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1Q results were in line with our estimates on PAT, with the 9.5% miss on EBIT offset by higher
other income and lower tax. With the recent price hike and easing commodity prices, guidance is
for a gradual margin improvement. Building in strong volume growth, we lift our EPS forecasts
and TP slightly. Buy.
Historic high sales volume fails to support EBIT margin in 1Q
Despite Hero Honda’s sales volume surging 23.9% yoy to a historic high in 1QFY12, its EBIT
margin slid 80bp qoq and 270bp yoy to 10.2%. This was largely due to its raw material costs as a
proportion of net sales rising 190bp qoq and 350bp yoy to a high of 74.7%. Although EBIT missed
our estimate by 9.5%, this disappointment was offset by a 65.5% yoy rise in other income and by
a low tax rate (down 270bp yoy). EPS for the quarter was Rs27.9.
Strong volume traction and low tax rate prompt us to lift our EPS forecasts marginally
In its conference call, management said it believed margins had bottomed out in 1Q and should
now improve gradually, given its recent 1.3% vehicle price hike and easing input costs. Building in
the recent strong sales growth, we lift our volume forecasts by 3% for both FY12 and FY13 and
see EBITDA margins improving from 14.4% in 1Q to 15.1% by 2QFY12. Building in management
guidance that the 1Q low tax rate will be sustained in the near term, we raise our EPS forecasts
4.6% for FY12 and 2.6% for FY13.
Preparing to leverage its large volume base to gain a global footprint
Hero Honda’s strong franchise covering 0.1m villages in India has successfully delivered better
rural demand growth, with rural markets accounting for 45% of its sales volume in FY11. The
company’s refurbishment of its 125cc motorcycle brand Glamour is aimed at capturing some
uptrending demand. Management also said it had finalised its strategic plan for exports and, with
this in mind, hoped to start building up its back-end infrastructure a few quarters from now. We
expect the impact of the brand change costs to be largely over by 2Q and quarterly PAT
momentum to start improving strongly from 3Q. We think the near-10% correction in the stock
price in recent weeks already discounts the disappointing EBIT results. Incorporating our EPS
revisions, we upgrade our three-stage DCF-based target price to Rs2,157.9, which implies 15.1x
FY13F PE with an EPS CAGR of 19.2% for FY11-13F. We reiterate our Buy rating with around
21% upside potential.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1Q results were in line with our estimates on PAT, with the 9.5% miss on EBIT offset by higher
other income and lower tax. With the recent price hike and easing commodity prices, guidance is
for a gradual margin improvement. Building in strong volume growth, we lift our EPS forecasts
and TP slightly. Buy.
Historic high sales volume fails to support EBIT margin in 1Q
Despite Hero Honda’s sales volume surging 23.9% yoy to a historic high in 1QFY12, its EBIT
margin slid 80bp qoq and 270bp yoy to 10.2%. This was largely due to its raw material costs as a
proportion of net sales rising 190bp qoq and 350bp yoy to a high of 74.7%. Although EBIT missed
our estimate by 9.5%, this disappointment was offset by a 65.5% yoy rise in other income and by
a low tax rate (down 270bp yoy). EPS for the quarter was Rs27.9.
Strong volume traction and low tax rate prompt us to lift our EPS forecasts marginally
In its conference call, management said it believed margins had bottomed out in 1Q and should
now improve gradually, given its recent 1.3% vehicle price hike and easing input costs. Building in
the recent strong sales growth, we lift our volume forecasts by 3% for both FY12 and FY13 and
see EBITDA margins improving from 14.4% in 1Q to 15.1% by 2QFY12. Building in management
guidance that the 1Q low tax rate will be sustained in the near term, we raise our EPS forecasts
4.6% for FY12 and 2.6% for FY13.
Preparing to leverage its large volume base to gain a global footprint
Hero Honda’s strong franchise covering 0.1m villages in India has successfully delivered better
rural demand growth, with rural markets accounting for 45% of its sales volume in FY11. The
company’s refurbishment of its 125cc motorcycle brand Glamour is aimed at capturing some
uptrending demand. Management also said it had finalised its strategic plan for exports and, with
this in mind, hoped to start building up its back-end infrastructure a few quarters from now. We
expect the impact of the brand change costs to be largely over by 2Q and quarterly PAT
momentum to start improving strongly from 3Q. We think the near-10% correction in the stock
price in recent weeks already discounts the disappointing EBIT results. Incorporating our EPS
revisions, we upgrade our three-stage DCF-based target price to Rs2,157.9, which implies 15.1x
FY13F PE with an EPS CAGR of 19.2% for FY11-13F. We reiterate our Buy rating with around
21% upside potential.
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