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UBS Investment Research
Hero Honda Ltd.
Key beneficiary of rural growth
Raising earnings estimates due to strong volume growth
Hero Honda (HH) remains our preferred pick given strong rural demand and its
growing share in India’s scooter market. Almost two-thirds of HH’s sales come
from rural areas and agriculture-related towns. We believe the positive pricing
environment will offset the company’s input cost pressures. We raise our FY12/13
sales volume growth forecasts for HH from 13%/11% to 17%/14% given our
strong sector outlook. We raise our FY12/13 EPS estimates by 10.4%/9.3%.
Improving market share; weak competition; strong pricing power
HH’s motorcycle (2-W) market share is now at its highest level in five quarters.
We do not expect any 100cc launches from Bajaj and HMSI in FY12. With its
improving market share in Q3 and Q4 FY11, HH raised its prices in mid-December
2010 and early March 2011 to offset rising raw material costs. Thus, we believe its
margins have bottomed and are likely to improve. We raise our FY12/13 EBITDA
margin estimates from 11.6%/12.4% to 12.5%/13.1%.
Upside risk to margins; concerns on R&D and rebranding spend overdone
We believe margins will improve steadily from Q1 FY12 onwards. As it is unlikely
R&D spending will exceed 0.5% of sales in FY12, there should be no significant
impact on HH’s EBITDA margins. We believe FY11 is a high base for marketing
spending given one-off events such as the Commonwealth Games and the Cricket
World Cup during the year. Thus, spending on rebranding is unlikely to lower its
EBITDA margins.
Valuation: maintain Buy rating, raise price target from Rs2,000 to Rs2,200
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a WACC of
11.5%. At our price target, the stock would trade at 16x FY13E earnings.
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
The principal risk to our earnings estimates for auto companies is fluctuation in
sales volumes and raw material prices. Demand is linked to various factors
including economic growth and interest rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hero Honda Ltd.
Key beneficiary of rural growth
Raising earnings estimates due to strong volume growth
Hero Honda (HH) remains our preferred pick given strong rural demand and its
growing share in India’s scooter market. Almost two-thirds of HH’s sales come
from rural areas and agriculture-related towns. We believe the positive pricing
environment will offset the company’s input cost pressures. We raise our FY12/13
sales volume growth forecasts for HH from 13%/11% to 17%/14% given our
strong sector outlook. We raise our FY12/13 EPS estimates by 10.4%/9.3%.
Improving market share; weak competition; strong pricing power
HH’s motorcycle (2-W) market share is now at its highest level in five quarters.
We do not expect any 100cc launches from Bajaj and HMSI in FY12. With its
improving market share in Q3 and Q4 FY11, HH raised its prices in mid-December
2010 and early March 2011 to offset rising raw material costs. Thus, we believe its
margins have bottomed and are likely to improve. We raise our FY12/13 EBITDA
margin estimates from 11.6%/12.4% to 12.5%/13.1%.
Upside risk to margins; concerns on R&D and rebranding spend overdone
We believe margins will improve steadily from Q1 FY12 onwards. As it is unlikely
R&D spending will exceed 0.5% of sales in FY12, there should be no significant
impact on HH’s EBITDA margins. We believe FY11 is a high base for marketing
spending given one-off events such as the Commonwealth Games and the Cricket
World Cup during the year. Thus, spending on rebranding is unlikely to lower its
EBITDA margins.
Valuation: maintain Buy rating, raise price target from Rs2,000 to Rs2,200
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a WACC of
11.5%. At our price target, the stock would trade at 16x FY13E earnings.
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
The principal risk to our earnings estimates for auto companies is fluctuation in
sales volumes and raw material prices. Demand is linked to various factors
including economic growth and interest rates.
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