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Hero Honda :“ S p l e n d o r o u s ” H e r o t o r i d e s o l o …
Hero Honda (HHL) is the largest two wheeler manufacturer in the world
and caters to the mass segment in the domestic two-wheeler industry.
With strong brand equity (Splendor, Passion) along with a strong sales
and distribution network, we believe it will be a key beneficiary of the
structural demand growth originating from the strong and ever-growing
middle class in the rural and urban regions. It recently underwent a JV
break-up with Honda, which has left it with opportunities and
challenges. Its higher operating costs and downward trending margins
have received no respite from steep input prices and increased selling
expenses. We project revenues and PAT will grow at 15.9% and 4.1%
CAGR over FY10-13E to | 24,559 crore and | 2,521 crore, respectively.
We are initiating coverage on Hero Honda with an ADD rating.
Economics and demographics sweeten long term growth prospects
The Indian economy along with China is the leader in growth among
emerging markets. With improvements in disposable incomes for the
growing middle class (~35 million household above | 2 lakh p.a. income)
and younger demographics position (median age ~37 years) India is at
the beginning of a long-term consumption boom. We believe the boom
would be strongly driven by rural segment along with urban support as
the middle class size is expected to more than double in the next decade.
Strong brand equity to continue driving sales
Hero Honda has mammoth brands in Splendor and Passion that
contribute ~75% of total sales volumes. The brands have continued to be
leaders for more than a decade due to strong, stable and consistent
consumer outlook towards the same. We believe brand recognition/belief
and wide distribution reach are critical aspects of sales in India. This
would help Hero Honda to maintain its position in the wake of higher
competition.
Valuations
At the current market price of | 1530, HHL is trading at 13.8x FY12E EPS
of | 110.5 and 12.1x FY13E EPS of | 126.2.We have factored in positive
growth for HHL. However, concerns related to margins remain a
dampener towards the stock outlook. We have valued the stock on a
P/E multiple basis at 13x FY13E EPS of | 126.2. The multiple assigned
has been conservative due to the margin maintenance overhang on the
stock. We are initiating coverage on Hero Honda with an ADD rating at
a target price of | 1641 with a 7% upside potential.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda :“ S p l e n d o r o u s ” H e r o t o r i d e s o l o …
Hero Honda (HHL) is the largest two wheeler manufacturer in the world
and caters to the mass segment in the domestic two-wheeler industry.
With strong brand equity (Splendor, Passion) along with a strong sales
and distribution network, we believe it will be a key beneficiary of the
structural demand growth originating from the strong and ever-growing
middle class in the rural and urban regions. It recently underwent a JV
break-up with Honda, which has left it with opportunities and
challenges. Its higher operating costs and downward trending margins
have received no respite from steep input prices and increased selling
expenses. We project revenues and PAT will grow at 15.9% and 4.1%
CAGR over FY10-13E to | 24,559 crore and | 2,521 crore, respectively.
We are initiating coverage on Hero Honda with an ADD rating.
Economics and demographics sweeten long term growth prospects
The Indian economy along with China is the leader in growth among
emerging markets. With improvements in disposable incomes for the
growing middle class (~35 million household above | 2 lakh p.a. income)
and younger demographics position (median age ~37 years) India is at
the beginning of a long-term consumption boom. We believe the boom
would be strongly driven by rural segment along with urban support as
the middle class size is expected to more than double in the next decade.
Strong brand equity to continue driving sales
Hero Honda has mammoth brands in Splendor and Passion that
contribute ~75% of total sales volumes. The brands have continued to be
leaders for more than a decade due to strong, stable and consistent
consumer outlook towards the same. We believe brand recognition/belief
and wide distribution reach are critical aspects of sales in India. This
would help Hero Honda to maintain its position in the wake of higher
competition.
Valuations
At the current market price of | 1530, HHL is trading at 13.8x FY12E EPS
of | 110.5 and 12.1x FY13E EPS of | 126.2.We have factored in positive
growth for HHL. However, concerns related to margins remain a
dampener towards the stock outlook. We have valued the stock on a
P/E multiple basis at 13x FY13E EPS of | 126.2. The multiple assigned
has been conservative due to the margin maintenance overhang on the
stock. We are initiating coverage on Hero Honda with an ADD rating at
a target price of | 1641 with a 7% upside potential.
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