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Hero Honda
Underweight
HROH.BO, HH IN
4Q FY11 PAT of Rs.5B (-16% yoy) in line with
estimates
• Hero Honda’s 4Q reported PAT of Rs.5B (-16% yoy) was in line with our
estimate. While revenues expanded 31% yoy to Rs.53.9B, adjusted EBITDA
margin came in at 12.2% (vs. 11.2% in 3Q). Margins expanded sequentially as
the company benefited from price increases taken over 2H. However, higher
depreciation charges and increased tax rates (+510bp yoy) offset the above.
• Conference call takeaways: Volume outlook: Management expects industry
volume growth to moderate to c.12-15% in the year (after robust growth of
c.24% in the past two years). Margin outlook: Management expects margins to
remain range-bound over the near term given firm commodity prices, rising
R&D expenses, rebranding costs (as the group rolls out its corporate brand) and
expenses related to exports. Royalty (and its accounting treatment):
Management highlighted that according to the agreement with Honda, it has to
incur a fixed spend of Rs.24B (JPY 45B) over the next 14 quarters (i.e. until
2014). This amount is payable irrespective of the volumes sold by Hero Honda.
Thus, management will amortize Rs1.7B per quarter (the expenditure will be
clubbed under depreciation expenses). However, in order ot make a like-for-like
comparison, we are charging this as an operating expense. Also, the OEM will
incur further royalty charges on the new bikes that are introduced from the
Honda stable (however, these are likely to contribute to only 10-15% of sales,
thus the impact will be limited). Capacity expansion: the company is close to
finalizing the location of its fourth plant and has guided for a capex of Rs.9B in
FY12 (compared to the modest Rs3B in FY11). Hero Honda has de
bottlenecked capacity at the existing plants to c.6m units (the Haridwar plant is
2.25m units).
• We raise our price target: We are marginally adjusting our estimates for FY12
(+4%) and FY13 (-1%) following the 4Q results. We are rolling forward our
price target to Jun-11 and set a revised PT of Rs1,550. We value the company at
a forward P/E of 13.5x, which is in line with the stock’s historical mean P/E
multiple. As Hero has now split with Honda, we are lowering our earnings
multiple to factor in a rising competitive environment as well as emerging
challenges for the local group (relating to branding, technology). Further,
industry growth rates are likely to moderate from hereon as the rising monthly
operating costs are impacting consumer sentiment. Key upside risks: higherthan-
anticipated industry growth rates and market share gains for Hero Honda.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda
Underweight
HROH.BO, HH IN
4Q FY11 PAT of Rs.5B (-16% yoy) in line with
estimates
• Hero Honda’s 4Q reported PAT of Rs.5B (-16% yoy) was in line with our
estimate. While revenues expanded 31% yoy to Rs.53.9B, adjusted EBITDA
margin came in at 12.2% (vs. 11.2% in 3Q). Margins expanded sequentially as
the company benefited from price increases taken over 2H. However, higher
depreciation charges and increased tax rates (+510bp yoy) offset the above.
• Conference call takeaways: Volume outlook: Management expects industry
volume growth to moderate to c.12-15% in the year (after robust growth of
c.24% in the past two years). Margin outlook: Management expects margins to
remain range-bound over the near term given firm commodity prices, rising
R&D expenses, rebranding costs (as the group rolls out its corporate brand) and
expenses related to exports. Royalty (and its accounting treatment):
Management highlighted that according to the agreement with Honda, it has to
incur a fixed spend of Rs.24B (JPY 45B) over the next 14 quarters (i.e. until
2014). This amount is payable irrespective of the volumes sold by Hero Honda.
Thus, management will amortize Rs1.7B per quarter (the expenditure will be
clubbed under depreciation expenses). However, in order ot make a like-for-like
comparison, we are charging this as an operating expense. Also, the OEM will
incur further royalty charges on the new bikes that are introduced from the
Honda stable (however, these are likely to contribute to only 10-15% of sales,
thus the impact will be limited). Capacity expansion: the company is close to
finalizing the location of its fourth plant and has guided for a capex of Rs.9B in
FY12 (compared to the modest Rs3B in FY11). Hero Honda has de
bottlenecked capacity at the existing plants to c.6m units (the Haridwar plant is
2.25m units).
• We raise our price target: We are marginally adjusting our estimates for FY12
(+4%) and FY13 (-1%) following the 4Q results. We are rolling forward our
price target to Jun-11 and set a revised PT of Rs1,550. We value the company at
a forward P/E of 13.5x, which is in line with the stock’s historical mean P/E
multiple. As Hero has now split with Honda, we are lowering our earnings
multiple to factor in a rising competitive environment as well as emerging
challenges for the local group (relating to branding, technology). Further,
industry growth rates are likely to moderate from hereon as the rising monthly
operating costs are impacting consumer sentiment. Key upside risks: higherthan-
anticipated industry growth rates and market share gains for Hero Honda.
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