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Hero Moto Corp: Taxes spoil the show - Views on News from Equitymaster

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Hero Moto Corp: Taxes spoil the show
Jan 31, 2014

Hero Moto Corp has announced its December quarter results. The company has reported an 11.1% growth in topline while its bottomline grew by 7.5% YoY for the quarter ended December 2013. Here is our analysis of the results.

Performance summary
  • Hero Moto Corp reports a 11% YoY growth in topline during the quarter
  • Operating margins expand 0.5%, leading to a 15% growth in operating profits
  • Profit after tax is higher by 7.5% as higher tax rates take toll
  • For the nine month period, profits are nearly flat despite a 6.5% growth in topline

(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Two-wheelers sold 1,573,135 1,680,940 6.9% 4,548,232 4,656,498 2.4%
Net sales 61,876 68,768 11.1% 176,224 187,625 6.5%
Expenditure 54,090 59,788 10.5% 151,877 161,166 6.1%
Operating profit (EBDITA) 7,787 8,980 15.3% 24,347 26,459 8.7%
EBDITA margin (%) 12.6% 13.1%   13.8% 14.1%  
Other income 901 957 6.2% 2,939 3,234 10.0%
Interest (net) 30 30 0.7% 88 89 0.6%
Depreciation 2,832 2,732 -3.5% 8,762 8,345 -4.8%
Profit before tax 5,826 7,174 23.2% 18,435 21,259 15.3%
Tax 947 1,928 103.6% 2,996 5,712 90.7%
Profit after tax/(loss) 4,879 5,247 7.5% 15,439 15,547 0.7%
Net profit margin (%) 7.9% 7.6%   8.8% 8.3%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share (Rs)*         106.6  
Price to earnings ratio (x)*         18.5  
(* on trailing twelve months earnings)

What has driven performance in 3QFY14?
  • Company's net sales have gone up by 11% YoY during the quarter. Volumes however were up by just 7% YoY. Therefore the higher growth seems to be a mix of both improved product mix as well as higher realisations. The volume growth is not that bad on a relative basis as rivals like Bajaj Auto actually witnessed a decline in volumes during the quarter. Even the industry growth was in line with growth in Hero Moto Corp's volumes. The company is also planning to increase its focus on the exports markets which will also help drive volumes we believe.

  • On the margins front, the company suffered an expansion to the tune of 0.5% YoY. This was on account of savings on the raw material costs front. On a QoQ basis however, margins were lower by around 0.4% as higher commodity costs and higher other expenses took toll.

    Cost break-up...
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Raw materials 45,854 49,989 9.0% 129,581 135,501 4.6%
    % sales 74.1% 72.7%   73.5% 72.2%  
    Staff cost 1,982 2,439 23.0% 5,950 6,944 16.7%
    % sales 3.2% 3.5%   3.4% 3.7%  
    Other expenditure 6,253 7,360 17.7% 16,345 18,722 14.5%
    % sales 10.1% 10.7%   9.3% 10.0%  

  • The company was not able to carry forward the good operating performance to the bottomline as higher tax rates played spoilsport. The company's tax outgo more than doubled as tax benefits from the company's Haridwar plant have had a partial phasing out. Consequently, bottomline was up 7.5% on a YoY basis.
What to expect?
At the current price of Rs 1,970 the stock trades at a multiple of around 11 times its expected FY16 cash flow per share. The company has outlined a capex of Rs 11 bn for FY14, which besides setting up a new plant could also be used towards launching new products for the domestic market. As far as exports are concerned, the company will try to increase its presence in more than 20 markets, up from around 15 now, in the near future. Since this is likely to take some time to show in the company's numbers and since the current valuations also look stretched, we reiterate our SELL view on the stock from a medium term perspective.

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