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Poor show, maintain SELL on expensive valuations
HH’s Q1FY12 results were below expectations, with commodity costs playing
spoilsport. RM cost/sales jumped 190bps QoQ, causing a 100bps QoQ margin
decline to 14.4%. In the conference call, the management has guided to only
marginal benefits flowing in from price hikes and slight softening of input costs. This
should broadly lead to flattish margins going forward. Overall, we continue to
believe that though volume growth will remain healthy for the year (we build in 15%
YoY growth to 6.2mn units), margins will remain subdued owing to cost pressures
stemming from R&D set-ups and rebranding exercises. At 16xFY12E earnings, we
find the stock expensive and maintain a SELL on the stock with a TP of Rs 1,550.
Higher RM costs, flat realisations dent Q1 margins: HH’s Q1 net revenues grew 32%
YoY to Rs 56.8bn, following a 24% volume growth and a 7% increase in realisations.
Revenues increased 5.4% QoQ, largely volumes-driven as realisations remained flat.
EBITDA margins stood at 14.4%, lower 100bps QoQ, weighed down by higher RM costs
(↑190 bps QoQ); employee/other operating expenses were down 20bps/60bps QoQ. PAT
stood at Rs 5.6bn as higher other income partially offset the impact of RM cost increases.
Management commentary/guidance:
Q1 performance- Results, particularly margins, reeled under the full impact of
‘extremely high’ commodity prices, which in the management’s assessment have peaked
out and should soften going forward and gross margins to consequently improve. While
no discounts were extended during the quarter, the company effected a price increase of
Rs 500–750 (on 24 June) on select models. Higher ‘other income’ was on account of a)
profits from investments, liquidated during the quarter in order to pay out interim
dividend b) high prevailing yields. Dealer inventory ruled at levels lower than the
historical average (two weeks of sales), suggesting robust demand.
Guidance (FY12)- Volume: 6mn units | Exit capacity: 6.5mn units | Tax rate in line with
MAT rate | Capex: Rs 8bn–9bn (bulk of which to be incurred on the planned fourth plant;
gestation period of the plant estimated at ~10–12 months).
Key management observations:
The management has reiterated higher expenses post-split on R&D (to increase to ~1.2%
of sales), rebranding (Rs ~1bn earmarked for one-time rebranding in FY12) and
depreciation (on account of royalty amortisation until June ’14).
The management sees robust demand for premium bikes and scooters—hitherto, the
company’s capacity constraints restricted volume growth in this segment. Nevertheless,
the segment has outgrown the company’s other segments.
While contribution of rural sales has increased over the years to 45% of sales (vs. 38% in
08-09), the management finds demand potential from the urban market as a low-hanging
fruit to capture. Two-wheelers penetration for the rural/urban market stood at ~10%/25-
30%.
Geographically, northern markets are the largest for two-wheelers, followed by western,
southern and eastern markets. All pockets registered good double-digit volume growth.
The five-year tax holiday for the Haridwar plant (capacity 2.25mn units) would come to
an end after a year. Subsequently, only 30% of the taxable profits will be tax-exempt and
effective tax rate would creep up to ~22% levels.
On exports, while HH is currently sizing-up the opportunity, it will take some time before
a clear action plan is crystallised and products are rolled out in new geographies
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Poor show, maintain SELL on expensive valuations
HH’s Q1FY12 results were below expectations, with commodity costs playing
spoilsport. RM cost/sales jumped 190bps QoQ, causing a 100bps QoQ margin
decline to 14.4%. In the conference call, the management has guided to only
marginal benefits flowing in from price hikes and slight softening of input costs. This
should broadly lead to flattish margins going forward. Overall, we continue to
believe that though volume growth will remain healthy for the year (we build in 15%
YoY growth to 6.2mn units), margins will remain subdued owing to cost pressures
stemming from R&D set-ups and rebranding exercises. At 16xFY12E earnings, we
find the stock expensive and maintain a SELL on the stock with a TP of Rs 1,550.
Higher RM costs, flat realisations dent Q1 margins: HH’s Q1 net revenues grew 32%
YoY to Rs 56.8bn, following a 24% volume growth and a 7% increase in realisations.
Revenues increased 5.4% QoQ, largely volumes-driven as realisations remained flat.
EBITDA margins stood at 14.4%, lower 100bps QoQ, weighed down by higher RM costs
(↑190 bps QoQ); employee/other operating expenses were down 20bps/60bps QoQ. PAT
stood at Rs 5.6bn as higher other income partially offset the impact of RM cost increases.
Management commentary/guidance:
Q1 performance- Results, particularly margins, reeled under the full impact of
‘extremely high’ commodity prices, which in the management’s assessment have peaked
out and should soften going forward and gross margins to consequently improve. While
no discounts were extended during the quarter, the company effected a price increase of
Rs 500–750 (on 24 June) on select models. Higher ‘other income’ was on account of a)
profits from investments, liquidated during the quarter in order to pay out interim
dividend b) high prevailing yields. Dealer inventory ruled at levels lower than the
historical average (two weeks of sales), suggesting robust demand.
Guidance (FY12)- Volume: 6mn units | Exit capacity: 6.5mn units | Tax rate in line with
MAT rate | Capex: Rs 8bn–9bn (bulk of which to be incurred on the planned fourth plant;
gestation period of the plant estimated at ~10–12 months).
Key management observations:
The management has reiterated higher expenses post-split on R&D (to increase to ~1.2%
of sales), rebranding (Rs ~1bn earmarked for one-time rebranding in FY12) and
depreciation (on account of royalty amortisation until June ’14).
The management sees robust demand for premium bikes and scooters—hitherto, the
company’s capacity constraints restricted volume growth in this segment. Nevertheless,
the segment has outgrown the company’s other segments.
While contribution of rural sales has increased over the years to 45% of sales (vs. 38% in
08-09), the management finds demand potential from the urban market as a low-hanging
fruit to capture. Two-wheelers penetration for the rural/urban market stood at ~10%/25-
30%.
Geographically, northern markets are the largest for two-wheelers, followed by western,
southern and eastern markets. All pockets registered good double-digit volume growth.
The five-year tax holiday for the Haridwar plant (capacity 2.25mn units) would come to
an end after a year. Subsequently, only 30% of the taxable profits will be tax-exempt and
effective tax rate would creep up to ~22% levels.
On exports, while HH is currently sizing-up the opportunity, it will take some time before
a clear action plan is crystallised and products are rolled out in new geographies
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