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Hero Moto: Strong show at the operating level - Views on News from Equitymaster

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Hero Moto: Strong show at the operating level

Jan 23, 2012

Hero Motocorp Ltd announced third quarter results of the financial year 2011-2012 (3QFY12). The company has reported a growth of 17% YoY and 43% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 17% YoY during the quarter led by an 11% increase in sales volumes. The company sells over 1.5 m units during the quarter (around 1.4 m during 3QFY11).
  • Operating margins increase by 4.4% YoY to 15.6%, on the back of lower raw material costs and significant reduction in other expenditure. Operating profits grow by 63.5% YoY during 3QFY12.
  • Net profit growth (excluding extraordinary items) at 21% YoY is lower than the growth in operating profits on account of a surge in depreciation charges.

Financial performance summary
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Units sold 1,428,030 1,589,286 11.3% 3,948,013 4,663,178 18.1%
Net sales 51,617 60,315 16.9% 140,102 175,441 25.2%
Expenditure 45,851 50,885 11.0% 122,232 148,500 21.5%
Operating profit (EBDITA) 5,766 9,430 63.5% 17,871 26,941 50.8%
EBDITA margin (%) 11.2% 15.6%   12.8% 15.4%  
Other income 673 795 18.2% 2,038 2,444 20.0%
Depreciation 560 2,987 433.7% 1,650 8,169 395.1%
Interest         38  
Profit before tax 5,879 7,238 23.1% 18,258 21,178 16.0%
Exceptional item (798)     (798)    
Tax 790 1,108 40.2% 3,197 3,433 7.4%
Profit after tax/(loss) 4,290 6,130 42.9% 14,263 17,745 24.4%
Net profit margin (%) 8.3% 10.2%   10.2% 10.1%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         114.0  
Price to earnings ratio (x)*         18.3  
(* on trailing twelve months earnings)

What has driven performance in 3QFY12?
  • Hero Motocorp reported a revenue growth of 17% YoY on the back of an 11% YoY increase in sales volumes. The company sold over 1.5 m units during the quarter and had sold around the same number of units in 1QFY12 and 2QFY12 as well. During the corresponding quarter last year, sales volumes stood at about 1.4 m units. For the nine month period, the company reported sales growth of 25% YoY. The company was able to report growth in excess of half a million two wheelers in every month of the quarter and has unveiled plans of launching more new models over the next few months.

  • Hero Motocorp put up a strong performance at the operating level as profits grew by a healthy 63.5% YoY during the quarter. This was because operating margins increased by 4.4% to 15.6%. While raw material costs (as a percentage of sales) fell by around 1%, it was the substantial drop in other expenditure that enabled the company to expand its operating margins.
    Cost break-up...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw materials 38,149 43,948 15.2% 101,842 128,633 26.3%
    % sales 73.9% 72.9%   72.7% 73.3%  
    Staff cost 1,561 1,993 27.7% 4,509 5,432 20.5%
    % sales 3.0% 3.3%   3.2% 3.1%  
    Other expenditure 6,141 4,943 -19.5% 15,880 14,435 -9.1%
    % sales 11.9% 8.2%   11.3% 8.2%  

  • However, while the performance at the operating level was robust, the same was not mirrored at the net profit level. Net profits grew at a much slower pace of 21% YoY (excluding extraordinary items) and this was largely due to the considerable surge in depreciation charges. It should be noted that the same came in high because the company decided in 4QFY11 to amortise the license fee payment that it will pay to Honda over the next 14 quarters.

What to expect?
At the current price of Rs 1,892, the stock is trading a multiple of 10 times our estimated FY14 cash flow per share. We believe that on account of its strong cash flow generating ability, the company will not have any major problems in paying the royalty to the outgoing partner, Honda Motors. Despite headwinds in the auto industry in the form of higher interest rates and fuel prices, the company has managed to perform well during the quarter and a strong rural demand has been one of the factors that has bolstered growth in sales. Plus, the fact that two-wheelers are less expensive and more fuel efficient than passenger vehicles has also led to good growth. We maintain our positive view on the stock from a long term perspective.

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