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Hero Honda: Continues to impress - Views on News from Equitymaster

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Hero Honda: Continues to impress
Jan 27, 2010

Performance summary
  • Topline grows 33% YoY for the quarter led by 30% growth in volumes.
  • Operating margins zoom to 17.3%, a jump of nearly 300 basis points, leading to a strong 59% growth in operating profits.
  • Bottomline growth comes in at even more impressive 78% as lower tax charges further add to the buoyancy.
  • Bottomline growth for the nine month period comes in at 86% YoY, led by 31% growth in topline.

(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Units sold 857,806 1,111,392 29.6% 2,723,695 3,413,614 25.3%
Net sales 28,813 38,270 32.8% 89,344 117,089 31.1%
Expenditure 24,643 31,661 28.5% 77,339 96,537 24.8%
Operating profit (EBDITA) 4,170 6,609 58.5% 12,004 20,552 71.2%
EBDITA margin (%) 14.5% 17.3%   13.4% 17.6%  
Other income 436 550 26.1% 1,367 1,661 21.6%
Interest (net) (87) (46) -47.5% (221) (162) -26.8%
Depreciation 475 469 -1.2% 1,363 1,428 4.8%
Profit before tax 4,219 6,736 59.7% 12,229 20,947 71.3%
Extraordinary income/(expense) - -   - -  
Tax 1,214 1,378 13.5% 3,433 4,617 34.5%
Profit after tax/(loss) 3,004 5,358 78.3% 8,796 16,330 85.7%
Net profit margin (%) 10.4% 14.0%   9.8% 13.9%  
No. of shares (m) 199.7 199.7   199.7 199.7  
* on trailing twelve months earnings

What has driven performance in 3QFY10?
  • Hero Honda has continued with its robust performance on the volumes front. It managed to grow its motorcycles volumes by 31% during the quarter. This was however lower than the growth rate of 40% achieved by the overall motorcycles segment in the same period. Consequently, the company lost some market share and the same stood at 57% at the end of the quarter as opposed to nearly 61% during the same quarter last year. While the company could continue to lose market share going forward as competition gets intense, given Hero Honda’s strong presence and the potential that exists in the market place, growth in the region of 10%-12% over the long term cannot be ruled out.

    sales break up
    Domestic 3QFY09 3QFY10 % change 9mFY09 9mFY10 % change
    Scooter/scooterette 42,957 44,263 3.0% 104,320 143,782 37.8%
    Motorcycles 793,126 1,041,722 31.3% 2,555,453 3,196,505 25.1%
    Total 836,083 1,085,985 29.9% 2,659,773 3,340,287 25.6%
    Exports            
    Scooter/scooterette 728 1,668 129.1% 2,401 4,040 68.3%
    Motorcycles 20,545 23,739 n.a. 61,521 69,287 12.6%
    Total 21,273 25,407 19.4% 63,922 73,327 14.7%
    Grand total 857,356 1,111,392 29.6% 2,723,695 3,413,614 25.3%

  • While the topline growth was impressive, company’s operating margins also came in much higher than same quarter last year. The same zoomed to 17.3%, an increase of nearly 300 basis points as compared to same quarter last year. This also led to its operating profits growing by an impressive 59% YoY. Raw material expenses emerged as the main contributor towards margin expansion, falling by nearly 200 basis points as a percentage of sales. The company seems to have benefited from a fall in prices of most commodities like metals and plastics as the same ruled at high levels during same quarter last year. Besides, drop in other expenditure and staff costs as a percent of sales has also benefited the company.

    cost break up
    (Rs m) 3QFY09 3QFY09 Change 9mFY09 9mFY10 Change
    Raw materials 20,218 26,146 29.3% 63,855 79,679 24.8%
    % sales 70.2% 68.3%   71.5% 68.1%  
    Staff cost 1,155 1,371 18.7% 3,297 4,144 25.7%
    % sales 4.0% 3.6%   3.7% 3.5%  
    Other expenditure 3,269 4,144 26.7% 10,187 12,714 24.8%
    % sales 11.3% 10.8%   11.4% 10.9%  

  • With the company’s effective tax rate falling to 20% from levels of 29%, its bottomline received a further boost and has come in higher by a strong 78% YoY during the quarter. Furthermore, with the company notching up good numbers for the third quarter in succession, bottomline for the nine month period has also witnessed an impressive growth of 86% YoY.

What to expect?
At the current price of Rs 1,555, the stock is trading a price to cash flow multiple of 12.3x its expected FY12 cash flow per share. As mentioned above, outperformance of the magnitude that the company managed to achieve during the nine month of the current fiscal may not be possible going forward. However, given the under penetration that exists in the domestic markets and company’s strong focus on costs and its leadership position, Hero Honda certainly is the best way to participate in the industry growth story. We remain positive on Hero Honda from a long term perspective.

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