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Hero Honda: Leading the way - Views on News from Equitymaster
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  • Apr 15, 2002

    Hero Honda: Leading the way

    Hero Honda, the largest motorcycle manufacturer in the world, continues to race ahead in the two-wheeler segment. The company's outstanding performance in FY02 vindicates its product strength, marketing ability and a strong distribution network. While topline growth was impressive at 41% for FY02, net profit has also increased notably on the back of improvement in operating margins.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Net sales 8,541 12,555 47.0% 31,709 44,654 40.8%
    Other Income 57 302 432.5% 202 741 266.5%
    Expenditure 7,444 10,543 41.6% 27,548 37,947 37.8%
    Operating Profit (EBDIT) 1,097 2,012 83.3% 4,161 6,707 61.2%
    Operating Profit Margin (%) 12.8% 16.0%   13.1% 15.0%  
    Interest (1) (5)   7 (12)  
    Depreciation 120 131 8.9% 443 510 15.2%
    Profit before Tax 1,035 2,188 111.5% 3,914 6,949 77.5%
    Extraordinary items (144) (5)   (144) (5)  
    Tax 329 657 99.7% 1,301 2,315 77.9%
    Profit after Tax/(Loss) 561 1,526 171.8% 2,469 4,629 87.5%
    Net profit margin (%) 6.6% 12.2%   7.8% 10.4%  
    No. of Shares (m) 199.7 199.7   199.7 199.7  
    Diluted Earnings per share 11.2 30.6   12.4 23.2  
    P/E Ratio (x)         15.4  

    The company has sold 1.4 m motorcycles during the year as against 1.0 m last year, a growth of 38%. Growth in volumes was even impressive in 4QFY02 at 45% to 399,200 units. The company has achieved 48% market share in the motorcycle category during the year; and 33% of the total two -wheeler market. While the motorcycle segment grew by 27% during FY02 to 2.7 m units, the two-wheeler industry grew at an impressive rate of 15% to 4.3 m units. This stellar growth in sales was also aided higher value growth from new models like Passion, Joy and CBZ. The company has been able to successfully graduate customers from models like 'Splendor' to 'Passion' and 'CBZ', which has been its hallmark over the years. Average realisation per vehicle is estimated to have increased by more than 2% in FY02. This, despite a competitive environment, is a creditable performance.

    The company's spare parts business also showed a remarkable increase of 39%, taking the annual sales to Rs 2,030 m (5% of FY02 sales). Hero Honda expects its spare parts division sales to touch Rs 2,500 m in FY03, a growth of 23%. Other income has also shown a sharp rise during the year and this could be attributed to the deployment of surplus cash (On an average, Hero Honda generates around Rs 1.7 bn as free cash flow each year). Though operating expenses have risen 38% in FY02, the company has benefited from lower raw material costs. Raw material cost as a percentage of sales has come down from 72% in FY01 to 69% in FY02. On the other hand, other expenses have shown a notable growth probably led by increased advertisement costs. While operating profit grew by 61%, net profit would have been higher if not for higher provision towards deferred taxation.

    Expenditure break-up...
    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Raw material 6,116 8,718 42.6% 22,859 30,926 35.3%
    % of sales 71.6% 69.4%   72.1% 69.3%  
    Staff cost 314 440 40.3% 1,180 1,689 43.2%
    % of sales 3.7% 3.5%   3.7% 3.8%  
    Other expenditure 974 1,468 50.7% 3,691 5,274 42.9%
    % of sales 11.4% 11.7%   11.6% 11.8%  
    Total 7,404 10,627 43.5% 27,729 37,889 36.6%

    As against a CAGR growth of 20% for the motorcycle segment over the last five years, growth is expected to taper down in the coming years. We expect the motorcycle segment to grow at 15% in FY03. Though Hero Honda has lined up a number of models to increase market share, future growth prospects are challenging. Bajaj Auto, off late, has emerged as a strong contender in this segment and has cornered almost 23%-25% market share. Hero Honda, historically, has been benefiting from premium pricing for its models due to fuel efficiency standards. However, increased competition might force the company to lower prices in the future. This could slowdown the growth in operating margins, which seem to be on the higher side compared to the industry.

    The stock currently trades at Rs 357 implying a P/E multiple of 15.4x FY02 earnings. Perhaps the only apprehension for investors is its joint venture with Honda, which expires in FY05. However, it needs to be mentioned that the company's management has been proactive over the years and one expects that to continue in the future too.



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