Hero Honda (HROH.BO) 1QFY12 Results – Optically Appealing :: Citi Research

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Hero Honda (HROH.BO)
 1QFY12 Results – Optically Appealing
 
 PAT at Rs 5.6bn reflects lower tax rate+ higher other income — Headline PAT beat
of ~10% vs. our estimates was aided by higher other income (higher yield on financial
assets) and a sharply lower tax rate (~17% vs. ~19% est). EBITDA of Rs6.5bn was
~3% ahead of our estimates, as strong sales growth (+32% YoY, aided by volume
growth momentum) was offset by increased cost pressures (raw mat / sales rose c180
bps Q/Q, indicating cost pressures in 1Q). SG&A expenses (after adjusting for Rs1.7bn
of royalty) rose ~28% YoY, a reflection of higher marketing expenses during IPL. Going
forward, we expect margin outlook to remain challenging, given elevated marketing
spends (~Rs1bn for rebranding), and higher R&D expenses (~1% of revenues).  
 Conference Call: Key Takeaways — 1) Mgmt maintained its healthy industry volume
growth guidance of 15% in FY12. FY12 vols for HH are expected to be slightly above
6mn units. Rural demand is strong, with c45% of volumes from rural areas (vs. 38% a
few years ago), 2) Price hike of Rs 500-700 / bike in June is expected to driving margin
improvement. Mgmt also believes that commodity cost pressures have peaked, aiding
margin improvement, 3) Model refreshes for Karizma, Hunk and CBZ have resulted in
volume growth as well as positive mix shift,  4) While maintaining the FY12 capex
guidance of Rs8-9bn (majority for the new  greenfield facility), mgmt said that
debottlenecking would result in production capacity increase to Rs6.4-6.5mn by the
end of FY12 (currently 6.15mn).
 Competitive intensity is stable  — Hero Honda's share in the overall domestic
motorcycle segment increased c60bps QoQ, indicating that the company benefitted
more than peers from the festive season  in north India. In the domestic scooter
segment, HH maintained its ~18.4% mkt share. We note that the gain in HMSI's market
share in 1QFY12 (wrt 4QFY11) thus reflects market share loss for TVS Motor.
 Maintain Sell: Increase TP to Rs 1,552 from Rs1,501 — as we roll forward to March
13E EPS from Sept 12E EPS, while maintaining our 13x multiple. We retain our earnings
forecast for now. We will calibrate our numbers and incorporate FY14 estimates once we
incorporate balance sheet data for FY11.