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Hero Honda: Robust 3Q expectations

Jan 15, 2001

Hero Honda, India's leading motorcycle manufacturer will be announcing its 3QFY01 results tomorrow. The market is expecting a robust growth of around 35%-40% growth in net for the 3QFY01. This is driven mainly by higher volume growth in the past quarter. From April to December 2000, the company sold 754,794 units as compared to 537,113 units for the same period of the previous year, a growth of 41% YoY. The company's market share is 48% currently as compared to 42% in FY2000.

Its four stroke 100 cc bike, the Splendor is the leader in its segment and is surging ahead with strong volume growth for the company. It is the most sought after bike in its segment with a fairly long waiting period. However, as the company does not want to be complacent on its past achievements it plans to launch a superior version of Splendor in the 4QFY01.

The next financial year (FY2002), however would be a tougher one for the company. For one, agricultural growth is expected to be lacklustre at less than 1% in the current financial year. The lag effect of this on rural incomes is likely to be felt in FY02. As 60% of motorcycle demand is from rural areas, this segment of the automobile sector is sure to be affected.

In terms of competition also, the scenario is expected to get tougher in the coming year. Its two nearest competitors, Bajaj Auto and TVS Suzuki are getting set to come out with new models in the current year. The company cannot undermine the presence of Bajaj Auto. In the current financial year, Bajaj Auto has mopped up a good 21% of market share in FY01, due to its aggressive expansion into the motorcycle segment.

Hero Honda's excellent growth prospects, higher margins and returns as compared to its peers justify its premium valuations as compared to Bajaj Auto and TVS Suzuki. However, a slowdown in the motorcycle segment cannot be ruled out in the coming year.

On the current price of Rs 914 it is trading at 10.7x FY02E EPS of Rs 85.2.

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