Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HERO MOTOCORP (HMC)
PRICE: RS.1975 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1838 FY13E P/E: 15X
q HMC has posted strong volumes in 1HFY12; however we expect the
growth rate to taper down in 2HFY12 as base increases.
q Competition for HMC expected to get stiff over the next couple of years.
q Recovery in margins could take some time as Rebranding cost, export
promotion cost and R&D related cost expected to keep operating margins
subdued in the near to medium term.
q We have marginally changed our FY12 estimates and introducing FY13
numbers.
q On the valuation front, we find the stock slightly overvalued at the current
market price of Rs1,975. We roll over our target price to FY13 earnings
as against our earlier target price based on FY12 estimates.
q Our revised price target stands at 1,838 (earlier Rs1,724) based on 14x
FY13 estimated earnings of Rs131.3 (earlier 15x FY12 estimates). We rate
the stock as REDUCE.
Current volume growth rates not sustainable going ahead
n HMC's volumes in 1HFY12 grew at a robust 22% outperforming the peers. However
as the company moves into the 2HFY12, we expect the growth rate to
come down, primarily because of higher 2HFY11 base.
n Until now, the impact of rate hike and economic slowdown on the 2W volumes
has been limited. However, if the current trend continues, we expect to see
moderation in 2W sales.
n Competition for HMC is expected to intensify over the next couple of years.
Honda Motorcycle and Scooters India (HMSI) recently started work on its 3rd 2W
plant (annual capacity of 1.2mn units) that would help the company raise annual
capacity to almost 4mn units. This signals the company's aggressive plans post
parting ways with the Hero group. Bajaj Auto too has become aggressive in the
executive segment with the success of their Discover brand.
n In our assumptions, we have factored in 17% and 11% increase in HMC's volumes
in FY12 and FY13 respectively.
Meaningful margin recovery could take some more time
n HMC's operating margins have been under pressure over the past few quarters
with margins declining from the peak of 18.3% in 2QFY10 to 11.3% in 1QFY12.
n While we believe that margins are near their bottom, but their recovery might
take some time in our view.
n During the current year margins could remain under pressure as the company
carries out their rebranding exercises.
n In FY13, operating margins could remain subdued as the company will probably
be investing in export related activities. Add to that the cost related to scaling up
of R&D activities.
n Going forward, on account of expected moderation in demand along with increased
competition, current pricing power may come under threat putting additional
burden on operating margins.
n Given above mentioned reasons, we do not expect any meaningful improvement
in the margins in the near to medium term for HMC.
Introducing FY13 estimates
n We are introducing FY13 estimates for HMC. We have factored in 11% volume
growth for the company in FY13.
n Our FY13 EBITDA margin estimates stands at 15.1%. We expect the company's
net profit in FY13 to grow by 17% to Rs26.2bn. Our EPS estimates for FY13
stands at 131.3.
n We have marginally lowered our FY12 EPS estimates to Rs112 (earlier Rs114.9).
n Post new agreement with Honda Motors, Japan, HMC now treats amount payable
to Honda Motors Japan, as part of the intangible asset and the same will be
amortized over the period of 42 months (upto June 30 2014). Accordingly royalty
on existing products (part of operating expenses) would cease to exist thereby
inflating operating profits going forward. However this change in accounting
treatment will not have any impact at the net profit level.
Valuations
n At the CMP of Rs1,975, the stock trades at a PE of 17.6x and 15x its FY12 and
FY13 expected earnings respectively. We find the current valuation slightly expensive
given persisting pressure over the company's margins. Volume growth
too is expected to taper down from the current levels, going forward.
n HMC's past 5 years historical average one year forward PE multiple stands at
14x. HMC's earnings is expected to grow at around 16% CAGR between FY11-
FY13E which is in line with past 5 years CAGR earnings growth rate of 15%.
n We roll over our target price to FY13 earnings as against our earlier target price
based on FY12 estimates.
