Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda (HH)
Automobiles
Margins disappoint on higher raw material costs. Hero Honda’s 1QFY12
performance was impacted by higher raw material costs while lower tax rate and higher
other income led to a 6% beat on our profit estimates. Net profit of Rs5.6 bn (14%
yoy, 11% qoq) was 6% higher than our estimates while EBITDA of Rs6.4 bn was 6%
below our estimates. We maintain our REDUCE rating on the stock as we believe
valuations are fair at current levels and we see limited triggers for margin expansion.
Strong volume growth but limited pricing power
Company reported a 32% yoy and 5% qoq growth in revenues but EBITDA increased by only 6%
yoy and declined by 2% qoq in 1QFY12 which clearly reflects – (1) slightly inferior product mix and
(2) limited pricing power. Company had increased prices by ~1.6% in March 2011 but raw
material cost to net sales increased by 180 bps qoq reflecting higher material cost pressure and
slightly inferior product mix (average gross realizations were flat qoq). Lower tax rate (16.7% vs.
our estimate of 23%) and higher other income due to higher yield on its investments led to a 6%
beat on our net profit estimates.
We see limited triggers for improvement in EBITDA margins from current levels
Company indicated that volume growth remains strong but indicated that one-time rebranding
cost of Rs1.2 bn which company will spend over the next two quarters is likely to impact EBITDA
margins. While the inventory levels are low and demand momentum is strong we see limited
triggers for improvement in EBITDA margins due to increase in spend on R&D cost, export
promotion activity, rebranding cost and limited pricing power. We also believe company will find it
very difficult to increase its market share in the premium segment as Bajaj, Honda and Yamaha
plan to launch new models in that segment as they have a much superior brand equity than Hero
Honda in the premium segment.
We retain our REDUCE rating on the stock
We maintain our REDUCE rating on the stock as we believe stock is trading at fair valuations (14X
on our FY2013E EPS) and we see limited triggers for significant improvement in EBITDA margins
from current levels as competitive intensity is likely to escalate in the sector over the next 12-
month period and we feel company’s ability to increase market share in the premium segment is
limited. Our target price of Rs1,730 is based on 13.5X FY2013E EPS in line with its historical
multiples. We marginally adjust earnings for FY2012E to factor in lower tax rate of 17% versus
20% earlier and increase our raw material cost estimates
Higher raw material costs impact EBITDA margins
Hero Honda’s 1QFY12 results were operationally below our estimates and reflected higher
cost pressures which impacted EBITDA margins. Revenues increased by 32% yoy aided by
24% yoy increase in volume growth and 6% yoy increase in average selling prices. Average
selling prices were flat sequentially despite a price increase of ~1.6% taken in March 2011,
however average selling prices were better than our estimates as product mix did not
deteriorate as per our expectations.
Raw material to net sales increased by 180 bps qoq despite not much material change in the
product mix during the quarter. We believe higher raw material cost increases were given
during the quarter to suppliers which led to sharp rise in material costs. Staff costs were
slightly below estimates aided by operating leverage benefits and other expenses also
declined by 80 bps qoq driven by lower selling and advertisement costs.
We have adjusted Rs1.77 bn of royalty paid to Honda every quarter in other expenses for
like to like comparison. We have also reverted to same methodology for forecasting our
annual numbers for like to like comparison and accurately factor in benefit of operating
leverage on royalty costs as they are fixed costs in nature.
Other income increased by 19% qoq due to higher yields on its investments. Company
indicated that other income is likely to be lower in the coming quarters as yields on its
investments have started to decline from current levels.
Depreciation expenses (excluding royalty expenses which have been included in other
expenses) increased by 4% yoy due to increase in production from Haridwar plant. Tax rate
was 16.7% much lower than MAT rate as company indicated that they will be claiming MAT
credit in the current year and the tax rate will remain at 17% levels for FY2012E before
increasing to 20% levels in FY2013E.
Conference call highlights
Company indicated that volume growth is likely to remain strong and dealer inventory
levels are close to 20 days. Company launched 4 new models/refreshes in 1QFY12
(Glamour, Glamour FI, refreshed models of Karizma and Karizma ZMR). Company will
continue to launch new models/refreshes every quarter.
Company’s rural sales remain strong and now form 45% of domestic volumes versus
38% in FY2011.
Company is also likely to increase its production from 1.8 mn annually in FY2011 to 2.25
mn annually in FY2012 from the Haridwar plant.
