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Hero Motocorp (HMCL)
Automobiles
Strong operational performance. Hero Motocorp’s 2QFY12 net profit of Rs6.04 bn
(+19.4% yoy, 8.2% qoq) was 11% ahead of our estimates due to 220 bps qoq
sequential improvement in gross margins. We believe EBITDA margins are likely to
remain strong over the next few quarters until Honda launches affordable 100cc bikes
in 1QFY13, which could put pressure on Hero’s pricing power in the lower-end
segment. We maintain our SELL rating on the stock as we see limited upside triggers.
2QFY12 surprised positively due to lower raw material expense and lower rebranding cost
Hero Motocorp reported net sales of Rs58.3 bn (+28% yoy, 3% qoq) which were in line with
our estimates while EBITDA of Rs7.09 bn (+16.6% yoy, 10.6% qoq) was 14% ahead of our
estimates. Gross margins improved by 223 bps qoq driven by – (1) 1% increase in price in June
2011, (2) lower aluminium and rubber cost, (3) slightly improved product mix and (4) higher
contribution from the Haridwar plant.
Gross average selling prices increased by 1.8% qoq due to increase in prices and slight
improvement in product mix.
Staff costs increased by 9% qoq due to higher production at the Haridwar plant (which was
1/3rd of total volumes sold). Other expenses increased by only 2% qoq (after adding back
Rs2.1 bn of fixed royalty paid during the quarter) as the company contained the advertising
expenses despite a hit of Rs500 mn due to rebranding expense in this quarter. We expect
rebranding cost of Rs500 mn to be incurred in 3QFY12E as well.
Depreciation expenses increased by 9% qoq (excluding Rs21 bn of fixed royalty costs) due to
increase in production at the Haridwar plant. Royalty expenses have increased from Rs1.86 bn
in 1QFY12 to Rs2.1 bn in 2QFY12 due to appreciation of Yen versus Rupee as they had to pay
royalty to Honda in Yen and Yen exposure was unhedged. Tax rate remained unchanged at
17% from the last quarter.
We maintain our SELL rating on the stock driven by – (1) we expect Hero Motocorp’s volume
growth to moderate to 6% over 2HFY12E due to high base effect and aggressive competitor
launches (Bajaj Auto’s Boxer and Pulsar bike launches) and (2) we believe operating margins
could come under pressure in FY2013E as Honda launches 100cc bikes in 1QFY13E which could
impact market share/pricing of Hero Motocorp in the economy/executive segment. Honda is
expanding capacities at an aggressive pace and plans to raise capacity from 2.2 mn to 4 mn by
4QFY13E which is a key risk to the stock performance, in our view. We will review our earnings
estimates post the concall on Wednesday.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Motocorp (HMCL)
Automobiles
Strong operational performance. Hero Motocorp’s 2QFY12 net profit of Rs6.04 bn
(+19.4% yoy, 8.2% qoq) was 11% ahead of our estimates due to 220 bps qoq
sequential improvement in gross margins. We believe EBITDA margins are likely to
remain strong over the next few quarters until Honda launches affordable 100cc bikes
in 1QFY13, which could put pressure on Hero’s pricing power in the lower-end
segment. We maintain our SELL rating on the stock as we see limited upside triggers.
2QFY12 surprised positively due to lower raw material expense and lower rebranding cost
Hero Motocorp reported net sales of Rs58.3 bn (+28% yoy, 3% qoq) which were in line with
our estimates while EBITDA of Rs7.09 bn (+16.6% yoy, 10.6% qoq) was 14% ahead of our
estimates. Gross margins improved by 223 bps qoq driven by – (1) 1% increase in price in June
2011, (2) lower aluminium and rubber cost, (3) slightly improved product mix and (4) higher
contribution from the Haridwar plant.
Gross average selling prices increased by 1.8% qoq due to increase in prices and slight
improvement in product mix.
Staff costs increased by 9% qoq due to higher production at the Haridwar plant (which was
1/3rd of total volumes sold). Other expenses increased by only 2% qoq (after adding back
Rs2.1 bn of fixed royalty paid during the quarter) as the company contained the advertising
expenses despite a hit of Rs500 mn due to rebranding expense in this quarter. We expect
rebranding cost of Rs500 mn to be incurred in 3QFY12E as well.
Depreciation expenses increased by 9% qoq (excluding Rs21 bn of fixed royalty costs) due to
increase in production at the Haridwar plant. Royalty expenses have increased from Rs1.86 bn
in 1QFY12 to Rs2.1 bn in 2QFY12 due to appreciation of Yen versus Rupee as they had to pay
royalty to Honda in Yen and Yen exposure was unhedged. Tax rate remained unchanged at
17% from the last quarter.
We maintain our SELL rating on the stock driven by – (1) we expect Hero Motocorp’s volume
growth to moderate to 6% over 2HFY12E due to high base effect and aggressive competitor
launches (Bajaj Auto’s Boxer and Pulsar bike launches) and (2) we believe operating margins
could come under pressure in FY2013E as Honda launches 100cc bikes in 1QFY13E which could
impact market share/pricing of Hero Motocorp in the economy/executive segment. Honda is
expanding capacities at an aggressive pace and plans to raise capacity from 2.2 mn to 4 mn by
4QFY13E which is a key risk to the stock performance, in our view. We will review our earnings
estimates post the concall on Wednesday.
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