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Hero Honda: A dogged display - Views on News from Equitymaster

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Hero Honda: A dogged display

Jan 20, 2009

Performance summary
  • Topline grows by 5% YoY during the quarter despite a 4% drop in volumes
  • Operating profits grow by 7% YoY as margins expand by 30 basis points during the quarter
  • Lower tax outgo helps boost profitability further and enables the bottomline to grow by 9% YoY during the quarter
  • Net profit growth for the nine month period comes in at 31% YoY on the back of an 18% YoY growth in topline.

Standalone numbers
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Units sold 893,581 857,806 -4.0% 2,453,067 2,724,145 11.1%
Net sales 27,502 28,813 4.8% 75,647 89,344 18.1%
Expenditure 23,605 24,643 4.4% 66,056 77,339 17.1%
Operating profit (EBDITA) 3,897 4,170 7.0% 9,590 12,004 25.2%
EBDITA margin (%) 14.2% 14.5%   12.7% 13.4%  
Other income 450 436 -3.1% 1,088 1,367 25.6%
Interest (net) (87) (87) 0.9% (277) (221) -20.4%
Depreciation 408 475 16.3% 1,168 1,363 16.7%
Profit before tax 4,026 4,219 4.8% 9,787 12,229 25.0%
Extraordinary income/(expense) - -   - -  
Tax 1,276 1,214 -4.8% 3,095 3,433 10.9%
Profit after tax/(loss) 2,750 3,004 9.2% 6,692 8,796 31.4%
Net profit margin (%) 10.0% 10.4%   8.8% 9.8%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share (Rs)         59.0  
Price to earnings ratio (x)**         14.2  
( * on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • Hero Honda sold 4% less two wheelers than it managed during same quarter last year. Although the number is not impressive on a standalone basis, it does look commendable when you consider the performance of some of its peers. Just to put things in perspective, rival Bajaj Auto saw its domestic motorcycles volumes plunge a huge 50% YoY during the quarter and hence on a relative basis, Hero Honda’s performance is indeed laudable. Even more laudable is the 5% YoY growth in topline during the quarter, which could be attributed to an improved product mix and higher realisations. The company also managed to improve its market share in the domestic motorcycle market to an imposing 56%.

  • On the operating margins front, they have come in higher by 30 basis points as compared to 3QFY08. This has been made possible because of less than proportionate increase in the company’s raw material costs as well as its other expenses. Company’s operating margin improvement on a QoQ basis, at 90 basis points, is even better and highlights the drop in prices of most commodities that go into the making of a two-wheeler. We expect the margins to continue to remain favorable in the near to medium term.

    Cost break-up…
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Raw materials 19,449 20,218 4.0% 54,309 63,855 17.6%
    % sales 70.7% 70.2%   71.8% 71.5%  
    Staff cost 1,010 1,155 14.4% 2,846 3,297 15.8%
    % sales 3.7% 4.0%   3.8% 3.7%  
    Other expenditure 3,146 3,269 3.9% 8,901 10,187 14.5%
    % sales 11.4% 11.3%   11.8% 11.4%  

  • Despite significantly higher depreciation charges and lower other income, the company’s bottomline for the quarter has seen a growth of 9% on a YoY basis. This was largely due to a drop in the effective tax rate. The lower tax rates could be attributed to the tax incentives that the company gets at one of its manufacturing facilities.

What to expect?
At the current price of Rs 834, the stock is trading at a multiple of 8.6 times its expected FY11 cash flow per share. The company’s performance is largely in line with our expectations and as such we do not feel the need to revisit our assumptions. As far as the valuations are concerned, the company looks fairly valued from a medium term perspective and maybe, a 20%-25% correction from the current levels could make it a decent bet.

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