Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero MotoCorp
N ear-term margin upside likely priced in
Event: downgrade to Neutral, limited upside to volumes and margins
We downgrade Hero MotoCorp (HMCL) to Neutral as: 1) we see limited upside to
volume estimates. Petrol prices are up 30%YoY and are likely to negatively impact
demand. Also, we believe volume growth for the company is likely to slow
significantly in H2FY12 as the low base effect of H1FY11 has been played out; 2)
we see limited probability of margins surprising significantly on the upside as
R&D spend is likely to increase significantly from 0.16% of sales in FY11 to 1.5%
of sales in FY12/FY13.
Impact: raise FY12/FY13 EPS estimates by 1.3%/4.1%
We realign our numbers following the release of the FY11 annual report. We are
moving royalty (fixed portion) below the EBITDA, in line with the company’s
reporting. We now expect EBITDA margins of 15.2%/15.9% for FY12/FY13. This
compares with 14.5% EBITDA margin reported in Q1FY12. We lower our volume
growth estimate to 15% from 16% previously. We remain 5%/8% ahead of
consensus for FY12/FY13.
Action: downgrade to Neutral rating post strong price performance
We continue to like HMCL given its strong exposure to rural demand. However,
given the recent sharp run-up in the stock price (stock up 11% YTD and has
outperformed the market by 34% YTD), valuations at 15.5x FY13E leave limited
room for further upside even if margins surprise on the upside, in our view.
Valuation: trading at 15.5x FY13E PE, price target of Rs2,320
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.5%.
Downgrade to Neutral rating
The stock is trading at the upper end of its trading band and offers limited
room for further multiple expansion even if earnings surprise on the upside,
in our view.
We believe it is better to look at historical EBITDA margins (pre royalty) as
given the lump-sum nature of royalty, it is now a part of depreciation and
amortization.
We believe margins are unlikely to recover significantly from our current
estimates as the company needs to invest significantly in R&D (incremental
impact of ~1% of sales). Also, the company lost margin (1.5% of sales) due
to a revision in emission norms in FY11, which is unlikely to be recovered in
the near term.
We see limited upside to volume estimates as we believe there will a
negative impact on growth due to the sharp increase in petrol prices
Hero MotoCorp
Hero Honda, which sold 4.6m motorcycles in FY10, is the world's largest twowheeler
manufacturer, even though it is present primarily only in the motorcycle
segment of the Indian two-wheeler market. Hero Honda is a joint venture
between Honda (Japan) and Hero group (owned by the Munjal family) of India.
The joint venture agreement was renewed in June 2004 for 10 years (2014).
Statement of Risk
Key risks to our earnings estimates for auto companies are fluctuations in sales
volumes and raw material prices. Demand is linked to various factors including
the economic growth rate and interest rates in the economy. Given, the high
level of consolidation within the industry, two wheeler industry is more prone to
price wars among players
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero MotoCorp
N ear-term margin upside likely priced in
Event: downgrade to Neutral, limited upside to volumes and margins
We downgrade Hero MotoCorp (HMCL) to Neutral as: 1) we see limited upside to
volume estimates. Petrol prices are up 30%YoY and are likely to negatively impact
demand. Also, we believe volume growth for the company is likely to slow
significantly in H2FY12 as the low base effect of H1FY11 has been played out; 2)
we see limited probability of margins surprising significantly on the upside as
R&D spend is likely to increase significantly from 0.16% of sales in FY11 to 1.5%
of sales in FY12/FY13.
Impact: raise FY12/FY13 EPS estimates by 1.3%/4.1%
We realign our numbers following the release of the FY11 annual report. We are
moving royalty (fixed portion) below the EBITDA, in line with the company’s
reporting. We now expect EBITDA margins of 15.2%/15.9% for FY12/FY13. This
compares with 14.5% EBITDA margin reported in Q1FY12. We lower our volume
growth estimate to 15% from 16% previously. We remain 5%/8% ahead of
consensus for FY12/FY13.
Action: downgrade to Neutral rating post strong price performance
We continue to like HMCL given its strong exposure to rural demand. However,
given the recent sharp run-up in the stock price (stock up 11% YTD and has
outperformed the market by 34% YTD), valuations at 15.5x FY13E leave limited
room for further upside even if margins surprise on the upside, in our view.
Valuation: trading at 15.5x FY13E PE, price target of Rs2,320
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.5%.
Downgrade to Neutral rating
The stock is trading at the upper end of its trading band and offers limited
room for further multiple expansion even if earnings surprise on the upside,
in our view.
We believe it is better to look at historical EBITDA margins (pre royalty) as
given the lump-sum nature of royalty, it is now a part of depreciation and
amortization.
We believe margins are unlikely to recover significantly from our current
estimates as the company needs to invest significantly in R&D (incremental
impact of ~1% of sales). Also, the company lost margin (1.5% of sales) due
to a revision in emission norms in FY11, which is unlikely to be recovered in
the near term.
We see limited upside to volume estimates as we believe there will a
negative impact on growth due to the sharp increase in petrol prices
Hero MotoCorp
Hero Honda, which sold 4.6m motorcycles in FY10, is the world's largest twowheeler
manufacturer, even though it is present primarily only in the motorcycle
segment of the Indian two-wheeler market. Hero Honda is a joint venture
between Honda (Japan) and Hero group (owned by the Munjal family) of India.
The joint venture agreement was renewed in June 2004 for 10 years (2014).
Statement of Risk
Key risks to our earnings estimates for auto companies are fluctuations in sales
volumes and raw material prices. Demand is linked to various factors including
the economic growth rate and interest rates in the economy. Given, the high
level of consolidation within the industry, two wheeler industry is more prone to
price wars among players
No comments:
Post a Comment