Hero Honda Motors - Capacity concerns addressed but margin headwind persists :: Emkay

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Hero Honda Motors Ltd.

Capacity concerns addressed but margin headwind persists

REDUCE

CMP: Rs 1,695                                       Target Price: Rs 1,590

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n     Capacity increased by debottlenecking, revised capacity stands at ~6.2mn units. There is further scope of increasing capacity

n     Royalty is a fixed expense to be paid by 2014. Our est. indicates a royalty outgo of Rs 1.9bn to Rs 2.1bn in FY12-FY14. Cost pressures are significant due to metal prices

n     4QFY11/1QFY12 to have higher adv. spends due to World cup/IPL. Raise FY12 vol. est. to 6.1mn units (+3.6%) and EPS to Rs 113.8 (+3.7%). Expect FY12 DPS of Rs 68 (earlier Rs 30)

n     Expect negative surprises on the earnings. Current valuations (FY12e PER/EV-EBIDTA of 14.9x/10.5x) do not factor in such risks. Raise TP to Rs.1,590 (+3%), retain REDUCE