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Hero Honda
Solid demand, improving
margins
„Raise PO, Buy for 23% potential upside
Hero Honda's Q4 profit at Rs 5.02bn was slightly ahead of estimates despite
higher deferred taxes. Net sales grew 30.8% at Rs 53.9bn but EBITDA declined
8.3% at Rs 6.5bn, albeit up 8% qoq and 7% ahead of expectations. The
company's dividend payout last fiscal exceeded annual profit, which is significant.
Raise EPS forecasts by 4% over FY12/13E, and our PO by 4% to Rs 1,970.
Royalty issue clarified
Following termination of JV with Honda, there is no royalty outgo, which explains
reported margins of 15.4%. However, based on new licensing agreement with
Honda, the company has agreed to pay JPY45bn (equivalent to Rs 24.79bn) to
manufacture and sell new products in both, domestic and export markets. Hero
Honda has treated this as intangible asset and hence capitalised the same, which
will be duly amortised over Jan2011-June2014, at Rs 1.77bn/quarter.
Best positioned to meet domestic demand
Management expects industry growth to decelerate to low teens, and we remain
optimistic on company’s prospects, given superior franchise in bikes and growing
presence in scooters. Also, portfolio will be enhanced through technology support
of Honda. Our yoy growth assumption of 15%-14% over FY12-13E is ahead of
expectations for domestic market. Forecasts do not include new export forays.
Margins have troughed
Q4 margins, treating amortisation of intangibles as other expense works out to
12.1%, up 40bps qoq. We believe margins will further improve during forecast
period, driven by (1) price hikes, catching up with higher input costs and (2)
operating leverage, as amortisation charges in lieu of royalty is now fixed. We
forecast cumulative 100bps increase over next 2 years.
Price objective basis & risk
Hero Honda (HRHDF)
Our PO of Rs 1,970 is based on 14x FY13E P/E (same as earlier), in line with
similar sized peers. At PO stock would trade at 9.5x FY13E EV/EBITDA. Risks:
Execution risk during transition period and new models from competition. Higher
input costs would also impact profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda
Solid demand, improving
margins
„Raise PO, Buy for 23% potential upside
Hero Honda's Q4 profit at Rs 5.02bn was slightly ahead of estimates despite
higher deferred taxes. Net sales grew 30.8% at Rs 53.9bn but EBITDA declined
8.3% at Rs 6.5bn, albeit up 8% qoq and 7% ahead of expectations. The
company's dividend payout last fiscal exceeded annual profit, which is significant.
Raise EPS forecasts by 4% over FY12/13E, and our PO by 4% to Rs 1,970.
Royalty issue clarified
Following termination of JV with Honda, there is no royalty outgo, which explains
reported margins of 15.4%. However, based on new licensing agreement with
Honda, the company has agreed to pay JPY45bn (equivalent to Rs 24.79bn) to
manufacture and sell new products in both, domestic and export markets. Hero
Honda has treated this as intangible asset and hence capitalised the same, which
will be duly amortised over Jan2011-June2014, at Rs 1.77bn/quarter.
Best positioned to meet domestic demand
Management expects industry growth to decelerate to low teens, and we remain
optimistic on company’s prospects, given superior franchise in bikes and growing
presence in scooters. Also, portfolio will be enhanced through technology support
of Honda. Our yoy growth assumption of 15%-14% over FY12-13E is ahead of
expectations for domestic market. Forecasts do not include new export forays.
Margins have troughed
Q4 margins, treating amortisation of intangibles as other expense works out to
12.1%, up 40bps qoq. We believe margins will further improve during forecast
period, driven by (1) price hikes, catching up with higher input costs and (2)
operating leverage, as amortisation charges in lieu of royalty is now fixed. We
forecast cumulative 100bps increase over next 2 years.
Price objective basis & risk
Hero Honda (HRHDF)
Our PO of Rs 1,970 is based on 14x FY13E P/E (same as earlier), in line with
similar sized peers. At PO stock would trade at 9.5x FY13E EV/EBITDA. Risks:
Execution risk during transition period and new models from competition. Higher
input costs would also impact profitability.
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