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Hero Honda: A positive surprise - Views on News from Equitymaster
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Hero Honda: A positive surprise
Jan 31, 2008

Performance summary
  • Despite adverse market conditions, the company has reported a positive growth in topline of 3% YoY during the quarter.

  • Operating margins have expanded by a strong 260 basis points resulting into a 27% YoY growth in operating profits

  • Aided by higher other income and benign depreciation charges, net profit growth during the quarter has come in at an impressive 31% YoY.

  • On a nine month basis, bottomline has grown marginally at 1% while topline has grown 4% YoY.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Units sold 896,113 893,581 -0.3% 2,480,772 2,453,067 -1.1%
Net sales 26,661 27,431 2.9% 72,604 75,432 3.9%
Expenditure 23,641 23,605 -0.2% 63,560 66,056 3.9%
Operating profit (EBDITA) 3,019 3,826 26.7% 9,044 9,375 3.7%
EBDITA margin (%) 11.3% 13.9%   12.5% 12.4%  
Other income 336 521 55.2% 1,453 1,303 -10.4%
Interest (net) 55 87 57.2% 153 277 81.0%
Depreciation 376 408 8.6% 1,043 1,168 12.1%
Profit before tax 3,034 4,026 32.7% 9,608 9,787 1.9%
Extraordinary income/(expense) - -   - -  
Tax 943 1,276 35.3% 2,979 3,095 3.9%
Profit after tax/(loss) 2,092 2,750 31.5% 6,629 6,692 0.9%
Net profit margin (%) 7.8% 10.0%   9.1% 8.9%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share (Rs)         43.3  
Price to earnings ratio (x)**         15.8  
( * on trailing twelve months earnings)

What has driven performance in 3QFY08?
  • Company’s overall volumes have slipped marginally during the quarter on a YoY basis. However, a better product mix has seen sales in volume terms grow by 3% during the quarter. Motorcycles, the company’s mainstay have seen their domestic volumes remain almost stagnant. The performance is better than the industry, where volumes have come off by 7% YoY. New launches, especially in the premium segment seems to have revived the fortunes of the segment. The fact that the festive season fell during the quarter also helped matters. Exports on the other hand have fallen by 17% YoY, led by a 19% decline in motorcycles exports. However, the volumes being small, they were not able to make a significant dent to the company’s overall volumes.

    Sales break-up (3QFY08)
    Domestic 3QFY07 3QFY08 % change 9mFY07 9mFY08 % change
    Motorcycles 845,316 844,570 -0.1% 2,329,158 2,313,886 -0.7%
    Scooter/scooterette 29,279 31,112 6.3% 72,106 79,316 10.0%
    Total 874,595 875,682 0.1% 2,401,264 2,393,202 -0.3%
    Exports            
    Motorcycles 21,518 17,451 -18.9% 78,532 58,521 -25.5%
    Scooter/scooterette - 448 n.a. 976 1,344 37.7%
    Total 21,518 17,899 -16.8% 79,508 59,865 -24.7%
    Grand total 896,113 893,581 -0.3% 2,480,772 2,453,067 -1.1%
    Source: SIAM

  • While better product mix helped, it is the big improvement that the company made in controlling its operating costs that helped boost operating profits. Raw material costs as a percentage of sales came off substantially and this helped company post a big 260 basis point expansion in operating margins. Also, the fact that costs of quite a few commodities have come down worked in its favour. Further, with the company taking the all-important decision of postponing production in its new plant, staff costs and other expenses were also kept under control, giving the margins an additional boost. The former nevertheless increased by 10% YoY, however, it could have been much worse.

    cost break up...
    (Rs m) 3QFY07 3QFY08 Change
    Raw materials 19,629 19,449 -0.9%
    % sales 73.6% 70.9%  
    Staff cost 917 1,010 10.1%
    % sales 3.4% 3.7%  
    Other expenditure 3,095 3,146 1.6%
    % sales 11.6% 11.5%  

  • Growth in bottomline at 32% YoY came in slightly higher than the growth in operating profits, due mainly to a 55% jump in other income and modest rise in depreciation charges. Had it not been for the 57% jump in interest expenses, bottomline growth could have been even higher.

What to expect?
At the current price of Rs 682, the stock is trading at a multiple of 10 times our estimated FY10 cash flow. With the recent improved performance, the company is on track to meeting our FY08 earnings estimates. Further, the current dynamics of the industry do not warrant drastic changes to our FY09 and FY10 estimates as well. As such, at the current price, there is little upside to the stock from a FY10 perspective.

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