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Hero Honda Underweight
HROH.BO, HH IN
1QFY12 Review: EBITDA margin disappoints, reiterate UW
1QFY12 PAT at Rs.5.6B (+13% yoy) was marginally ahead of our
estimates - the variance was driven by lower tax rates (-280bp yoy) and
higher other income (+65% yoy). However, the adjusted operating margins
were considerably below our estimates at 11.4% (-80bp qoq). Despite a
healthy growth of 24% yoy in volumes, the OEM witnessed margin
pressures, given rising input costs. We re-iterate our UW rating on the
stock as Hero Honda will have to incur higher costs on branding, R&D, etc.
from hereon. Further, as industry growth is likely to moderate (management
expects industry to grow by c.15% in FY12E vs. 25% CAGR over FY09-
11); competition is ramping up with HMSI announcing aggressive plans for
the local market (post the split with Hero Honda).
Conference call takeaways: Volume Outlook: (1) Management expects to
sell in excess of 6m units in FY12E (c.+14% yoy). The OEM is
debottlenecking capacity to 6.4m units. Currently, the rural segment
accounts for 45% of the sales (up from 37% earlier). Management expects
that the growth will continue to be driven by the rural segment as
penetration rates herein are at 10% as compared to 25% for the urban
segment. Margin outlook: The management expects margins to improve
from hereon given easing commodity prices as well as a 1.5% price hikes
taken in end June. However, the company will have to incur higher
expenses relating to a) Rs.1B towards re- branding expenses in 2Q & 3Q b)
higher R&D costs (c.1% of sales). Tax rates are likely to sustain at current
levels.
Price Target: We are marginally raising our EPS by 2% for FY12-13E to
factor in lower tax rates. We are rolling forward our PT to Sep'12 and set a
revised target price of Rs.1,600 based on 13.5x one year forward EPS (in
line with our earlier methodology). Key Risks: higher than 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
1QFY12 Review: EBITDA margin disappoints, reiterate UW
1QFY12 PAT at Rs.5.6B (+13% yoy) was marginally ahead of our
estimates - the variance was driven by lower tax rates (-280bp yoy) and
higher other income (+65% yoy). However, the adjusted operating margins
were considerably below our estimates at 11.4% (-80bp qoq). Despite a
healthy growth of 24% yoy in volumes, the OEM witnessed margin
pressures, given rising input costs. We re-iterate our UW rating on the
stock as Hero Honda will have to incur higher costs on branding, R&D, etc.
from hereon. Further, as industry growth is likely to moderate (management
expects industry to grow by c.15% in FY12E vs. 25% CAGR over FY09-
11); competition is ramping up with HMSI announcing aggressive plans for
the local market (post the split with Hero Honda).
Conference call takeaways: Volume Outlook: (1) Management expects to
sell in excess of 6m units in FY12E (c.+14% yoy). The OEM is
debottlenecking capacity to 6.4m units. Currently, the rural segment
accounts for 45% of the sales (up from 37% earlier). Management expects
that the growth will continue to be driven by the rural segment as
penetration rates herein are at 10% as compared to 25% for the urban
segment. Margin outlook: The management expects margins to improve
from hereon given easing commodity prices as well as a 1.5% price hikes
taken in end June. However, the company will have to incur higher
expenses relating to a) Rs.1B towards re- branding expenses in 2Q & 3Q b)
higher R&D costs (c.1% of sales). Tax rates are likely to sustain at current
levels.
Price Target: We are marginally raising our EPS by 2% for FY12-13E to
factor in lower tax rates. We are rolling forward our PT to Sep'12 and set a
revised target price of Rs.1,600 based on 13.5x one year forward EPS (in
line with our earlier methodology). Key Risks: higher than anticipated
industry growth rates and market share gains for Hero Honda.
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