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Hero Moto.: Top down, bottom up - Views on News from Equitymaster
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Hero Moto.: Top down, bottom up
Mar 3, 2015

Hero Motocorp Ltd announced third quarter results of the financial year 2014-2015 (3QFY15). The company has reported a 0.5% YoY decline in sales, while net profits have grown by 11% YoY. Here is our analysis of the results.

Performance summary
  • Revenues fall by 0.5% YoY during the quarter led by a 2% YoY decline in volumes.
  • Operating margins contract by 1.1% to 12% on account of a rise in staff costs and other expenditure (as percentage of sales).
  • Net profits, however, grow by 11% YoY due to the substantial reduction in depreciation charges.

Standalone financials: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
No. of two wheelers sold 1,680,940 1,648,548 -1.9% 4,656,498 5,056,325 8.6%
Net sales 68,768 68,393 -0.5% 187,625 207,914 10.8%
Expenditure 59,788 60,175 0.6% 161,166 180,876 12.2%
Operating profit (EBDITA) 8,980 8,218 -8.5% 26,459 27,038 2.2%
EBDITA margin (%) 13.1% 12.0%   14.1% 13.0%  
Other income 957 936 -2.2% 3,234 3,999 23.6%
Depreciation 2,732 838 -69.3% 8,345 4,502 -46.0%
Interest 30 24 -18.8% 89 103 16.3%
Profit before tax 7,174 8,292 15.6% 21,259 26,431 24.3%
Tax 1,928 2,462 27.7% 5,712 7,340 28.5%
Profit after tax / (loss) 5,247 5,830 11.1% 15,547 19,091 22.8%
Net profit margin (%) 7.6% 8.5%   8.3% 9.2%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         123.4  
Price to earnings ratio (x)*         21.3  
*Based on twelve month trailing earnings and excluding extraordinary items

What has driven performance in 3QFY15?
  • Hero Motocorp reported a 0.5% YoY fall in sales during the quarter on the back of 2% YoY drop in volumes. Volumes were down largely on account of the 6% YoY fall in motorcycle volumes which account for around 86% of total volumes. Scooter volumes, however, provided some cushion, as they grew at a strong pace of 31% YoY. Realisations, however, increased on account of rise in product prices.

  • Operating margins contracted by 1.1% to 12% during the quarter. Higher staff costs and other expenditure (as a percentage of sales) led to the dip in margins, while raw material costs remained under control. Other expenditure was higher as increased competitive pressure meant that there was a rise in marketing expenses and ad spends. Staff costs increased on account of the Neemrana facility coming on stream. As a result, operating profits fell by 8.5% YoY. That said, the company has put in place a cost rationalisation program over the next five years which is expected to result in cost savings every year.

  • Net profits grew by 11% YoY due to the 69% YoY fall in depreciation charges. Since the amortization of royalty payments to Honda ended in 1QFY15, there was a substantial reduction in depreciation.
What to expect?

At the current price of Rs 2,634, the stock is trading a multiple of 12.1 times our estimated FY17 cash flow per share. Going forward, scooters will continue to grow at a strong pace and while the company had been facing some constraints, the new capacity at Neemrana which has come on stream is expected to bolster volumes. The company has also lined up some new product launches. The company has outlined a capex program which will largely be towards ramping capacity to 9 m units. Valuations though seem expensive and so investors should not buy the stock at the current price levels.

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