Hero Honda: December sales up 25% - Views on News from Equitymaster

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Hero Honda: December sales up 25%

Jan 4, 2001

Hero Honda continues to report robust volume growth. For the month of December 2000 its volumes grew by 25% YoY to 85,785. For April to December 2000, the company has sold 7,54,794 units as compared to 5,37,113 units for the same period of the previous year, a growth of 41% YoY. Hero Honda's market share went upto 48% for the period April-November 2000 as compared to 42% in FY2000. Its four stroke 100 cc bike, the Splendor is the leader in its segment and is surging ahead the strong growth in volumes for Hero Honda. It is currently the most sought after bike in its segment with a fairly long waiting period. The company also plans to launch a redesigned 100 cc Splendor in the 4QFY01.

Hero Honda has been aggressive on new fuel efficient product launches. In FY2000, the company launched CBZ (ee), a four-stroke bike powered with a 156 cc engine. Within the motorcycle segment demand has shifted to 100 cc bikes.

This increase in market share should be viewed in the light that competition has intensified in the motorcycle market with the aggressive entry of Bajaj Auto in the current financial year. The loser in this segment has been TVS Suzuki as it lacks a substantial presence in fast growing 100-150cc four stroke bikes.

Demand for motorcycles continues to remain strong in the current financial year. The consumer preference for motorcycles over scooters and mopeds continues. The share of motorcycles in India's two wheeler market went upto 55% during April-September 2000, while that of scooters declined to 26% for the same period. Scooter sales fell by 19% YoY during the same period.

Volumes April-September 2000 Market share
Scooters 478,312 26%
Motorcycles 1,013,863 55%
Mopeds 366,811 20%
Two wheelers 1,858,986 100%

The fact that agriculture production declined 2% in FY2000, and is expected to clock in a growth of only around 0.9% in FY01E, will result in a slowdown in rural market demand. Hence it is quite likely that motorcycles demand is likely to slowdown in FY2002.

The company has reported excellent results for 1HFY01. Its net profit for the 1HFY01 at Rs 1,205 m is a growth of 48% YoY. For the 3QFY01 the market is expecting a buoyant growth in net of 40% YoY. We are projecting an EPS growth of over 30% for the next three years for Hero Honda. Its excellent growth prospects, higher margins and returns as compared to its peers and attractive valuations make it the best available play in the two wheeler market today. Its premium valuations as compared to Bajaj Auto and TVS Suzuki seem justified in light of its better growth prospects.

Hero Honda's stock price has taken a beating in the past year due to fears regarding Honda's 100% subsidiary in India. Given the robust volume growth and the company's aggressive stance towards new launches has resulted in renewed interest in the stock.

On the current price of Rs 929 it is trading at 10.9x FY02E EPS of Rs 85.2.


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