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Hero Honda
Take a pillion ride
Sole two wheeler pick, Raise PO
Following 13% YTD underperformance, Hero Honda is our preferred stock in two
wheelers space. While FY11 is expected to be weak, we expect earnings to
rebound at 16% CAGR over FY11E-13E, driven by (1) two wheeler sales growth
of 13% annually, and (2) bottoming out of margins. Our revised PO is based on
lowered multiples, similar to peers, thereby factoring increased execution risks.
Margins close to bottoming out
Margins will likely remain subdued 1-2 quarters, similar to disappointing Q3 FY11,
due to high input costs and sports sponsorship related ad-spends. Also, rebranding
costs will restrict reported profit. We however expect margins to improve
subsequently, driven by stronger volumes and likely stability in commodity price.
Sales will be driven by domestic demand
We largely retain our volume assumptions over next 2 years of 6.2mn units (+14%
yoy) and 6.9mn units respectively (+12% yoy). We expect company to better
manage headwinds of rising interest rates and competition, given relatively low
dependence of financed vehicles and superior pan India franchise.
Opportunities could offset challenges
Hero Honda faces growing challenges of rising competition, not only from
erstwhile JV partner Honda but a rejuvenated Bajaj Auto. On the other hand, the
company has unfulfilled opportunities in exports (presently miniscule) and
premium bikes, which has not been factored in our forecasts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda
Take a pillion ride
Sole two wheeler pick, Raise PO
Following 13% YTD underperformance, Hero Honda is our preferred stock in two
wheelers space. While FY11 is expected to be weak, we expect earnings to
rebound at 16% CAGR over FY11E-13E, driven by (1) two wheeler sales growth
of 13% annually, and (2) bottoming out of margins. Our revised PO is based on
lowered multiples, similar to peers, thereby factoring increased execution risks.
Margins close to bottoming out
Margins will likely remain subdued 1-2 quarters, similar to disappointing Q3 FY11,
due to high input costs and sports sponsorship related ad-spends. Also, rebranding
costs will restrict reported profit. We however expect margins to improve
subsequently, driven by stronger volumes and likely stability in commodity price.
Sales will be driven by domestic demand
We largely retain our volume assumptions over next 2 years of 6.2mn units (+14%
yoy) and 6.9mn units respectively (+12% yoy). We expect company to better
manage headwinds of rising interest rates and competition, given relatively low
dependence of financed vehicles and superior pan India franchise.
Opportunities could offset challenges
Hero Honda faces growing challenges of rising competition, not only from
erstwhile JV partner Honda but a rejuvenated Bajaj Auto. On the other hand, the
company has unfulfilled opportunities in exports (presently miniscule) and
premium bikes, which has not been factored in our forecasts.
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