Hero Honda - Honda’s exit remains an overhang: UBS

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UBS Investment Research
Hero Honda Ltd.
Honda’s exit remains an overhang
􀂄 Honda’s potential exit remains an overhang
We maintain our neutral stance on Hero Honda (HH) due to Honda’s likely exit
from its JV with Hero. We believe these concerns are well-founded given: 1) HH is
completely dependent on Honda for R&D and product development; 2) HH’s
aging product portfolio and the limited success of its new products; and
3) competition from Honda Motorcycles and Scooters India (HMSI) will increase
following the breakup.
􀂄 Lack of R&D capability could lead to a de-rating
We think HH’s lack of demonstrated capability in terms of product development
will remain an overhang on its share price. The stock was significantly de-rated in
2002-03 due to concerns about a non-renewal of the Honda JV. While HH is now
financially strong, we believe successful product development will likely involve a
learning curve, which could limit HH’s growth over the medium term.
􀂄 We expect limited export growth in the near term
Some investors think Honda’s potential exit could mean a significant export
opportunity for HH, similar to that for Bajaj Auto. However, as Bajaj Auto has
been developing its export markets over the past 7-8 years, HH is unlikely to be
able to replicate its growth potential in the short term.
􀂄 Valuation: maintain Neutral rating and Rs1,950.00 price target
We derive our price target from a DCF methodology, assuming a WACC of
11.6%, intermediate growth of 5% and a long-term operating margin of 13%.