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Hero Honda: Operating pressure continues - Views on News from Equitymaster

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Hero Honda: Operating pressure continues

Feb 3, 2011

Hero Honda Ltd has announced its 3QFY11 results. The company has reported a growth of 34% YoY and a decline of 20% YoY in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • Revenues grow by 34% YoY during the quarter led by a 29% increase in sales volumes. The company sold over 1.4 m units during the quarter (1.3 m during the preceding quarter).
  • Operating margins fall by 6% YoY to 11.2%, on the back of higher raw material costs. Operating profits decline by 13% YoY during 3QFY11.
  • Net profits decline by 20% YoY on the back of a poor operating performance and an exception item of Rs 798 m. On excluding the one-time item, profits come in lower by 5% YoY.
  • During 9mFY11, revenues rise by 19% YoY on the back of a 16% YoY increase in volumes. Profits during the period decline by 13% YoY (8% YoY on adjusting for extraordinary items).

    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Units sold 1,111,372 1,428,030 28.5% 3,413,594   3,948,013 15.7%
    Net sales 38,394 51,617 34.4% 117,382  140,102 19.4%
    Expenditure 31,785 45,851 44.3% 96,835  122,232 26.2%
    Operating profit (EBDITA) 6,609 5,766 -12.8% 20,547 17,871 -13.0%
    EBDITA margin (%) 17.2% 11.2%   17.5% 12.8%  
    Other income 550 620 12.9% 1,661 1,938 16.6%
    Interest expense/(income) (46) (52) 13.7% (162) (100) -38.4%
    Depreciation 469 560 19.3% 1,423 1,650 15.9%
    Exceptional item - (798)   - (798)  
    Profit before tax 6,736 5,080 -24.6% 20,947 17,460 -16.6%
    Tax 1,378 790 -42.6% 4,617 3,197 -30.8%
    Profit after tax/(loss) 5,358 4,290 -19.9% 16,330 14,263 -12.7%
    Net profit margin (%) 14.0% 8.3%   13.9% 10.2%  
    No. of shares (m)       199.7 199.7  
    Diluted earnings per share (Rs)*         105.4  
    Price to earnings ratio (x)*         14.4  
    (* on trailing twelve months earnings)

    What has driven performance in 3QFY11?
    • Hero Honda reported a revenue growth of 34% YoY on the back of a 29% YoY increase in sales volumes. The company sold over 1.4 m units during the quarter. During the preceding quarter, sales volumes stood at about 1.3 m units. Hero Honda's excise duty rate was up by 80 basis points or 0.8% to 6.6%, indicating that the company found it difficult to pass on the prices to customers. The company's average realisation per unit increased by 5.3% YoY during the quarter.

    • Hero Honda put up disappointing performance at the operating level as expenses increased at a much faster pace of 44% YoY (as compared to the sales increase of 34% YoY). Operating profits declined by 13% YoY during the quarter. The key reason for the same was the 46% YoY and 44% increase in raw material and other expenses during the quarter. Raw material costs formed about 74% of net sales as compared to 68% last year.

      Cost break-up...
      (Rs m) 3QFY10 3QFY11 Change
      Raw materials 26,146 38,149 45.9%
      % sales 68.1% 73.9%  
      Staff cost   1,371   1,561 13.8%
      % sales 3.6% 3.0%  
      Other expenditure   4,268   6,141 43.9%
      % sales 11.1% 11.9%  

    • Hero Honda's net profits declined by 20% YoY during the quarter. Apart from a poor operating performance, the company's bottomline was impacted by an exception item of Rs 798 m. As per the company, this amount represents estimates made mainly for probable claims arising out of litigations/ disputes pending with statutory authorities. On excluding this amount, the profit decline would stand at 5% YoY.

    • Hero Honda reported a 19% YoY increase in net sales on the back of a 16% YoY increase in volumes. However, similar to the quarter ended December 2010, the company's financial were impacted at the operating level with operating profits declining by 13% YoY. Net profits declined by 13% YoY during the period.

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