Hero Honda: 4Q margins slow profit growth - Views on News from Equitymaster

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Hero Honda: 4Q margins slow profit growth

Apr 28, 2001

Hero Honda, India's largest manufacturer of motorcycles has reported a net profit of Rs 2.5 bn for FY01, a growth of 29% YoY. The company's operating margins dipped to 13.1% in FY01, due to higher expenses. In 4QFY01, however the company's net profit declined by 9.8%, due to an extraordinary provision of Rs 144 m related to reclassification of certain investments from short term to long term. The company has had to provide for diminution in value of such investments.

The company's profit growth before providing for such provisions too slowed down in 4QFY01. Its profit before tax and adjustments grew by only 10% in 4QFY01 due to a fall in operating margins from 16.3% in 4QFY00 to 12.8% in 4QFY01, as a result of a 15% growth in its expenses.

(Rs m) 4QFY00 4QFY01 Change FY00 FY01 Change
Sales 5,836 8,541 46.4% 22,482 31,709 41.0%
Other income 113.3 61.5 -45.7% 203.9 220.5 8.1%
Expenditure 4,884 7,444 52.4% 19,446 27,548 41.7%
Operating profit (EBDIT) 952 1,097 15.3% 3,036 4,161 37.1%
Operating profit margin (%) 16.3% 12.8%   13.5% 13.1%  
Interest 8 4 -50.0% 47 25 -46.3%
Depreciation 120 120 -0.2% 347 443 27.7%
Profit before Tax 937 1035 10.4% 2847 3914 37.5%
Other adjustments - 144.4   - 144.4  
Tax 314 329 4.7% 925 1301 40.6%
Profit after Tax/(Loss) 622 561 -9.8% 1,921 2,469 28.5%
Net profit margin (%) 10.7% 6.6%   8.5% 7.8%  
No. of Shares (eoy) (m) 39.9 199.7   39.9 199.7  
Diluted number of shares 199.7 199.7   199.7 199.7  
Diluted Earnings per share* 12.5 11.2   9.6 12.4  
*(annualised)            

In 4QFY01, the company’s raw material expenses went up by 53% YoY and its other expenses grew by 82% YoY. It is likely that the marketing and advertising costs for the company have gone up significantly due to higher competition in the four stroke 100 cc segment.

The encouraging factor here is that the company's sales grew by 46% in 4QFY01, inspite of only a 22% volume growth in this quarter, as the motorcycle industry showed signs of a slowdown in this quarter due to lower rural demand. However the positive news was on the realisations front.

Its realisations have done very well despite tough market conditions. Its average realisations in 4QFY01 grew by 20% to Rs 31,089 due to price revisions. This growth is much higher than what the company achieved for first nine months of FY01, which was only a 1% growth in its realisations.

  4QFY00 4QFY01 Change FY00 FY01 Change
Volumes 224,756 274,716 22.2% 761,623 1,029,510 35.2%
Average realisation (Rs) 25,965.0 31,089.2 19.7% 29,518.1 30,800.2 4.3%

Hero Honda has sold 1,029,510 vehicles in FY01, a growth of 35% YoY over 7,61,623 vehicles sold in FY00. As a result of aggressive marketing the company's market share went upto 47% in FY01 from 42% in FY00.

We were expecting a net profit of Rs 2.7 bn for FY01, as these results are lower than ours by 8.6%, we will need to revise our FY02E and FY03E results downwards by around 5%, keeping in mind the slowdown in the motorcycle segment.

On the current price of Rs 150 it is trading at 12.1x FY01E EPS of Rs 12.4.

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