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Margin twist
Hero Motocorp - margin expansion story continues to unfold
The gross margin expansion story that started in Q2FY12 for the
company is expected to continue in Q3FY12E, as we expect stable
realisations and raw material costs adding 132bps to gross margin. We
further note that a sequential weakness in raw material prices (though
quite visible in dollar terms, but gets negated by rupee depreciation),
as witnessed in Q2FY12 may add to margin surprise. The company
may also surprise on lower than expected spend on advertisement
and brand building costs, although it would again have to take MTM
hit of ~300-350mn on royalty payments, due to 11.6% QoQ
depreciation in rupee.
Bajaj Auto – margin surprise in store
Similar to Q2FY12, when it surprised on its EBITDA margin on the
upside, due to 3.4% uptick in exports realisation on rupee
depreciation, Bajaj Auto is expected to repeat the trend in Q3FY12E, if
not better its last reported margins. We expect exports realisation to
move up by 8% QoQ, and domestic realisation by 2.5% due to better
product mix, leading to a 150bps improvement in EBITDA margins
sequentially and a YoY earnings growth of 26%.
TVS Motor – high operating leverage turns a foe
With only 1% YoY improvement in volumes, TVS Motor is in for a rude
shock as high operating leverage takes toll on margins. We expect
15% correction in earnings and contraction of 90bps in operating
margins.
Valuation and recommendations
We continue to remain positive on Hero Motocorp given comfort over
volume growth and strong possibility of margin expansion, while we
remain negative on Bajaj Auto over lack of comfort over FY13E volume
growth and possibility of high FY13E effective tax rate eroding
earnings growth. We turn cautious on TVS Motor, despite cheap
valuations, as volume growth appears iffy post weak Q3FY12 volume
growth trend.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin twist
Hero Motocorp - margin expansion story continues to unfold
The gross margin expansion story that started in Q2FY12 for the
company is expected to continue in Q3FY12E, as we expect stable
realisations and raw material costs adding 132bps to gross margin. We
further note that a sequential weakness in raw material prices (though
quite visible in dollar terms, but gets negated by rupee depreciation),
as witnessed in Q2FY12 may add to margin surprise. The company
may also surprise on lower than expected spend on advertisement
and brand building costs, although it would again have to take MTM
hit of ~300-350mn on royalty payments, due to 11.6% QoQ
depreciation in rupee.
Bajaj Auto – margin surprise in store
Similar to Q2FY12, when it surprised on its EBITDA margin on the
upside, due to 3.4% uptick in exports realisation on rupee
depreciation, Bajaj Auto is expected to repeat the trend in Q3FY12E, if
not better its last reported margins. We expect exports realisation to
move up by 8% QoQ, and domestic realisation by 2.5% due to better
product mix, leading to a 150bps improvement in EBITDA margins
sequentially and a YoY earnings growth of 26%.
TVS Motor – high operating leverage turns a foe
With only 1% YoY improvement in volumes, TVS Motor is in for a rude
shock as high operating leverage takes toll on margins. We expect
15% correction in earnings and contraction of 90bps in operating
margins.
Valuation and recommendations
We continue to remain positive on Hero Motocorp given comfort over
volume growth and strong possibility of margin expansion, while we
remain negative on Bajaj Auto over lack of comfort over FY13E volume
growth and possibility of high FY13E effective tax rate eroding
earnings growth. We turn cautious on TVS Motor, despite cheap
valuations, as volume growth appears iffy post weak Q3FY12 volume
growth trend.
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