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UBS Investment Research
Hero Honda Ltd.
Q 1FY12: Margins lower but outlook strong
Event: Q1FY12 Sales and PAT inline with UBS-e
Sales increased 5%qoq driven by 5%qoq increase in vols. EBITDA margin
declined 80bps qoq to 11.4% (UBS-e: 12.3%) due to 190bps increase in raw
material cost (as %age of sales). However, PAT was inline at Rs 5.6bn
(+13%YoY) due to higher other income and lower than expected tax rate.
Impact: Marginal cut to FY12 EPS estimate; Margins have bottomed
We reduce our EBITDA margin est. by 60bps to 11.6% for FY12, however, we
also reduce tax rate by 3% to 17% inline with mgmt. guidance. We therefore
reduce our FY12 est. by 4%. Mgmt. expects margins to improve on a sequential
basis despite additional rebranding spend in the next 2 quarters, given the small
softening in commodity prices and recent price increases effected by the co.
Action: Maintain Buy, Mgmt. continues to see strong demand
We expect margins to improve going forward. Mgmt. continues to see strong
demand growth across both rural and urban markets. The co. has continued to gain
market share and is likely to outperform industry growth. We continue to like Hero
Honda given strong exposure to rural demand. We also expect Hero Honda to
benefit from its dominance in the 100cc segment as customers shift more to fuel
efficient 100cc bikes given rising petrol prices.
Valuation: Maintain Buy, PT Rs 2,200
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation driver using UBS’s VCAM tool, assuming a WACC of 11.5%.
Key Conference Call Takeaways
Mgmt. expects industry growth of 15% YoY in FY12. The co. currently has
less than 250k units or ~2 weeks of inventory (dealer + transit) versus target
of about 3 weeks. Retail sales have closely tracked wholesale shipments.
Co. continues to see strong demand across the board, both in rural and urban
markets. Rural markets have continued to remain strong. Scooters and
premium bikes helping to drive growth in urban markets.
Co. has raised capacity to 6.15mn by Mar’11 and expects to raise it to 6.5mn
by further debottlenecking and capacity enhancement. Mgmt. remains
confident of meeting FY12 demand from existing plants.
Co. looking to set up fourth plant and expect it to come on stream with first
phase capacity of 750k p.a. in the next 12-14 mths. Likely to incur a capex of
Rs 5bn for this phase. Co. expects to announce the plant location shortly.
Total Capex in FY12 to be Rs 9bn. Higher capex primarily on account of
new plant.
Expects normal advertising spend at around 2% of sales and incur about Rs
1bn on the rebranding. Most of the rebranding spend will be incurred in
Q2FY12 and Q3FY12. However, mgmt. confident that EBITDA margins
should improve from current levels albeit marginally given some softening in
commodity prices.
R&D spend is likely to be 1%-1.2% of sales incl. capital spend.
Co. raised prices of various models by Rs 500 – Rs 750 per unit from Jun 24,
2011.
Mgmt. expects tax rate to remain at 17% for FY12.
Co. is working on developing export markets. New market entry will take
time. Co. still looking to understand markets and identify the right partners.
Hero Honda Ltd.
Hero Honda, which sold 4.6m motorcycles in FY10, is the world's largest twowheeler
manufacturer, even though it is present primarily only in the motorcycle
segment of the Indian two-wheeler market. Hero Honda is a joint venture
between Honda (Japan) and Hero group (owned by the Munjal family) of India.
The joint venture agreement was renewed in June 2004 for 10 years (2014).
Statement of Risk
Key risks to our earnings estimates for auto companies are fluctuations in sales
volumes and raw material prices. Demand is linked to various factors including
the economic growth rate and interest rates in the economy. Given, the high
level of consolidation within the industry, two wheeler industry is more prone to
price wars among players.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hero Honda Ltd.
Q 1FY12: Margins lower but outlook strong
Event: Q1FY12 Sales and PAT inline with UBS-e
Sales increased 5%qoq driven by 5%qoq increase in vols. EBITDA margin
declined 80bps qoq to 11.4% (UBS-e: 12.3%) due to 190bps increase in raw
material cost (as %age of sales). However, PAT was inline at Rs 5.6bn
(+13%YoY) due to higher other income and lower than expected tax rate.
Impact: Marginal cut to FY12 EPS estimate; Margins have bottomed
We reduce our EBITDA margin est. by 60bps to 11.6% for FY12, however, we
also reduce tax rate by 3% to 17% inline with mgmt. guidance. We therefore
reduce our FY12 est. by 4%. Mgmt. expects margins to improve on a sequential
basis despite additional rebranding spend in the next 2 quarters, given the small
softening in commodity prices and recent price increases effected by the co.
Action: Maintain Buy, Mgmt. continues to see strong demand
We expect margins to improve going forward. Mgmt. continues to see strong
demand growth across both rural and urban markets. The co. has continued to gain
market share and is likely to outperform industry growth. We continue to like Hero
Honda given strong exposure to rural demand. We also expect Hero Honda to
benefit from its dominance in the 100cc segment as customers shift more to fuel
efficient 100cc bikes given rising petrol prices.
Valuation: Maintain Buy, PT Rs 2,200
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation driver using UBS’s VCAM tool, assuming a WACC of 11.5%.
Key Conference Call Takeaways
Mgmt. expects industry growth of 15% YoY in FY12. The co. currently has
less than 250k units or ~2 weeks of inventory (dealer + transit) versus target
of about 3 weeks. Retail sales have closely tracked wholesale shipments.
Co. continues to see strong demand across the board, both in rural and urban
markets. Rural markets have continued to remain strong. Scooters and
premium bikes helping to drive growth in urban markets.
Co. has raised capacity to 6.15mn by Mar’11 and expects to raise it to 6.5mn
by further debottlenecking and capacity enhancement. Mgmt. remains
confident of meeting FY12 demand from existing plants.
Co. looking to set up fourth plant and expect it to come on stream with first
phase capacity of 750k p.a. in the next 12-14 mths. Likely to incur a capex of
Rs 5bn for this phase. Co. expects to announce the plant location shortly.
Total Capex in FY12 to be Rs 9bn. Higher capex primarily on account of
new plant.
Expects normal advertising spend at around 2% of sales and incur about Rs
1bn on the rebranding. Most of the rebranding spend will be incurred in
Q2FY12 and Q3FY12. However, mgmt. confident that EBITDA margins
should improve from current levels albeit marginally given some softening in
commodity prices.
R&D spend is likely to be 1%-1.2% of sales incl. capital spend.
Co. raised prices of various models by Rs 500 – Rs 750 per unit from Jun 24,
2011.
Mgmt. expects tax rate to remain at 17% for FY12.
Co. is working on developing export markets. New market entry will take
time. Co. still looking to understand markets and identify the right partners.
Hero Honda Ltd.
Hero Honda, which sold 4.6m motorcycles in FY10, is the world's largest twowheeler
manufacturer, even though it is present primarily only in the motorcycle
segment of the Indian two-wheeler market. Hero Honda is a joint venture
between Honda (Japan) and Hero group (owned by the Munjal family) of India.
The joint venture agreement was renewed in June 2004 for 10 years (2014).
Statement of Risk
Key risks to our earnings estimates for auto companies are fluctuations in sales
volumes and raw material prices. Demand is linked to various factors including
the economic growth rate and interest rates in the economy. Given, the high
level of consolidation within the industry, two wheeler industry is more prone to
price wars among players.
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