Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hero MotoCorp
P otential upside risk to margins
Event: management meeting highlights robust outlook
Management expects FY12 volumes of 6.2m–6.3m units. Dealer inventory levels
as at the end of July 2011 remained below 15days. The company is yet to see a
slowdown in demand The company expects margins to improve due to the price
hike taken at end-June 2011 and the decline in the price of aluminium and rubber
this quarter. So despite higher R&D and rebranding spend, management expects
margins to improve in Q2FY12. The company expects to launch its first selfdeveloped
product in the export markets in FY13 (more takeaways on page 2).
Impact: raise FY12 EPS estimate by 2.5%; upside to margins remains
We raise our EBITDA margin estimates for FY12/FY13 from 11.6%/12.2% to
12%/12.6%. However, we slightly lower our volume growth estimate by 1ppt to
16% for FY12 given the deceleration in the market. We believe there continues to
be upside risk to our earnings estimates. Our estimates remain 5%/6% ahead of
consensus for FY12/FY13.
Action: maintain Buy rating; Q2FY12 results will be the next catalyst
We continue to like Hero MotoCorp (HMCL) given its strong exposure to rural
demand. We also expect HMCL to benefit from its dominance in the 100cc
segment as customers increasingly shift to fuel efficient 100cc bikes given rising
petrol prices. However, given the recent sharp run-up in the stock price, we believe
near-term margin improvement is largely priced in unless the company delivers a
significant beat in Q2FY12 results.
Valuation: trading at 15x FY13E PE, price target of Rs2,200
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation driver using UBS’s VCAM tool, assuming a WACC of 11.5%.
Demand outlook remains robust
Volume for FY12 should be in the range of 6.2m–6.3m. The company believes
demand should slow going forward. Generally, it has observed slower growth
with a 4-6 month lag to passenger vehicles in the past. However, it is yet to see
any significant slowdown in the market. Inventory levels as at end-July
remained at less than 15 days of sales.
Margins should improve
Impact of price increases taken towards the end of June 2011 should flow into
the numbers. Also, the decline in rubber and aluminium prices should help
margins. This will be partly offset by increase in other expenses (advertising.
etc.)
Advertising and R&D
Normal advertising has been significantly limited. Primarily, ad spend has been
related to the corporate rebranding. Advertising, including rebranding spend, is
unlikely to exceed 2.5%. R&D spend is likely to be around 1.5% of net sales for
the first two years.
Branding
The company believes there is no need to rebrand current models which are
under ‘Hero Honda’ name till 2014. Newer models will be launched under the
‘Hero’ brand. Hero Honda name can also continue in current export territories
i.e. Sri Lanka, Bangladesh, Nepal, Colombia, and Bhutan. However, a new
brand will be required for other markets. The company expects to launch its own
R&D-based products in the global market in FY13.
Capacity
The company expects the new plant to come up by 2HFY13. However, no
location has been finalized as yet. It will take 6-9 months to set up an assembly
unit. The company has sufficient capacity to cater to existing demand.
The tax rate should remain at 17% for this year, according to management.
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
We believe the key risks to our estimates and valuations 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, the twowheeler
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 �� ��
UBS Investment Research
Hero MotoCorp
P otential upside risk to margins
Event: management meeting highlights robust outlook
Management expects FY12 volumes of 6.2m–6.3m units. Dealer inventory levels
as at the end of July 2011 remained below 15days. The company is yet to see a
slowdown in demand The company expects margins to improve due to the price
hike taken at end-June 2011 and the decline in the price of aluminium and rubber
this quarter. So despite higher R&D and rebranding spend, management expects
margins to improve in Q2FY12. The company expects to launch its first selfdeveloped
product in the export markets in FY13 (more takeaways on page 2).
Impact: raise FY12 EPS estimate by 2.5%; upside to margins remains
We raise our EBITDA margin estimates for FY12/FY13 from 11.6%/12.2% to
12%/12.6%. However, we slightly lower our volume growth estimate by 1ppt to
16% for FY12 given the deceleration in the market. We believe there continues to
be upside risk to our earnings estimates. Our estimates remain 5%/6% ahead of
consensus for FY12/FY13.
Action: maintain Buy rating; Q2FY12 results will be the next catalyst
We continue to like Hero MotoCorp (HMCL) given its strong exposure to rural
demand. We also expect HMCL to benefit from its dominance in the 100cc
segment as customers increasingly shift to fuel efficient 100cc bikes given rising
petrol prices. However, given the recent sharp run-up in the stock price, we believe
near-term margin improvement is largely priced in unless the company delivers a
significant beat in Q2FY12 results.
Valuation: trading at 15x FY13E PE, price target of Rs2,200
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation driver using UBS’s VCAM tool, assuming a WACC of 11.5%.
Demand outlook remains robust
Volume for FY12 should be in the range of 6.2m–6.3m. The company believes
demand should slow going forward. Generally, it has observed slower growth
with a 4-6 month lag to passenger vehicles in the past. However, it is yet to see
any significant slowdown in the market. Inventory levels as at end-July
remained at less than 15 days of sales.
Margins should improve
Impact of price increases taken towards the end of June 2011 should flow into
the numbers. Also, the decline in rubber and aluminium prices should help
margins. This will be partly offset by increase in other expenses (advertising.
etc.)
Advertising and R&D
Normal advertising has been significantly limited. Primarily, ad spend has been
related to the corporate rebranding. Advertising, including rebranding spend, is
unlikely to exceed 2.5%. R&D spend is likely to be around 1.5% of net sales for
the first two years.
Branding
The company believes there is no need to rebrand current models which are
under ‘Hero Honda’ name till 2014. Newer models will be launched under the
‘Hero’ brand. Hero Honda name can also continue in current export territories
i.e. Sri Lanka, Bangladesh, Nepal, Colombia, and Bhutan. However, a new
brand will be required for other markets. The company expects to launch its own
R&D-based products in the global market in FY13.
Capacity
The company expects the new plant to come up by 2HFY13. However, no
location has been finalized as yet. It will take 6-9 months to set up an assembly
unit. The company has sufficient capacity to cater to existing demand.
The tax rate should remain at 17% for this year, according to management.
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
We believe the key risks to our estimates and valuations 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, the twowheeler
industry is more prone to price wars among players.
No comments:
Post a Comment