1. 4QFY2010 Result Update I Automobile
April 19, 2010
Hero Honda Accumulate
CMP Rs1,897
Performance Highlights Target Price Rs2,085
For 4QFY2010, Hero Honda (HH) registered 20% yoy growth in Net Sales to Investment Period 12 Months
Rs4,093cr (Rs3,412cr), and a 49% surge in Net Profit to Rs599cr (Rs402cr)
Stock Info
that was above our expectations. The company reported robust performance
on the Operating front, owing to higher operating efficiency and a yoy dip in Sector Automobile
the Raw Material cost. Going ahead, the company expects to maintain its Market Cap (Rs cr) 37,881
market share, following the launch of motorcycles over the next few quarters to
Beta 0.7
combat competition. On the bourses, the stock price has seen a decline in the
last few sessions and is currently trading below its fair valuations. Hence, we 52 WK High / Low 2,094/1,061
recommend an Accumulate rating on the stock. Avg. Daily Volume 73835
Top-line in-line; Bottom-line exceeds expectations: For 4QFY2010, Hero Face Value (Rs) 2
Honda (HH) clocked a 20% growth in Net Sales to Rs4,093cr (Rs3,412cr),
BSE Sensex 17,401
which was in line with our estimates. EBITDA Margins increased by 89bp yoy,
owing to lower Raw Material costs, which fell by 142bp yoy and accounted for Nifty 5,204
67.6% of Sales (69.1% in 4QFY2009), and due to better Operating leverage Reuters Code HROH.BO
during the quarter. HH reported a 49% surge in Net Profit to Rs599cr
Bloomberg Code HH@IN
(Rs402cr) during 4QFY2010, owing to an improvement in the OPM and a
lower Tax provision arising from the commencement of its Haridwar plant. Shareholding Pattern (%)
Outlook and Valuation: We expect HH to record around a 10% CAGR in Promoters 55.0
Revenues over FY2010-12E, aided by around an 8% CAGR in Volumes during MF/Banks/Indian FIs 7.2
the period. We estimate the OPM to decline to around 16.3% (16.9%) in
FY2012E, due to the increasing Raw Material prices (aluminum and steel). We FII/NRIs/OCBs 30.0
expect the Net Profit to register a CAGR of 8% over FY2010-12E, on account
Indian Public 7.8
of the Tax benefits availed by HH at its new plant in Uttaranchal. We have
revised our EPS estimates marginally upwards to Rs120.3 (Rs113 earlier) for Abs. (%) 3m 1yr 3yr
FY2011E and to Rs130.3 (Rs123), following the better-than-expected
4QFY2010 performance by the company. We recommend Accumulate the Sensex (0.5) 57.9 27.8
stock, with a Target Price of Rs2,085, owing to the recent decline in the stock
price. HH 13.5 70.8 189.8
Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 12,319 15,758 17,332 19,009
% chg 19.2 27.9 10.0 9.7
Net Profit 1,282 2,232 2,403 2,602
% chg 32.4 74.1 7.7 8.3
OPM (%) 13.9 16.9 16.5 16.3
EPS (Rs) 64.2 111.8 120.3 130.3
P/E (x) 29.6 17.0 15.8 14.6
P/BV (x) 10.0 10.0 7.9 6.6
RoE (%) 37.8 58.9 56.1 49.4
RoCE (%) 42.1 61.6 58.0 51.6
Vaishali Jajoo
EV/Sales (x) 2.5 2.0 1.7 1.5
Tel: 022 – 4040 3800 Ext: 344
EV/EBITDA (x) 20.1 12.5 11.4 10.2 E-mail: vaishali.jajoo@angeltrade.com
Source: Company, Angel Research
1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539
2. Hero Honda I 4QFY2010 Result Update
Top-line in-line, riding on robust volumes: For 4QFY2010, Hero Honda (HH)
clocked a 20% growth in Net Sales to Rs4,093cr (Rs3,412cr), which was in line with
our estimates. Sales increased primarily on the back of a strong 18.9% growth in
Volumes and a marginal rise in the yoy average Realisations of around Rs34,492
per bike (compared to Rs34,192 last year). Operating Margins improved by 89bp,
on the back of a decline in Raw Material costs, decent Top-line growth and optimal
operating leverage. As a result, the Bottom-line spurted by 49% to Rs599cr (Rs402cr)
during the quarter, surpassing our expectation of Rs545cr.
