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Hero Honda: Competing against itself - Views on News from Equitymaster

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Hero Honda: Competing against itself

Apr 20, 2010

Hero Honda Ltd has announced its FY10 results. The company has reported a 28% YoY and 74% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • Sales grow 20% YoY for the quarter led by 19% growth in volumes.
  • Operating margins jump to 17.3%, leading to a strong 30% growth in operating profits during the quarter.
  • Net profit growth comes in at even more impressive 49% as lower tax charges further add to the buoyancy. Profit growth for the full year comes in at 74% YoY, led by 28% growth in net sales.
  • Recommends a final dividend of Rs 30 per share. This translates into a dividend yield of 1.6% at current prices.

(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Units sold 997,855 1,186,536 18.9% 3,722,000 4,600,130 23.6%
Net sales 34,304 41,223 20.2% 123,823 158,605 28.1%
Expenditure 28,813 34,106 18.4% 106,327 130,936 23.1%
Operating profit (EBDITA) 5,491 7,117 29.6% 17,495 27,670 58.2%
EBDITA margin (%) 16.0% 17.3%   14.1% 17.4%  
Other income 442 695 57.1% 1,809 2,356 30.2%
Interest expense/(income) (96) (45) -53.6% (317) (206) -34.9%
Depreciation 444 487 9.7% 1,807 1,915 6.0%
Profit before tax 5,586 7,370 31.9% 17,815 28,317 59.0%
Tax 1,564 1,382 -11.6% 4,997 5,999 20.1%
Profit after tax/(loss) 4,022 5,988 48.9% 12,818 22,318 74.1%
Net profit margin (%) 11.7% 14.5%   10.4% 14.1%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share(Rs)*         111.8  
Price to earnings ratio (x)*         16.8  
(* on trailing twelve months earnings)

What What has driven performance in 4QFY10?
  • Hero Honda has continued with its robust performance on the volumes front. It managed to grow its motorcycles volumes by 19% during 4QFY10. The continued buoyancy on the economic front helped the company post another quarter of strong volumes growth. Volumes came in higher by 24% for the full year. Normally, bikes in the region of 100-125 cc are the company's forte. But it is the premium bikes that took the cake this time around. Their volumes grew by nearly 27% for the full year and helped the company achieve a strong overall volume growth. The company also did well in the scooters segment, growing by 37% YoY as against the market growth rate of 25% YoY. It should be noted that such good performance on the volumes front may not be sustainable. Long term, the volume growth should revert to the old range of 10-12%. In fact, the company has itself projected a conservative volume growth in the region of 9-10% for FY11. The company will spend in the region of Rs 1.3 bn to raise its capacity to 5.7 m units from the current 5.4 m. This is likely to take care of its volume needs at least in the medium term.

  • Operating margins have seen a jump of more than 1% during the quarter. Even here, the company has surprised positively. Lower raw material costs have been the key reason behind the improvement. However, sustaining the same level of margins could be a challenge. Commodities prices are on an upswing and this should pressurize margins going forward. Furthermore, higher expenditure in the form of ad-spends and royalty will also not help the cause of margins. Hence, it will not come as a surprise if margins soften a bit from here on.

    Cost break-up...
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Raw materials 23,565 27,684 17.5% 87,420 107,374 22.8%
    % sales 68.7% 67.2%   70.6% 67.7%  
    Staff cost 1,190 1,460 22.7% 4,487 5,603 24.9%
    % sales 3.5% 3.5%   3.6% 3.5%  
    Other expenditure 4,059 4,962 22.3% 14,421 17,969 24.6%
    % sales 11.8% 12.0%   11.6% 11.3%  

  • With the company's effective tax rate falling to 19% from levels of 28% on account of increased production from tax exempt facility of Haridwar, its bottomline received a further boost and has come in higher by a strong 49% YoY during the quarter. Furthermore, with the company notching up good numbers for the fourth quarter in succession, bottomline for the nine month period has also witnessed an impressive growth of 74% YoY.

What to expect?
At the current price of Rs 1,877, the stock is trading a multiple of 14.6 times our estimated FY12 cash flow per share. It should be noted that the company has outperformed our estimates on the profits front for the full year by more than 20%. To that extent, we will have to revise our numbers upwards.

It should also be noted that the outperformance of the magnitude that the company managed to achieve during FY10 fiscal may not be possible going forward. However, given the under-penetration that exists in the domestic markets and company's strong focus on costs and its leadership position and also it's not so expensive valuations, Hero Honda certainly is the best way to participate in the industry growth story. We remain positive on Hero Honda from a long term perspective.

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