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Adjusted for royalty treatment, Hero Honda's EBITDA margin rose 40bp qoq to 12.1% in 4Q,
beating expectations. With the JV split overhang gradually clearing, we feel the company is well
placed to face challenges and deliver profitable volume growth. Buy, with revised EPS forecasts
on high dividend outflow
4Q results surprise with surge in sales volume and EBITDA margin expansion
Adjusting for an accounting change on its fixed royalty payment schedule to Honda, Hero
Honda’s 4Q EBITDA beat our estimate by 6.4%. EBITDA margins expanded 40bp to 12.1%, vs
Bloomberg consensus’s expectation of a decline to 11.5%, driven by improved realisation per
vehicle (+2.7% qoq) and a 110bp qoq fall in the ratio of raw material costs to net sales to 72.8%.
However, due to higher tax and other income, normalised PAT of Rs5.32bn was in line. A final
dividend of Rs35/share was announced, making a total FY11 dividend of Rs105.
Management forthcoming on royalty structure and its treatment
Management clarified that the Rs24.8bn fixed royalty agreement signed with Honda for January
2011-June 2014 would be depreciated in equal quarterly instalments, with yen currency risk
borne by Hero Honda. However, for ease of comparison with the historical data and peer set, we
maintain royalty as part of operating expenses in our estimates. We trim our FY11-12 EPS
forecasts by 6-10%, building in lower other income due to the large cash outflow for the one-time
dividend announced recently and capex for new plant in 2HFY12F.
Profitable volume growth ahead overcoming challenges
Hero Honda surprised us by debottlenecking capacity to extend its strong recent growth and,
thus, it looks on course to reach our FY12 volume estimate. This, and the market share gain in
4Q, strong pricing power and profitability growth look impressive to us. We believe management’s
confidence in its ability to withstand commodity price pressure amid a strong demand scenario
indicates room to cover new costs such as export development and R&D. We reiterate Buy, with
a revised three-stage DCF-based TP of Rs2,002.3 to reflect our EPS revisions and the dividend
outflow. Given Hero Honda’s large rural exposure, its favourable technology agreement with
Honda and the low sensitivity of its product demand to rising interest rates and fuel prices, we
expect it to attract consumption stock favour again, as its valuations look attractive at 13.6x
FY12F given an EPS CAGR of 17.6% for FY11-13F.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adjusted for royalty treatment, Hero Honda's EBITDA margin rose 40bp qoq to 12.1% in 4Q,
beating expectations. With the JV split overhang gradually clearing, we feel the company is well
placed to face challenges and deliver profitable volume growth. Buy, with revised EPS forecasts
on high dividend outflow
4Q results surprise with surge in sales volume and EBITDA margin expansion
Adjusting for an accounting change on its fixed royalty payment schedule to Honda, Hero
Honda’s 4Q EBITDA beat our estimate by 6.4%. EBITDA margins expanded 40bp to 12.1%, vs
Bloomberg consensus’s expectation of a decline to 11.5%, driven by improved realisation per
vehicle (+2.7% qoq) and a 110bp qoq fall in the ratio of raw material costs to net sales to 72.8%.
However, due to higher tax and other income, normalised PAT of Rs5.32bn was in line. A final
dividend of Rs35/share was announced, making a total FY11 dividend of Rs105.
Management forthcoming on royalty structure and its treatment
Management clarified that the Rs24.8bn fixed royalty agreement signed with Honda for January
2011-June 2014 would be depreciated in equal quarterly instalments, with yen currency risk
borne by Hero Honda. However, for ease of comparison with the historical data and peer set, we
maintain royalty as part of operating expenses in our estimates. We trim our FY11-12 EPS
forecasts by 6-10%, building in lower other income due to the large cash outflow for the one-time
dividend announced recently and capex for new plant in 2HFY12F.
Profitable volume growth ahead overcoming challenges
Hero Honda surprised us by debottlenecking capacity to extend its strong recent growth and,
thus, it looks on course to reach our FY12 volume estimate. This, and the market share gain in
4Q, strong pricing power and profitability growth look impressive to us. We believe management’s
confidence in its ability to withstand commodity price pressure amid a strong demand scenario
indicates room to cover new costs such as export development and R&D. We reiterate Buy, with
a revised three-stage DCF-based TP of Rs2,002.3 to reflect our EPS revisions and the dividend
outflow. Given Hero Honda’s large rural exposure, its favourable technology agreement with
Honda and the low sensitivity of its product demand to rising interest rates and fuel prices, we
expect it to attract consumption stock favour again, as its valuations look attractive at 13.6x
FY12F given an EPS CAGR of 17.6% for FY11-13F.
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