%.
Our 12-month target price implies Hero Honda will trade at 15.7x FY13 EPS
estimates.
Hero Honda Ltd.
Hero Honda, which sold 4.6m motorcycles in FY10, is the world's largest twowheeler
manufacturer, even though it is present primarily only in the motorcycle
segment of the Indian two-wheeler market. Hero Honda is a joint venture
between Honda (Japan) and Hero group (owned by the Munjal family) of India.
The joint venture agreement was renewed in June 2004 for 10 years (2014).
Statement of Risk
Key risks to our earnings estimates for auto companies are fluctuations in sales
volumes and raw material prices. Demand is linked to various factors including
the economic growth rate and interest rates in the economy. Given, the high
level of consolidation within the industry, two wheeler industry is more prone to
price wars among players.
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