n Our revised price target stands at 1,838 (earlier Rs1,724) based on 14x FY13 estimated
earnings of Rs131.3 (earlier 15x FY12 estimates). We rate the stock as
REDUCE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HERO MOTOCORP (HMC)
PRICE: RS.1975 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1838 FY13E P/E: 15X
q HMC has posted strong volumes in 1HFY12; however we expect the
growth rate to taper down in 2HFY12 as base increases.
q Competition for HMC expected to get stiff over the next couple of years.
q Recovery in margins could take some time as Rebranding cost, export
promotion cost and R&D related cost expected to keep operating margins
subdued in the near to medium term.
q We have marginally changed our FY12 estimates and introducing FY13
numbers.
q On the valuation front, we find the stock slightly overvalued at the current
market price of Rs1,975. We roll over our target price to FY13 earnings
as against our earlier target price based on FY12 estimates.
q Our revised price target stands at 1,838 (earlier Rs1,724) based on 14x
FY13 estimated earnings of Rs131.3 (earlier 15x FY12 estimates). We rate
the stock as REDUCE.
Current volume growth rates not sustainable going ahead
n HMC's volumes in 1HFY12 grew at a robust 22% outperforming the peers. However
as the company moves into the 2HFY12, we expect the growth rate to
come down, primarily because of higher 2HFY11 base.
n Until now, the impact of rate hike and economic slowdown on the 2W volumes
has been limited. However, if the current trend continues, we expect to see
moderation in 2W sales.
n Competition for HMC is expected to intensify over the next couple of years.
Honda Motorcycle and Scooters India (HMSI) recently started work on its 3rd 2W
plant (annual capacity of 1.2mn units) that would help the company raise annual
capacity to almost 4mn units. This signals the company's aggressive plans post
parting ways with the Hero group. Bajaj Auto too has become aggressive in the
executive segment with the success of their Discover brand.
n In our assumptions, we have factored in 17% and 11% increase in HMC's volumes
in FY12 and FY13 respectively.
Meaningful margin recovery could take some more time
n HMC's operating margins have been under pressure over the past few quarters
with margins declining from the peak of 18.3% in 2QFY10 to 11.3% in 1QFY12.
n While we believe that margins are near their bottom, but their recovery might
take some time in our view.
n During the current year margins could remain under pressure as the company
carries out their rebranding exercises.
n In FY13, operating margins could remain subdued as the company will probably
be investing in export related activities. Add to that the cost related to scaling up
of R&D activities.
n Going forward, on account of expected moderation in demand along with increased
competition, current pricing power may come under threat putting additional
burden on operating margins.
n Given above mentioned reasons, we do not expect any meaningful improvement
in the margins in the near to medium term for HMC.
Introducing FY13 estimates
n We are introducing FY13 estimates for HMC. We have factored in 11% volume
growth for the company in FY13.
n Our FY13 EBITDA margin estimates stands at 15.1%. We expect the company's
net profit in FY13 to grow by 17% to Rs26.2bn. Our EPS estimates for FY13
stands at 131.3.
n We have marginally lowered our FY12 EPS estimates to Rs112 (earlier Rs114.9).
n Post new agreement with Honda Motors, Japan, HMC now treats amount payable
to Honda Motors Japan, as part of the intangible asset and the same will be
amortized over the period of 42 months (upto June 30 2014). Accordingly royalty
on existing products (part of operating expenses) would cease to exist thereby
inflating operating profits going forward. However this change in accounting
treatment will not have any impact at the net profit level.
Valuations
n At the CMP of Rs1,975, the stock trades at a PE of 17.6x and 15x its FY12 and
FY13 expected earnings respectively. We find the current valuation slightly expensive
given persisting pressure over the company's margins. Volume growth
too is expected to taper down from the current levels, going forward.
n HMC's past 5 years historical average one year forward PE multiple stands at
14x. HMC's earnings is expected to grow at around 16% CAGR between FY11-
FY13E which is in line with past 5 years CAGR earnings growth rate of 15%.
n We roll over our target price to FY13 earnings as against our earlier target price
based on FY12 estimates.
n Our revised price target stands at 1,838 (earlier Rs1,724) based on 14x FY13 estimated
earnings of Rs131.3 (earlier 15x FY12 estimates). We rate the stock as
REDUCE.
No comments:
Post a Comment