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Hero Honda Motors (HROH.BO)
Sell Equity Research
Below expectations; earnings decline despite top-line growth; Sell
What surprised us
Hero Honda reported FY2011 net income of Rs19.2bn, down 13.6% yoy,
5.5% below Bloomberg consensus and 17% below our estimates. Revenue
grew by 22% yoy during this period, largely inline with consensus and our
own estimates. The key driver of surprise was margins, which declined by
about 4 pp mainly driven by higher raw material costs as percentage of
revenue (5 pp rise yoy). The company reported a new license agreement
with Honda under which it is required to pay Rs24.7bn license fee
amortized equally over 42 months upto June 30, 2014. We believe this
translates into an annual royalty expense in FY2012E/13E of 3.2%/2.8% as
percentage of revenue vs. 2.6% of revenues paid during FY2010. We lower
our FY12-13 EPS estimates by 6-7% mainly on lower margin assumptions.
What to do with the stock
We reiterate our Sell rating on Hero Honda, with 12-month FY12E P/E
based TP of Rs1,509 (unchanged). We believe that margins could come
under further pressure from spending on R&D and branding post Honda’s
exit from the JV. Further, Hero Honda’s exposure to the economy segment
potentially makes it more vulnerable to rising inflation, in our view. Hero
Honda is currently trading at 14.6X FY12E P/E, vs. its 13.0X 10-year
historical average, Indian auto coverage group trading at 12.4X, and global
coverage at 11.9X. Key risks: lower-than-expected capacity constraints or
expenses on R&D, higher-than-expected efficiencies on vendor
rationalization.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda Motors (HROH.BO)
Sell Equity Research
Below expectations; earnings decline despite top-line growth; Sell
What surprised us
Hero Honda reported FY2011 net income of Rs19.2bn, down 13.6% yoy,
5.5% below Bloomberg consensus and 17% below our estimates. Revenue
grew by 22% yoy during this period, largely inline with consensus and our
own estimates. The key driver of surprise was margins, which declined by
about 4 pp mainly driven by higher raw material costs as percentage of
revenue (5 pp rise yoy). The company reported a new license agreement
with Honda under which it is required to pay Rs24.7bn license fee
amortized equally over 42 months upto June 30, 2014. We believe this
translates into an annual royalty expense in FY2012E/13E of 3.2%/2.8% as
percentage of revenue vs. 2.6% of revenues paid during FY2010. We lower
our FY12-13 EPS estimates by 6-7% mainly on lower margin assumptions.
What to do with the stock
We reiterate our Sell rating on Hero Honda, with 12-month FY12E P/E
based TP of Rs1,509 (unchanged). We believe that margins could come
under further pressure from spending on R&D and branding post Honda’s
exit from the JV. Further, Hero Honda’s exposure to the economy segment
potentially makes it more vulnerable to rising inflation, in our view. Hero
Honda is currently trading at 14.6X FY12E P/E, vs. its 13.0X 10-year
historical average, Indian auto coverage group trading at 12.4X, and global
coverage at 11.9X. Key risks: lower-than-expected capacity constraints or
expenses on R&D, higher-than-expected efficiencies on vendor
rationalization.
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