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Hero Honda: 'Splendor' in doubt? - Views on News from Equitymaster
 
 
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  • Apr 10, 2003

    Hero Honda: 'Splendor' in doubt?

    Motorcycle major, Hero Honda Limited, has reported a marginal 3% dip in topline during the March quarter. Though the company improved its operating performance (operating margins improved to 16.8%), higher depreciation provisioning and taxes, took a toll on profit growth. The company registered over 2% dip in 4QFY03. Motorcycle volumes saw 0.8% dip during the quarter, reflecting the tough competitive environment the company is faced with.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales 12,555 12,154 -3.2% 44,654 51,017 14.2%
    Other Income 302 328 8.6% 741 929 25.4%
    Expenditure 10,543 10,110 -4.1% 37,947 42,531 12.1%
    Operating Profit (EBDIT) 2,012 2,044 1.6% 6,707 8,487 26.5%
    Operating Profit Margin (%) 16.0% 16.8%   15.0% 16.6%  
    Interest (5) 2   (12) (10) -11.3%
    Depreciation 131 163 25.1% 510 580 13.7%
    Profit before Tax 2,188 2,207 0.9% 6,949 8,846 27.3%
    Extraordinary items -5 0 - -5 0 -
    Tax 657 718 9.2% 2,315 3,038 31.3%
    Profit after Tax/(Loss) 1,526 1,490 -2.4% 4,629 5,808 25.5%
    Net profit margin (%) 12.2% 12.3%   10.4% 11.4%  
    No. of Shares 199.7 199.7   199.7 199.7  
    Diluted Earnings per share* 30.6 29.8   23.2 29.1  
    P/E Ratio   6.5     6.6  
    (* annualised)            

    For the full year FY03, Hero Honda finished with a 14% topline and 26% bottomline growth. The company sold 1.68 m motorcycles during FY03, an 18% growth over FY02. Over the last five years i.e. during the transition of preference to motorcycles from geared scooter, Hero Honda has been the biggest beneficiary. The motorcycle demand grew at 33% CAGR in the last five years. Consequently, the company has extended its market share to 50% in FY02 as compared to 45% in FY98. However, the concern now seems to stem from the fact that Hero Honda is more likely to lose market share going forward, given the intensity of competition in the motorcycle segment. Bajaj Auto, TVS, LML and MNCs have tasted success in the recent past.

    Coupled with concerns of loss of market share is the fact that motorcycle market itself is unlikely to show the stellar growth rates in the future going forward. The 4QFY03 performance of Hero Honda signals the slowdown in the motorcycle segment. The reason for the lacklustre performance of the company in FY03 is primarily due to its lack of competent models in all bike categories viz. entry-level, executive and power.

    The company's other income reported a significant 25% growth. This was primarily led by profit on sale of investments amounting to Rs 728 m (as compared to Rs 295 m last year). Excluding the sale of investments, other income actually shrunk by 55% YoY. If we consider profit on sale of investments as extraordinary income and exclude it, then net profit growth for FY03 stands at 18% YoY. The company has announced Rs 18 per share as dividend for the year, indicating a dividend yield of over 9%.

    At Rs 193 the stock trades at 6.6x FY03 earnings. The valuations are at record lows owing to concerns over the company's future growth. Though Hero Honda has indicated that it will introduce 3 new models in FY04 to take on the competition, the company will face competition from Honda Scooters in the future and it remains to be seen how model launches pare out (cannibalisation is also a key issue). Given this backdrop, despite strong brand equity, extensive dealership and attractive valuations, it is a status quo kind of a situation at the current juncture.

     

     

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