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We recently hosted Hero Motocorp top management for road show. Its preparation to develop inhouse
R&D capability impress us. With its new product plan, clarity on dividend pay-out and
capex for new capacity, we reiterate Buy. Key highlights of investor discussion with management
are as follows :
Ready to execute medium-term new product and new market plans
New Models – Under the new brand and company name, HMCL showcased two new
models in London on 9 August - Hero impulse a 150cc bike and Hero maestro 110cc
scooter. These new models should be launched around the festival season in India.
The New brand and logo were launched in India on 15 August 2011, India’s 65th
Independence day. As per the split agreement, Honda will continue to provide HMCL with new
models that were already in development stage. Company expects to launch additional 2-3
models till June 2014 on Honda technology. This understanding will help HMCL transition
smoothly and without any vacuum being created for new product launches.
Exports – HMCL has identified 9 countries for export and will now get the building
blocks into place to make exports as an inherent part of their sales growth strategy. The
target is to make exports 10% of sales (around 1mn units) over the next 4-5 years, when the total
sale volume target for company is to get to 10mn units, from current year projection of in excess
of 6mn units. Currently there are three plants with installed capacity of 6.4mn capacity. Target
export countries are Indonesia, Thailand, Vietnam, Iran, Egypt, Nigeria, Brazil, Argentina,
Philippines, part of African and Latin American countries.
Medium-term capacity and capability build-up plan
Capital Expenditure - Company plans to increase the installed capacity by building
two new green field plants; one in south and the second one in western India. With
these new plants, the installed capacity will be increased to around 9.5-10mn. The total
capex for two new plants is estimated at US$350-400mn. Add to this maintenance capital of
another US$250mn, the total capex for the next 3-4 year will be around US$ 600-650mn. If one
considers the current run rate of FCF / year of US$500-550mn, the total capex over the next 3-4
years will be funded by this FCF US$500-550mn. Funding is not a problem for the company,
considering large cash in hand. Leverage might be also explored to increase the balance sheet
efficiency.
Royalty Structure & its cash flow impact – Royalty structure is divided into 2 parts.
First, royalty on existing model till March 2011, the royalty payment will be lump
sum YEN45bn, which has been capitalised in March 2011 accounts and will be
amortised over the next 14 quarters till 30 June 2014. However the payment of Y45bn will be
made on 31 March 2012 (15months i.e. from 1 Jan 2011 to 31 March 2012), 31 March 2013, 31
March 2014 and last payment on 30 June 2014. Second, royalty payments on all new models
being launched and in the pipeline will be on the old understanding i.e. between US$1-5mn on
product development fee and second not more that max 5% on sales of new product launches.
R&D and Technology – HMCL already had 175 engineers working in their R&D team.
Recently they have recruited additional 50 -60 engineers, PHD’s and other people to beef up their
R&D. Additionally, they have already tied up with a Japanese firm to work on the existing engine
technology and to make improvements and changes. Finally, company is in advance stage of
talks to develop and modify engine designs with two leading European design houses AVL in
Austria and Ricardo in UK and will very soon announce their tie up.
Competition from Honda remains key challenge ahead for 2-wheeler industry
Competition – Management feels, Honda Japan’s 100% subsidiary i.e. Honda
Motorcycles & Scooters India Ltd. (HMSI) is the biggest threat to the Hero Moto Corp
and also for the industry. HMSI has been very tight lipped about their new and future
product launches and have only said that they will like to become No1 by 2020, will continue to
provide products as customer requirements and will ramp up their production to 4mn units by
March 2013. HMSI future product plans are key to watch out for the 2-wheeler industry. Irrational
pricing from HMSI or any other international maker can dent the industry growth rate going
forward.
Industry volume growth outlook : For FY2012, company expects to grow between
14-15% and going forward over the next 3-4 years a growth rate of 12% is possible keeping
status quo behaviour from all industry players.
Distribution and Rural Sales – In 2007, company created a new vertical for the rural
India marketing. In 2011 rural India contributed 45% of total sales, up from 38% in
2009. Distribution is key differentiation for HMCL as it has 5,000 touch points with 800 key
dealers v/s around 1300 touch points for HMSI and less than half for other Indian competitors.