Company also indicated that they are not offering any discounts on their models due to
strong demand. However, EBITDA margins have declined by 80 bps qoq which reflects
lack of pricing power and slight impact of inferior product mix in the quarter.
Company will be setting up a new plant to increase capacities in 12 months’ time.
Company indicated that they can expand capacities from 6.15 mn currently to 6.5 mn
through debottlenecking.
Company took another price increase of Rs 500-750/bike in June 2011 on Splendor
model which should offset raw material cost pressures, in our view. However, company
will incur rebranding costs of Rs1.2 bn and increase investments in R&D which will keep
EBITDA margins at current levels, in our view.
Company indicated that raw material costs are moderating and material costs should
decline in 2HFY12E.
Company also indicated that they would focus more on the premium motorcycle segment
to improve its EBITDA margins but we believe competition in premium segment is
escalating as Yamaha, Honda and Bajaj Auto all plan to launch new models in that
segment. Hero Honda has a very weak positioning in the premium segment and it will be
very difficult to improve market share in that segment for Hero Honda in our view.
Company has started preparing for exploring new export markets and our currently
looking at distribution tie-ups. Company indicated that introducing a new model in the
export market is still some time away. We believe if the DEPB scheme is withdrawn after
September 2011 export profitability for all two wheeler players will come down and entry
into export markets will be margin dilutive for Hero Honda.
We maintain our REDUCE rating on the stock
We maintain our REDUCE rating on the stock as we believe stock is trading at fair valuations
(14X on our FY2013E EPS). We see limited triggers for significant improvement in EBITDA
margins from current levels as competitive intensity is likely to escalate in the sector over the
next 12-month period and we feel company’s ability to increase market share in the
premium segment is limited given weaker brand equity than its peers in that segment.
Company enjoys dominance in the 100-125cc segment which is likely to get competitive
with new 100cc launch from Honda in 4QFY12 and Boxer 150cc at 100cc price point next
month. Our target price of Rs1,730 is based on 13.5X FY2013E EPS in line with its historical
multiples. We marginally adjust earnings for FY2012E to factor in lower tax rate of 17%
versus 20% earlier and increase our raw material cost estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Honda (HH)
Automobiles
Margins disappoint on higher raw material costs. Hero Honda’s 1QFY12
performance was impacted by higher raw material costs while lower tax rate and higher
other income led to a 6% beat on our profit estimates. Net profit of Rs5.6 bn (14%
yoy, 11% qoq) was 6% higher than our estimates while EBITDA of Rs6.4 bn was 6%
below our estimates. We maintain our REDUCE rating on the stock as we believe
valuations are fair at current levels and we see limited triggers for margin expansion.
Strong volume growth but limited pricing power
Company reported a 32% yoy and 5% qoq growth in revenues but EBITDA increased by only 6%
yoy and declined by 2% qoq in 1QFY12 which clearly reflects – (1) slightly inferior product mix and
(2) limited pricing power. Company had increased prices by ~1.6% in March 2011 but raw
material cost to net sales increased by 180 bps qoq reflecting higher material cost pressure and
slightly inferior product mix (average gross realizations were flat qoq). Lower tax rate (16.7% vs.
our estimate of 23%) and higher other income due to higher yield on its investments led to a 6%
beat on our net profit estimates.
We see limited triggers for improvement in EBITDA margins from current levels
Company indicated that volume growth remains strong but indicated that one-time rebranding
cost of Rs1.2 bn which company will spend over the next two quarters is likely to impact EBITDA
margins. While the inventory levels are low and demand momentum is strong we see limited
triggers for improvement in EBITDA margins due to increase in spend on R&D cost, export
promotion activity, rebranding cost and limited pricing power. We also believe company will find it
very difficult to increase its market share in the premium segment as Bajaj, Honda and Yamaha
plan to launch new models in that segment as they have a much superior brand equity than Hero
Honda in the premium segment.
