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EARNINGS REVIEW
Hero Honda Motors (HROH.BO)
Sell Equity Research
Inline with expectations: below EBITDA items boost earnings; retain Sell
What surprised us
Hero Honda reported 1QFY12 net income of Rs5.6bn, up 13% yoy, 11% qoq, 4%
below our and 1% above Bloomberg consensus estimates. Key takeaways: 1) At
the operating level (EBITDA adjusted for royalty amortization, up 7% yoy) and
PBT, result was below our and consensus estimates due to lower margins
(down 271bps yoy and 69bps qoq). 2) Earnings were boosted by higher other
income (sequentially higher by Rs141mn) and lower tax rates (16.9% in 1QFY12
vs. 17.9% in FY11) in our view. 3) Raw material cost as a percentage of revenue
rose from 73.4% in 4QFY11 to 75.2% in 1QFY12. Management expects
commodity costs to marginally moderate in 2QFY12, with full impact of 1-2%
price increase taken in June to flow in subsequent quarters. 4) The company
expects to spend about Rs1bn on rebranding costs during 2QFY12-4QFY12, and
about 1-1.2% of revenue on incremental R&D costs. 5) We raise our FY12-13E
EPS by 1-3% on lower tax rates, and as a consequence our 12-m FY12E P/E
based TP rises to Rs1551 (from Rs1509).
What to do with the stock
We retain our Sell rating on Hero Honda, as we believe: 1) Hero Honda’s margin
and earnings growth performance relative to competitor Bajaj Auto (BAJA.BO,
Buy, Rs1,419.40) remained weak in spite of strong volume growth during the
quarter. 2) Market is potentially overlooking incremental strategic challenges
and margin pressures from R&D and branding post Honda’s exit from the JV. 3)
Stock is trading at 16X FY12E P/E vs. 13X historical average (10 year), Bajaj Auto
at 13.4X and Indian auto peers at 12.7X. Risks: Higher than expected demand,
lower than expected success of 2-wheeler competitors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Hero Honda Motors (HROH.BO)
Sell Equity Research
Inline with expectations: below EBITDA items boost earnings; retain Sell
What surprised us
Hero Honda reported 1QFY12 net income of Rs5.6bn, up 13% yoy, 11% qoq, 4%
below our and 1% above Bloomberg consensus estimates. Key takeaways: 1) At
the operating level (EBITDA adjusted for royalty amortization, up 7% yoy) and
PBT, result was below our and consensus estimates due to lower margins
(down 271bps yoy and 69bps qoq). 2) Earnings were boosted by higher other
income (sequentially higher by Rs141mn) and lower tax rates (16.9% in 1QFY12
vs. 17.9% in FY11) in our view. 3) Raw material cost as a percentage of revenue
rose from 73.4% in 4QFY11 to 75.2% in 1QFY12. Management expects
commodity costs to marginally moderate in 2QFY12, with full impact of 1-2%
price increase taken in June to flow in subsequent quarters. 4) The company
expects to spend about Rs1bn on rebranding costs during 2QFY12-4QFY12, and
about 1-1.2% of revenue on incremental R&D costs. 5) We raise our FY12-13E
EPS by 1-3% on lower tax rates, and as a consequence our 12-m FY12E P/E
based TP rises to Rs1551 (from Rs1509).
What to do with the stock
We retain our Sell rating on Hero Honda, as we believe: 1) Hero Honda’s margin
and earnings growth performance relative to competitor Bajaj Auto (BAJA.BO,
Buy, Rs1,419.40) remained weak in spite of strong volume growth during the
quarter. 2) Market is potentially overlooking incremental strategic challenges
and margin pressures from R&D and branding post Honda’s exit from the JV. 3)
Stock is trading at 16X FY12E P/E vs. 13X historical average (10 year), Bajaj Auto
at 13.4X and Indian auto peers at 12.7X. Risks: Higher than expected demand,
lower than expected success of 2-wheeler competitors.
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