Urban market focus to return with new launches : Considering that 55% of its sales
volume still comes from Urban markets, it feels dominance in urban market remains key for
growth. The good response to passion pro and launch of 150cc bike in coming months, will be
helpful to regain grip on premium bike segment of Urban market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently hosted Hero Motocorp top management for road show. Its preparation to develop inhouse
R&D capability impress us. With its new product plan, clarity on dividend pay-out and
capex for new capacity, we reiterate Buy. Key highlights of investor discussion with management
are as follows :
Ready to execute medium-term new product and new market plans
New Models – Under the new brand and company name, HMCL showcased two new
models in London on 9 August - Hero impulse a 150cc bike and Hero maestro 110cc
scooter. These new models should be launched around the festival season in India.
The New brand and logo were launched in India on 15 August 2011, India’s 65th
Independence day. As per the split agreement, Honda will continue to provide HMCL with new
models that were already in development stage. Company expects to launch additional 2-3
models till June 2014 on Honda technology. This understanding will help HMCL transition
smoothly and without any vacuum being created for new product launches.
Exports – HMCL has identified 9 countries for export and will now get the building
blocks into place to make exports as an inherent part of their sales growth strategy. The
target is to make exports 10% of sales (around 1mn units) over the next 4-5 years, when the total
sale volume target for company is to get to 10mn units, from current year projection of in excess
of 6mn units. Currently there are three plants with installed capacity of 6.4mn capacity. Target
export countries are Indonesia, Thailand, Vietnam, Iran, Egypt, Nigeria, Brazil, Argentina,
Philippines, part of African and Latin American countries.
Medium-term capacity and capability build-up plan
Capital Expenditure - Company plans to increase the installed capacity by building
two new green field plants; one in south and the second one in western India. With
these new plants, the installed capacity will be increased to around 9.5-10mn. The total
capex for two new plants is estimated at US$350-400mn. Add to this maintenance capital of
another US$250mn, the total capex for the next 3-4 year will be around US$ 600-650mn. If one
considers the current run rate of FCF / year of US$500-550mn, the total capex over the next 3-4
years will be funded by this FCF US$500-550mn. Funding is not a problem for the company,
considering large cash in hand. Leverage might be also explored to increase the balance sheet
efficiency.
Royalty Structure & its cash flow impact – Royalty structure is divided into 2 parts.
First, royalty on existing model till March 2011, the royalty payment will be lump
sum YEN45bn, which has been capitalised in March 2011 accounts and will be
amortised over the next 14 quarters till 30 June 2014. However the payment of Y45bn will be
made on 31 March 2012 (15months i.e. from 1 Jan 2011 to 31 March 2012), 31 March 2013, 31
March 2014 and last payment on 30 June 2014. Second, royalty payments on all new models
being launched and in the pipeline will be on the old understanding i.e. between US$1-5mn on
product development fee and second not more that max 5% on sales of new product launches.
R&D and Technology – HMCL already had 175 engineers working in their R&D team.
Recently they have recruited additional 50 -60 engineers, PHD’s and other people to beef up their
R&D. Additionally, they have already tied up with a Japanese firm to work on the existing engine
technology and to make improvements and changes. Finally, company is in advance stage of
talks to develop and modify engine designs with two leading European design houses AVL in
Austria and Ricardo in UK and will very soon announce their tie up.
Competition from Honda remains key challenge ahead for 2-wheeler industry
Competition – Management feels, Honda Japan’s 100% subsidiary i.e. Honda
Motorcycles & Scooters India Ltd. (HMSI) is the biggest threat to the Hero Moto Corp
and also for the industry. HMSI has been very tight lipped about their new and future
product launches and have only said that they will like to become No1 by 2020, will continue to
provide products as customer requirements and will ramp up their production to 4mn units by
March 2013. HMSI future product plans are key to watch out for the 2-wheeler industry. Irrational
pricing from HMSI or any other international maker can dent the industry growth rate going
forward.
Industry volume growth outlook : For FY2012, company expects to grow between
14-15% and going forward over the next 3-4 years a growth rate of 12% is possible keeping
status quo behaviour from all industry players.
Distribution and Rural Sales – In 2007, company created a new vertical for the rural
India marketing. In 2011 rural India contributed 45% of total sales, up from 38% in
2009. Distribution is key differentiation for HMCL as it has 5,000 touch points with 800 key
dealers v/s around 1300 touch points for HMSI and less than half for other Indian competitors.
Urban market focus to return with new launches : Considering that 55% of its sales
volume still comes from Urban markets, it feels dominance in urban market remains key for
growth. The good response to passion pro and launch of 150cc bike in coming months, will be
helpful to regain grip on premium bike segment of Urban market.
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