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Hero Honda: Resounding farewell to FY09 - Views on News from Equitymaster
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Hero Honda: Resounding farewell to FY09
Apr 21, 2009

Performance summary
  • The company has posted a 20% YoY growth in topline for the full year on the back of a 12% growth in volumes
  • Tight control on costs has enabled the company to expand EBITDA margins by 110 basis points, resulting in 30% YoY jump in operating profits
  • Lower tax outgo further fuels the bottomline growth, leading to 32% YoY jump in net profits for the full year.
  • The company has posted an impressive performance during 4QFY09 as bottomline has surged 35% YoY on the back of a mere 23% YoY jump in topline. Here, EBITDA margins have expanded by 120 basis points
  • The board of the company has recommended a dividend of Rs 20 per share for FY09 (dividend yield of 1.8%).


(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 27,887 34,226 22.7% 103,318 123,569 19.6%
Expenditure 23,768 28,734 20.9% 89,824 106,074 18.1%
Operating profit (EBDITA) 4,118 5,491 33.3% 13,494 17,495 29.7%
EBDITA margin (%) 14.8% 16.0%   13.1% 14.2%  
Other income 551 442 -19.8% 1,854 1,809 -2.4%
Interest (net) (81) (96) 18.6% (358) (317) -11.5%
Depreciation 435 444 2.0% 1,603 1,807 12.7%
Profit before tax 4,316 5,586 29.4% 14,103 17,815 26.3%
Tax 1,329 1,564 17.7% 4,424 4,997 13.0%
Profit after tax/(loss) 2,987 4,022 34.7% 9,679 12,818 32.4%
Net profit margin (%) 10.7% 11.8%   9.4% 10.4%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share (Rs)*         64.2  
Price to earnings ratio (x)*         16.9  
(* on trailing twelve months earnings)

What has driven performance in FY09?
  • After glancing through Hero Honda’s results, it is hard not to get a feeling that the domestic two-wheeler industry had a splendid ride in FY09. But nothing could be further from the truth. Higher interest rates and lack of funding acted as huge spanners in the wheels of growth. However, what could not be achieved by virtue of the expansion of the overall two-wheeler pie was achieved by taking a bigger slice of the pie itself by Hero Honda. To put things in perspective, during the fiscal, the company’s volume growth was two times that of the industry. It attributes this to increased focus on semi-urban and rural areas, flurry of new product launches and more aggressive marketing campaigns. And it was not just volume growth, the company’s product mix also improved during the fiscal, thus giving a further boost to revenues.

  • On the costs front, all the major cost heads grew at lower rates than the topline, thus helping boost operating margins by 1.1% during the fiscal. Raw material costs, the major cost head that accounts for nearly 70% of revenues, witnessed the maximum contraction, thanks mainly to drop in prices of key commodities like steel, aluminium and plastics. The company also did well to keep staff costs and other expenses under check, not letting them grow at a higher rate than the topline.

    Cost break-up…
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Raw materials 19,716 23,565 19.5% 74,025 87,420 18.1%
    % sales 70.7% 68.9% 71.6% 70.7%
    Staff cost 988 1,190 20.4% 3,835 4,487 17.0%
    % sales 3.5% 3.5% 3.7% 3.6%
    Other expenditure 3,064 3,980 29.9% 11,964 14,167 18.4%
    % sales 11.0% 11.6% 11.6% 11.5%

  • One more factor that helped Hero Honda boost its profitability is the lower tax rate. It should be noted that the company, during the fiscal, commenced production at its Haridwar facility and since the same is tax exempt for a period of five years, it helped lower the company’s overall tax rates and play a part in boosting its bottomline by 32% during the fiscal.

What to expect?
At the current price of Rs 1,087, the company is trading at multiple of 11.2 times our expected FY11 cash flow per share. Hero Honda’s earnings for FY09 have come in 5% higher than our estimates. We will shortly update you with our latest view on the stock.

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