We retain our REDUCE rating on the stock
We maintain our REDUCE rating on the stock as we believe stock is trading at fair valuations (14X
on our FY2013E EPS) and we see limited triggers for significant improvement in EBITDA margins
from current levels as competitive intensity is likely to escalate in the sector over the next 12-
month period and we feel company’s ability to increase market share in the premium segment is
limited. Our target price of Rs1,730 is based on 13.5X FY2013E EPS in line with its historical
multiples. We marginally adjust earnings for FY2012E to factor in lower tax rate of 17% versus
20% earlier and increase our raw material cost estimates
Higher raw material costs impact EBITDA margins
Hero Honda’s 1QFY12 results were operationally below our estimates and reflected higher
cost pressures which impacted EBITDA margins. Revenues increased by 32% yoy aided by
24% yoy increase in volume growth and 6% yoy increase in average selling prices. Average
selling prices were flat sequentially despite a price increase of ~1.6% taken in March 2011,
however average selling prices were better than our estimates as product mix did not
deteriorate as per our expectations.
Raw material to net sales increased by 180 bps qoq despite not much material change in the
product mix during the quarter. We believe higher raw material cost increases were given
during the quarter to suppliers which led to sharp rise in material costs. Staff costs were
slightly below estimates aided by operating leverage benefits and other expenses also
declined by 80 bps qoq driven by lower selling and advertisement costs.
We have adjusted Rs1.77 bn of royalty paid to Honda every quarter in other expenses for
like to like comparison. We have also reverted to same methodology for forecasting our
annual numbers for like to like comparison and accurately factor in benefit of operating
leverage on royalty costs as they are fixed costs in nature.
Other income increased by 19% qoq due to higher yields on its investments. Company
indicated that other income is likely to be lower in the coming quarters as yields on its
investments have started to decline from current levels.
Depreciation expenses (excluding royalty expenses which have been included in other
expenses) increased by 4% yoy due to increase in production from Haridwar plant. Tax rate
was 16.7% much lower than MAT rate as company indicated that they will be claiming MAT
credit in the current year and the tax rate will remain at 17% levels for FY2012E before
increasing to 20% levels in FY2013E.
Conference call highlights
Company indicated that volume growth is likely to remain strong and dealer inventory
levels are close to 20 days. Company launched 4 new models/refreshes in 1QFY12
(Glamour, Glamour FI, refreshed models of Karizma and Karizma ZMR). Company will
continue to launch new models/refreshes every quarter.
Company’s rural sales remain strong and now form 45% of domestic volumes versus
38% in FY2011.
Company is also likely to increase its production from 1.8 mn annually in FY2011 to 2.25
mn annually in FY2012 from the Haridwar plant.
Company also indicated that they are not offering any discounts on their models due to
strong demand. However, EBITDA margins have declined by 80 bps qoq which reflects
lack of pricing power and slight impact of inferior product mix in the quarter.
Company will be setting up a new plant to increase capacities in 12 months’ time.
Company indicated that they can expand capacities from 6.15 mn currently to 6.5 mn
through debottlenecking.
Company took another price increase of Rs 500-750/bike in June 2011 on Splendor
model which should offset raw material cost pressures, in our view. However, company
will incur rebranding costs of Rs1.2 bn and increase investments in R&D which will keep
EBITDA margins at current levels, in our view.
Company indicated that raw material costs are moderating and material costs should
decline in 2HFY12E.
Company also indicated that they would focus more on the premium motorcycle segment
to improve its EBITDA margins but we believe competition in premium segment is
escalating as Yamaha, Honda and Bajaj Auto all plan to launch new models in that
segment. Hero Honda has a very weak positioning in the premium segment and it will be
very difficult to improve market share in that segment for Hero Honda in our view.
Company has started preparing for exploring new export markets and our currently
looking at distribution tie-ups. Company indicated that introducing a new model in the
export market is still some time away. We believe if the DEPB scheme is withdrawn after
September 2011 export profitability for all two wheeler players will come down and entry
into export markets will be margin dilutive for Hero Honda.
We maintain our REDUCE rating on the stock
We maintain our REDUCE rating on the stock as we believe stock is trading at fair valuations
(14X on our FY2013E EPS). We see limited triggers for significant improvement in EBITDA
margins from current levels as competitive intensity is likely to escalate in the sector over the
next 12-month period and we feel company’s ability to increase market share in the
premium segment is limited given weaker brand equity than its peers in that segment.
Company enjoys dominance in the 100-125cc segment which is likely to get competitive
with new 100cc launch from Honda in 4QFY12 and Boxer 150cc at 100cc price point next
month. Our target price of Rs1,730 is based on 13.5X FY2013E EPS in line with its historical
multiples. We marginally adjust earnings for FY2012E to factor in lower tax rate of 17%
versus 20% earlier and increase our raw material cost estimates.
No comments:
Post a Comment