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Hero Moto: Strong show in a weak environment - Views on News from Equitymaster
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Hero Moto: Strong show in a weak environment
May 7, 2012

Hero Motocorp Ltd. announced fourth quarter results of the financial year 2011-2012 (4QFY12). The company has reported a growth of 12% YoY and 20% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance Summary
  • Revenues grow by 12% YoY during the quarter led by an 8% increase in sales volumes. The company sells over 1.5 m units during the quarter (around 1.4 m during 4QFY11).
  • Operating margins remain stable at 15.3%. Operating profits grow by 11.5% YoY during 4QFY12.
  • Net profit growth at 20% YoY is higher than the growth in operating profits on account of lower interest costs and tax expenses.

(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Units sold 1,454,431 1,572,027 8.1% 5,402,444 6,235,205 15.4%
Net sales 53,909 60,349 11.9% 193,979 235,790 21.6%
Expenditure 45,612 51,097 12.0% 167,854 199,603 18.9%
Operating profit (EBDITA) 8,297 9,253 11.5% 26,125 36,188 38.5%
EBDITA margin (%) 15.4% 15.3%   13.5% 15.3%  
Other income 804 1,050 30.6% 2,896 3,646 25.9%
Depreciation 2,374 2,804 18.1% 4,024 10,973 172.7%
Interest 139 29 -79.0% 152 213  
Profit before tax 6,588 7,469 13.4% 24,846 28,647 15.3%
Exceptional item - -   (798) -  
Tax 1,572 1,433 -8.8% 4,769 4,866 2.0%
Profit after tax/(loss) 5,016 6,036 20.3% 19,279 23,781 23.4%
Net profit margin (%) 9.3% 10.0%   9.9% 10.1%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         114.0  
Price to earnings ratio (x)*         17.3  

What has driven performance in FY12?
  • Hero Motocorp reported a revenue growth of 22% YoY on the back of a 15% YoY increase in sales volumes. The company sold over 6.2 m units during the year as against sales volumes of 5.4 m units during last fiscal. The company was able to report growth in excess of 1.5 m two wheelers in every quarter of the year and has unveiled plans of launching more new models over the next few months.

  • Hero Motocorp put up a strong performance at the operating level as profits grew by a healthy 38.5% YoY during the year. This was because operating margins increased by 1.8% to 15.3%. While raw material costs (as a percentage of sales) increased by 0.6% during the year, it was the substantial drop in other expenditure that enabled the company to expand its operating margins.

    Cost break-up...
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw materials 39,269 44,183 12.5% 141,111 172,816 22.5%
    % sales 72.8% 73.2%   72.7% 73.3%  
    Staff cost 1,680 1,923 14.4% 6,190 7,355 18.8%
    % sales 3.1% 3.2%   3.2% 3.1%  
    Other expenditure 4,663 4,991 7.0% 20,553 19,432 -5.5%
    % sales 8.6% 8.3%   10.6% 8.2%  

  • However, while the performance at the operating level was robust, the same was not mirrored at the net profit level. Net profits grew at a much slower pace of 18% YoY (excluding extraordinary items) and this was largely due to the considerable surge in depreciation charges. It should be noted that the same came in high because the company decided in 4QFY11 to amortise the license fee payment that it will pay to Honda over the next 14 quarters.

What to expect?
At the current price of Rs 1,970, the stock is trading a multiple of 10.4 times our estimated FY14 cash flow per share. 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. Despite headwinds in the auto industry in the form of higher interest rates and fuel prices, the company has managed to perform well during the year and a strong rural demand has been one of the factors that has bolstered growth in sales. Plus, the fact that two-wheelers are less expensive and more fuel efficient than passenger vehicles has also led to good growth. We will update our research report on the company soon.

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