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Hero Honda: Margins play spoilsport - Views on News from Equitymaster
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Hero Honda: Margins play spoilsport
May 4, 2011

Hero Honda has announced its March quarter results. The company has reported a 31% growth in topline and 16% YoY fall in net profits for the quarter ended March 2011. Here is our analysis of the results.

Performance summary
  • Topline grows by 31% YoY during the quarter led by 23% YoY growth in volumes
  • Operating profits grow at a lower rate of 17% as higher raw material expenses take toll
  • Bottomline declines by 16% YoY led by subdued operating performance and a near fivefold jump in depreciation charges
  • Profit for the full year falls by 14% YoY on the back of a 22% growth in topline
  • Announces a dividend of Rs 35 per share (dividend yield of more than 2%).


(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Units sold 1,186,536 1,454,431 22.6% 4,600,130 5,402,444 17.4%
Net sales 41,223 53,909 30.8% 158,605 194,012 22.3%
Expenditure 34,106 45,610 33.7% 130,936 167,842 28.2%
Operating profit (EBDITA) 7,117 8,299 16.6% 27,670 26,170 -5.4%
EBDITA margin (%) 17.3% 15.4%   17.4% 13.5%  
Other income 695 743 7.0% 2,356 2,681 13.8%
Interest expense/(income) (45) 81   (206) (19) -91.0%
Depreciation 487 2,374 387.9% 1,915 4,024 110.2%
Profit before tax 7,370 6,588 -10.6% 28,317 24,846 -12.3%
Tax 1,382 1,572 13.7% 5,999 4,769 -20.5%
Extraordinary inc/(expense) - -   - (798)  
Profit after tax/(loss) 5,988 5,016 -16.2% 22,318 19,279 -13.6%
Net profit margin (%) 14.5% 9.3%   14.1% 9.9%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share (Rs)*         96.6  
Price to earnings ratio (x)*         16.6  
(* on trailing twelve months earnings)

What has driven performance in FY11?
  • The 22% YoY growth in full year sales were driven by 17% YoY growth in volumes. The company reported its highest ever sales volume in the fiscal backed by new launches and rapid network expansion. Domestic motorcycles accounted for the bulk of the sales and the same grew by 15% YoY. While at an all time high, the growth came in lower than the industry growth rate of 23% YoY resulting in a loss of market share for the company. Had it not been for the slight improvement in market share in 4QFY11, the drop would have been even more adverse. Scooter volumes jumped an impressive 65% YoY for the full year, albeit on a much lower base. Exports too witnessed a similar story, growing 36% YoY on a lower base. The company increased prices in the month of March to the tune of 2% and this should topline growth going forward.

    cost break up
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw materials 27,684 39,269 41.8% 107,364 141,111 31.4%
    % sales 67.2% 72.8%   67.7% 72.7%  
    Staff cost 1,460 1,680 15.1% 5,603 6,190 10.5%
    % sales 3.5% 3.1%   3.5% 3.2%  
    Other expenditure 4,962 4,661 -6.1% 17,969 20,541 14.3%
    % sales 12.0% 8.6%   11.3% 10.6%  

  • Operating margins for the full year came in lower by 3.9%. This was mainly on account of higher raw material prices that saw a jump of 5% on a percentage of sales basis. The other cost heads grew at a lower rate than sales and helped cushion the fall in margins to some extent. The increase in raw material expenses was led by the surge in commodity prices. Margins for the quarter were also affected on account of raw material expenses. However, the margins were higher on a sequential (QoQ) basis.

  • Profit before Tax (PBT) for the full year witnessed a 12% YoY decline. What led to this decline were the higher depreciation charges which more than doubled as compared to the previous year. It should be noted that the same came in so high was because the company has decided to amortise the licence fee payment that it will pay to Honda over the next 14 quarters. The total outgo has been pegged at Rs 24.8 bn out of which around Rs 1.8 bn will be amortised every quarter.

  • Profit after Tax (PAT) for the full year has thus come in lower by 14% YoY, mostly on account of lower operating margins and the licence fee amortisation charge. Besides an extraordinary expense to the tune of Rs 798 m has also caused a small adverse effect on the profits.

What to expect?
At the current price of Rs 1,733, the stock trades at around 13 times its FY13 cash flow per share (RPro subscribers, please click here). We believe that on account of its strong cash flow generating ability, the company will not have any major problems in paying the royalty to the outgoing partner, Honda Motors. However, due to the uncertainty prevailing post the final break up, we maintain our cautious view on the stock.

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