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India Equity Research Reports, IPO and Stock News
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● We received a number of investor queries on the 250 bp gross
margin expansion for Hero Motocorp highlighted in our report
Two>Four. As shown in Figure 1, Hero Motocorp’s price hikes
have lagged competitors, but with the June hike the company has
caught up—its benefits should be visible in 2Q FY12.
● Raw material prices will impact two-wheeler companies with a lag
of one quarter (Fig 2). With average prices of both aluminium and
rubber declining ~5%, gross margins will expand by Rs300/vehicle
(Rs100 on rubber and Rs200 on Aluminium).
● The third factor for margin expansion will be sourcing from non-
Honda approved vendors. While the potential benefit here can be
very large, we have assumed only ~50 bp from this, as we reckon
the company will go a bit slow on this initially, to protect its image
in the new avatar.
● Consensus estimates on Hero Motocorp have been continuously
downgraded over the next few quarters, with margins bottoming out.
The stock should enter an upgrade cycle in the next few quarters.
In the last year, the company lagged Bajaj Auto in passing on price
hikes to customers (Figure 1). For the last three hikes by Bajaj,
HeroMotocorp responded after a gap of two months. The latest price
hike by the company in June 2011 should improve its margins from
the next quarter.
The difference in margins of Hero Motocorp and Bajaj Auto expanded
sharply post the implementation of emission norms in 1Q FY10. The
key reason was that while the cost of a catalytic converter is
~Rs200/vehicle for Bajaj, it is ~Rs600/vehicle for Hero. This is just one
example of a component where the costs for the two large players are
vey different.
Our interaction with a common headlamp supplier suggests that Hero
components are 25% more expensive than Bajaj components, but
while Hero components last for five years, Bajaj component last only
two years. Hence, there is obviously a cost and quality trade-off, and
we reckon the company will be very selective and highly conscious of
its brand image before choosing to go for a cheaper supplier.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We received a number of investor queries on the 250 bp gross
margin expansion for Hero Motocorp highlighted in our report
Two>Four. As shown in Figure 1, Hero Motocorp’s price hikes
have lagged competitors, but with the June hike the company has
caught up—its benefits should be visible in 2Q FY12.
● Raw material prices will impact two-wheeler companies with a lag
of one quarter (Fig 2). With average prices of both aluminium and
rubber declining ~5%, gross margins will expand by Rs300/vehicle
(Rs100 on rubber and Rs200 on Aluminium).
● The third factor for margin expansion will be sourcing from non-
Honda approved vendors. While the potential benefit here can be
very large, we have assumed only ~50 bp from this, as we reckon
the company will go a bit slow on this initially, to protect its image
in the new avatar.
● Consensus estimates on Hero Motocorp have been continuously
downgraded over the next few quarters, with margins bottoming out.
The stock should enter an upgrade cycle in the next few quarters.
In the last year, the company lagged Bajaj Auto in passing on price
hikes to customers (Figure 1). For the last three hikes by Bajaj,
HeroMotocorp responded after a gap of two months. The latest price
hike by the company in June 2011 should improve its margins from
the next quarter.
The difference in margins of Hero Motocorp and Bajaj Auto expanded
sharply post the implementation of emission norms in 1Q FY10. The
key reason was that while the cost of a catalytic converter is
~Rs200/vehicle for Bajaj, it is ~Rs600/vehicle for Hero. This is just one
example of a component where the costs for the two large players are
vey different.
Our interaction with a common headlamp supplier suggests that Hero
components are 25% more expensive than Bajaj components, but
while Hero components last for five years, Bajaj component last only
two years. Hence, there is obviously a cost and quality trade-off, and
we reckon the company will be very selective and highly conscious of
its brand image before choosing to go for a cheaper supplier.
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