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UBS Investment Research
Hero Honda Ltd.
Preferred pick in the 2W segment
[ EXTRACT]
Key beneficiary of rural growth; pricing environment remains positive
Hero Honda (HH) remains our preferred pick in the two-wheeler (2W) segment, given
strong rural demand and the company’s growing share in India’s scooter market. We
believe HH’s strong rural exposure (almost two-thirds of its sales are in rural areas and
agriculture-related towns) provides a hedge against rising macroeconomic uncertainty.
We maintain our volume growth forecasts of 17%/14% for FY12/13. We believe the
pricing environment remains strong for HH and this will help offset cost pressure.
Royalty fixed; better visibility on margins
HH will pay Rs1.7bn/quarter in royalty over 14 quarters for its existing products. For
new products from Honda, the royalty will be expensed while upfront model fees will
be amortised over five years. We expect HH to implement gradual price increases to
offset input cost pressure in FY12. Management expects margins to remain flat in FY12
due higher R&D, rebranding and export development costs.We maintain our EBITDA
margin estimate at 12.2%/12.7% for FY12/FY13.
Debottlenecking to expand capacity
HH had raised capacity to 6.15m units by March 2011 through debottlenecking and
capacity enhancement. It is looking to further increase capacity at existing factories by
debottlenecking and increasing scooter capacity to 55,000/month from the current
36,000/month. Management remains confident of meeting FY12 demand from existing
plants.
Valuation: maintain Buy rating and price target of Rs2,200
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation driver using UBS’s VCAM tool, assuming a WACC of 11.5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hero Honda Ltd.
Preferred pick in the 2W segment
[ EXTRACT]
Key beneficiary of rural growth; pricing environment remains positive
Hero Honda (HH) remains our preferred pick in the two-wheeler (2W) segment, given
strong rural demand and the company’s growing share in India’s scooter market. We
believe HH’s strong rural exposure (almost two-thirds of its sales are in rural areas and
agriculture-related towns) provides a hedge against rising macroeconomic uncertainty.
We maintain our volume growth forecasts of 17%/14% for FY12/13. We believe the
pricing environment remains strong for HH and this will help offset cost pressure.
Royalty fixed; better visibility on margins
HH will pay Rs1.7bn/quarter in royalty over 14 quarters for its existing products. For
new products from Honda, the royalty will be expensed while upfront model fees will
be amortised over five years. We expect HH to implement gradual price increases to
offset input cost pressure in FY12. Management expects margins to remain flat in FY12
due higher R&D, rebranding and export development costs.We maintain our EBITDA
margin estimate at 12.2%/12.7% for FY12/FY13.
Debottlenecking to expand capacity
HH had raised capacity to 6.15m units by March 2011 through debottlenecking and
capacity enhancement. It is looking to further increase capacity at existing factories by
debottlenecking and increasing scooter capacity to 55,000/month from the current
36,000/month. Management remains confident of meeting FY12 demand from existing
plants.
Valuation: maintain Buy rating and price target of Rs2,200
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation driver using UBS’s VCAM tool, assuming a WACC of 11.5%.
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