Margins improve on better operating leverage: During 4QFY2010, HH’s EBITDA
Margins increased by 88bp yoy, owing to lower Raw Material costs, which fell by
142bp yoy and accounted for 67.6% of Sales (69.1% in 4QFY2009) and better
Operating leverage during the quarter. Other Expenditure increased by 46bp yoy
during the quarter, due to higher Advertising expenditure. HH reported 26.7% yoy
increase in Operating Profit to Rs682cr (Rs538cr) in 4QFY2010.
Net Profit exceeds expectations: HH reported a 49% surge in Net Profit to Rs599cr
(Rs402cr) during 4QFY2010, owing to the improvement in the OPM and a lower
Tax provision arising from the commencement of its Haridwar plant. Other Income,
which mainly comprised of treasury gains, increased by 80.6% yoy to Rs99.2cr
(Rs54.9cr) for 4QFY2010, and aided the Bottom-line growth during the quarter.
Market share reduced in FY2010; future outlook cautious: HH’s domestic
Motorcycle Segment market share of 53.9% at the end of FY2010 has come down
from about 63.1% at the end of FY2009. The company has guided to clock five
million motorcycles Sales Volume in FY2011E. The Scooter Segment recorded an
overall Volume growth of 37.2% yoy during FY2010, with its new launch, Pleasure,
selling about 17,500 units per month.
Exhibit 1: Motorcycle Segment Volume
Units %
1,300,000 100
80
1,100,000
60
900,000 40
20
700,000
0
500,000 (20)
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
Market Share(RHS) Volume(LHS) % yoy growth(RHS)
Source: SIAM, Angel Research
April 19, 2010 2
4. Hero Honda I 4QFY2010 Result Update
Key Highlights
Haridwar plant to ramp-up production
HH commenced expansion plans at its Haridwar in Uttarakhand, with the first plant
commissioned in April 2008 with an initial capacity of 500,000 units. The company
aims to increase its total installed capacity to 5.7 million (from 5.4 million) by August
2010. This will be done through an incremental investment of Rs130cr at its third
and newest plant at Haridwar. This plant also avails of tax benefits, including a
100% Excise exemption for 10 years, and a 100% Income Tax exemption for the first
five years and 30% for the next five years.
The company has two plants in the Gurgaon area, besides the one at Haridwar,
which enjoy tax benefits. Due to the increasing production levels at the Haridwar
plant, the company's overall tax rate for 2009-10 has come down to 21.2% from
28% in the previous fiscal.
Outlook and Valuation
The Two-wheeler Segment registered an improvement in Sales in FY2010, on the
back of the various measures adopted by the government to revive the Auto Sector,
coupled with the positive developments on the macro-economic front. We believe
that although the substantial ownership base of Two-wheelers has reduced the
headroom for higher double-digit growth rates, the increased Replacement demand
is expected to sustain Volumes. The rural markets are also expected to register better
growth on account of the new demand arising from the relevant rural population.
Thus, we estimate the Two-wheeler Segment to maintain its growth momentum and
to register around a 9% CAGR in Volumes over the next few years.
We expect HH to record around a 10% CAGR in Revenues over FY2010-12E, aided
by around an 8% CAGR in Volumes during the period. We estimate the OPM to
decline to around 16.3% (16.9%) in FY2012E, due to the increasing Raw Material
prices (aluminum and steel). We expect the Net Profit to register a CAGR of 8% over
FY2010-12E, on account of the Tax benefits availed by HH at its new plant in
Uttaranchal. We have revised our EPS estimates marginally upwards to Rs120.3
(Rs113 earlier) for FY2011E and to Rs130.3 (Rs123), following the better-than-
expected 4QFY2010 performance by the company. We recommend Accumulate the
stock, with a Target Price of Rs2,085, owing to the recent decline in the stock price.
Exhibit 3: Trading above average P/E
25.0
20.0
15.0
10.0
5.0
-
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Apr-02
Jul-02
Jan-03
Apr-03
Jul-03
Jan-04
Apr-04
Jul-04
Jan-05
Apr-05
Jul-05
Jan-06
Apr-06
Jul-06
Jan-07
Apr-07
Jul-07
Jan-08
Apr-08
Jul-08
Jan-09
Apr-09
Jul-09
Jan-10
Apr-10
Source: C-line, Angel Research
April 19, 2010 4
9. Hero Honda I 4QFY2010 Result Update
Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Hero Honda
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies’ Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors..
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April 19, 2010 9
