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Hero Honda Motors
Management contact highlights
Uncertainty on brand change impact and royalty structure continues to put
pressure on stock. However, volume leverage benefit from rural foray and
lumpsum royalty structure are positive, whereas exports ramp-up possible in
FY13F. We maintain EPS and TP. Buy
EBITDA margins to stabilize around 11% in short-term
! Confident of sustaining 3Q margins (11.7%) with marginal deviation inspite raw material cost
pressure from steel and rubber, whereas aluminium is stabilized. RBS est is 12.6% for
FY12F, which seems achievable with margins at 11.4% in 1H and rising to 13.6% in 2H, with
help of pricing power and relief in costs.
! Saving from Japanese board of directors will come few quarters down the line. Not sure about
size of board post Honda exist i.e will it shrink or remain same 16 members now.
! Tax rates to hover around 17-18% band in short-term as they are MAT.
! Import content from Japan is very low at just 15 yen per bike and is not a worry from split.
Highest imported value item is cast aluminium wheels from China.
Honda hedges royalty payment receipt
! Management clarified that Honda has hedged its royalty receipts from Hero Honda till June
2014. It has asked for lumpsum amount payment over this period, which is a part of the split
deal.
! Management guided that the amount has been arrived with 8-10% sales volume growth and
royalty expenses at 2.8-3% of net sales.
! Hence volume growth higher than the base assumption of 10% will be beneficial for the
company profitability.
! As a result of this agreement, the brand change necessitated by modification to existing
models will not immediately result into royalty payment saving.
! The royalty will go down only after June -2014.
Brand building plans :
! Management is yet to finalize brand building plans and cost. We feel, considering model
refreshments needed in the sector, they may act in 2QFY12F on mother brand change for few
of the brands.
! Company currently spends 2-2.3% of net sales as advertisement and promotion cost per
annum. Considering recent example of Bharati Telecom (Rs.1.6bn spent in India), we have
built Rs.750mn for this.
! Management plans to write-off entire brand change cost in same year of incurrence.
Capacity and volume build-up plan
! New plant build-up will take 5-6 quarters. Management can save 3 months time through better
land acquisition process in few states.
! At current prices, capex for 0.8mn capacity plant is estimated at Rs.5bn, as compared to
Rs.9.6bn spent by it for 2.1mn vehicle capacity in Haridwar. Considering first leg of capex
involves land and building costs, incremental cost of capacity is relatively lower.
! Short-term volume ramp-up to come from rural focus of the company, whereas export volume
may take six quarters to start delivering results.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda Motors
Management contact highlights
Uncertainty on brand change impact and royalty structure continues to put
pressure on stock. However, volume leverage benefit from rural foray and
lumpsum royalty structure are positive, whereas exports ramp-up possible in
FY13F. We maintain EPS and TP. Buy
EBITDA margins to stabilize around 11% in short-term
! Confident of sustaining 3Q margins (11.7%) with marginal deviation inspite raw material cost
pressure from steel and rubber, whereas aluminium is stabilized. RBS est is 12.6% for
FY12F, which seems achievable with margins at 11.4% in 1H and rising to 13.6% in 2H, with
help of pricing power and relief in costs.
! Saving from Japanese board of directors will come few quarters down the line. Not sure about
size of board post Honda exist i.e will it shrink or remain same 16 members now.
! Tax rates to hover around 17-18% band in short-term as they are MAT.
! Import content from Japan is very low at just 15 yen per bike and is not a worry from split.
Highest imported value item is cast aluminium wheels from China.
Honda hedges royalty payment receipt
! Management clarified that Honda has hedged its royalty receipts from Hero Honda till June
2014. It has asked for lumpsum amount payment over this period, which is a part of the split
deal.
! Management guided that the amount has been arrived with 8-10% sales volume growth and
royalty expenses at 2.8-3% of net sales.
! Hence volume growth higher than the base assumption of 10% will be beneficial for the
company profitability.
! As a result of this agreement, the brand change necessitated by modification to existing
models will not immediately result into royalty payment saving.
! The royalty will go down only after June -2014.
Brand building plans :
! Management is yet to finalize brand building plans and cost. We feel, considering model
refreshments needed in the sector, they may act in 2QFY12F on mother brand change for few
of the brands.
! Company currently spends 2-2.3% of net sales as advertisement and promotion cost per
annum. Considering recent example of Bharati Telecom (Rs.1.6bn spent in India), we have
built Rs.750mn for this.
! Management plans to write-off entire brand change cost in same year of incurrence.
Capacity and volume build-up plan
! New plant build-up will take 5-6 quarters. Management can save 3 months time through better
land acquisition process in few states.
! At current prices, capex for 0.8mn capacity plant is estimated at Rs.5bn, as compared to
Rs.9.6bn spent by it for 2.1mn vehicle capacity in Haridwar. Considering first leg of capex
involves land and building costs, incremental cost of capacity is relatively lower.
! Short-term volume ramp-up to come from rural focus of the company, whereas export volume
may take six quarters to start delivering results.
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