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Hero Honda
Tough solo ride ahead
Event
We transfer coverage of Hero Honda to Amit Mishra with an Underperform
rating and TP of Rs1,550 (previously Rs1,630). While we are positive on the
volume growth for two-wheelers, we see significant downside risks to Hero
Honda’s margins. Post Honda’s exit from the JV, we expect an increase in the
competition targeted at Hero Honda’s core segments. Higher branding and
product development costs will likely put further pressure on their margins.
Impact
Volume growth to remain strong. We expect two-wheeler industry sales
volumes to grow 16% in FY12E (consensus at 14%) and we are expecting HH
to grow in line with the industry. We expect the two-wheeler sales growth to
remain firm due to strong agri-output and pricing as well as high employment
generation in the economy. Headwinds like rising interest rates will have
limited impact as the dependence on financing has declined significantly.
Competitive pressures set to rise. Now that Honda (HMSI) has exited from
the JV, we expect HMSI to compete aggressively in the motorcycle market.
HMSI management has already announced their intent of reaching leadership
position in the Indian two-wheeler market. HMSI is likely to launch new bikes
in the high volume executive segment. This segment contributes ~80% to
HH’s motorcycle sales and it has a market share of 67% in this segment.
Market shares might not change, but margins should. Historically, Hero
Honda hasn’t been successful in maintaining their margins when they have
faced threats to their market shares. While we are not expecting much change
in market shares in FY12, due to Honda’s capacity constraints, things may
change after they launch a cheaper bike to challenge Hero Honda.
Downside risks to margins high. Over the last four quarters, HH’s margin
has declined ~600bp despite the strong volume growth. This was the worst
margin contraction amongst companies in our coverage universe. As HH
operates in the economy segment and has limited operating leverage, it shall
always be exposed to margin pressures, in our view. We expect HH’s margins
to fall 90bp in FY12E as brand-building and product development costs rise.
Earnings and target price revision
We are expecting HH to report EPS CAGR of 12% between FY11-13 despite
a 14% CAGR in volumes. Our EPS estimates are 3-4% below consensus.
Price catalyst
12-month price target: Rs1,550.00 based on a DCF methodology.
Catalyst: Volume growth data and new product launches.
Action and recommendation
HH stock is trading at 17.1x FY12E PER, which is higher end of its trading
range. At our DCF based target price, the stock would trade at 14x FY3/12E
PER, which would fairly reflect the weaker earnings growth prospects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda
Tough solo ride ahead
Event
We transfer coverage of Hero Honda to Amit Mishra with an Underperform
rating and TP of Rs1,550 (previously Rs1,630). While we are positive on the
volume growth for two-wheelers, we see significant downside risks to Hero
Honda’s margins. Post Honda’s exit from the JV, we expect an increase in the
competition targeted at Hero Honda’s core segments. Higher branding and
product development costs will likely put further pressure on their margins.
Impact
Volume growth to remain strong. We expect two-wheeler industry sales
volumes to grow 16% in FY12E (consensus at 14%) and we are expecting HH
to grow in line with the industry. We expect the two-wheeler sales growth to
remain firm due to strong agri-output and pricing as well as high employment
generation in the economy. Headwinds like rising interest rates will have
limited impact as the dependence on financing has declined significantly.
Competitive pressures set to rise. Now that Honda (HMSI) has exited from
the JV, we expect HMSI to compete aggressively in the motorcycle market.
HMSI management has already announced their intent of reaching leadership
position in the Indian two-wheeler market. HMSI is likely to launch new bikes
in the high volume executive segment. This segment contributes ~80% to
HH’s motorcycle sales and it has a market share of 67% in this segment.
Market shares might not change, but margins should. Historically, Hero
Honda hasn’t been successful in maintaining their margins when they have
faced threats to their market shares. While we are not expecting much change
in market shares in FY12, due to Honda’s capacity constraints, things may
change after they launch a cheaper bike to challenge Hero Honda.
Downside risks to margins high. Over the last four quarters, HH’s margin
has declined ~600bp despite the strong volume growth. This was the worst
margin contraction amongst companies in our coverage universe. As HH
operates in the economy segment and has limited operating leverage, it shall
always be exposed to margin pressures, in our view. We expect HH’s margins
to fall 90bp in FY12E as brand-building and product development costs rise.
Earnings and target price revision
We are expecting HH to report EPS CAGR of 12% between FY11-13 despite
a 14% CAGR in volumes. Our EPS estimates are 3-4% below consensus.
Price catalyst
12-month price target: Rs1,550.00 based on a DCF methodology.
Catalyst: Volume growth data and new product launches.
Action and recommendation
HH stock is trading at 17.1x FY12E PER, which is higher end of its trading
range. At our DCF based target price, the stock would trade at 14x FY3/12E
PER, which would fairly reflect the weaker earnings growth prospects.
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