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Hero Honda
Weak Q1, but likely trough
„Raise PO on solid volumes
Q1 net profit at Rs 5.57mn was slightly ahead of expectations, but due to higher
financial income and lower taxes. Sales grew 32% to Rs 56.8bn in tandem with
volumes and largely in line, but EBIDTA grew 6.3% to Rs 6.4bn, 4.5% below
estimates, due to a sharp drop in margins. We however raise forecasts to factor in
variances as well as stronger volume traction, and also revise our PO to Rs2,025.
Margins disappoint, but likely trough
EBITDA margin declined 275bps yoy to 11.3%, 40bps lower than our estimate,
due to (1) sharper than expected commodity price pressures, (2) slight slippage in
sales mix, and (3) seasonal weakness. Management indicated improvement in
trends, which is likely following (a) price hike of 1-2% end-June, (b) improving
utilisation at Hardwar, and (c) sustained increase in volumes. Also, ad-spend,
already at ~2.5% of sales is unlikely to see further increase, while higher R & D
spend will be partially capitalised and re-branding costs will be non-recurring. Still,
cut assumptions by 50bps-20bps to 12.1%-13.0% to factor competitive pressures.
Volumes expected to be strong
We believe sales concerns due to rising competition and re-branding (both related
to Honda) are overdone, and expect Hero Honda to sustain above industry
growth, driven by (1) superior franchise of its brands, compared to competitive
models in the 100cc commuter segment (2) increasing rural penetration, at 45%
of sales from under 40% last year, a significant entry barrier. As the company is
on track to ease capacity constraints (debottlenecking to 6.5mn and further
through greenfield unit), we slightly raise assumptions to 6.35mn in FY12E
(17.5% yoy), and 7.24mn in FY13E (14%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda
Weak Q1, but likely trough
„Raise PO on solid volumes
Q1 net profit at Rs 5.57mn was slightly ahead of expectations, but due to higher
financial income and lower taxes. Sales grew 32% to Rs 56.8bn in tandem with
volumes and largely in line, but EBIDTA grew 6.3% to Rs 6.4bn, 4.5% below
estimates, due to a sharp drop in margins. We however raise forecasts to factor in
variances as well as stronger volume traction, and also revise our PO to Rs2,025.
Margins disappoint, but likely trough
EBITDA margin declined 275bps yoy to 11.3%, 40bps lower than our estimate,
due to (1) sharper than expected commodity price pressures, (2) slight slippage in
sales mix, and (3) seasonal weakness. Management indicated improvement in
trends, which is likely following (a) price hike of 1-2% end-June, (b) improving
utilisation at Hardwar, and (c) sustained increase in volumes. Also, ad-spend,
already at ~2.5% of sales is unlikely to see further increase, while higher R & D
spend will be partially capitalised and re-branding costs will be non-recurring. Still,
cut assumptions by 50bps-20bps to 12.1%-13.0% to factor competitive pressures.
Volumes expected to be strong
We believe sales concerns due to rising competition and re-branding (both related
to Honda) are overdone, and expect Hero Honda to sustain above industry
growth, driven by (1) superior franchise of its brands, compared to competitive
models in the 100cc commuter segment (2) increasing rural penetration, at 45%
of sales from under 40% last year, a significant entry barrier. As the company is
on track to ease capacity constraints (debottlenecking to 6.5mn and further
through greenfield unit), we slightly raise assumptions to 6.35mn in FY12E
(17.5% yoy), and 7.24mn in FY13E (14%).
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