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Hero Moto.: Scooters lead the charge - Views on News from Equitymaster

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Hero Moto.: Scooters lead the charge
Jun 11, 2014

Hero Motocorp Ltd announced fourth quarter results of the financial year 2013-2014 (4QFY14). The company has reported a 6% YoY growth in sales, while net profits have fallen by 3% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 6% YoY during the quarter led by a 4% YoY growth in volumes.
  • Operating margins remain stable at 13.7%.
  • Despite the 5% YoY growth in operating profits, net profits fall by 3% YoY on account of a higher tax outgo.
Standalone financials: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
No. of two wheelers sold 1,527,351 1,589,462 4.1% 6,075,583 6,245,960 2.8%
Net sales 61,458 65,130 6.0% 237,681 252,755 6.3%
Expenditure 52,960 56,188 6.1% 204,836 217,354 6.1%
Operating profit (EBDITA) 8,498 8,942 5.2% 32,845 35,401 7.8%
EBDITA margin (%) 13.8% 13.7%   13.8% 14.0%  
Other income 1,045 1,230 17.7% 3,984 4,464 12.0%
Depreciation 2,655 2,728 2.8% 11,418 11,074 -3.0%
Interest 31 29 -4.6% 119 118 -0.8%
Profit before tax 6,857 7,414 8.1% 25,292 28,673 13.4%
Tax 1,115 1,870 67.7% 4,110 7,582 84.5%
Profit after tax / (loss) 5,742 5,544 -3.4% 21,182 21,091 -0.4%
Net profit margin (%) 9.3% 8.5%   8.9% 8.3%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         105.6  
Price to earnings ratio (x)*         25.7  

What has driven performance in 4QFY14?
  • Hero Motocorp reported a 6% YoY growth in sales during the quarter on the back of 4% YoY growth in volumes. Thus, the growth in revenues was a product of both volumes as well as realisations. Growth was largely aided by scooters as motorcycle volumes continued to remain weak. Exports also ramped up albeit on a smaller base. For the full year, revenues were up 6% YoY on the back of the 3% YoY growth in volumes. This was lower than the 2 wheeler industry which grew by 7% during the year.

  • Operating margins remained stable at 13.7% during the quarter. While raw material costs (as a percentage of sales) fell, there was some increase in other expenditure. Overall, the company has put in place a cost rationalisation program over the next five years which is expected to result in cost savings every year. For the full year operating margins improved by 0.2% to 14%.

  • While the profit before tax grew by 8% YoY led by operating profit growth and higher other income, the same could not be said for net profits, which fell by 3% YoY. This was on account of the steep 68% YoY rise in tax expenses. The company earlier enjoyed 100% tax exemption on its plant at Haridwar and this has now been reduced to 30% over the next 5 years. Hence there was a rise in tax expenses for the quarter. The same was the case for the full year wherein net profit growth remained flat even as profit before tax grew by 13% YoY.
What to expect?
At the current price of Rs 2,710, the stock is trading a multiple of 14.8 times our estimated FY16 cash flow per share. The company has outlined a capex program which will largely be towards ramping capacity from around 6.9 m units currently to 9 m units. In addition to this, the exercise of amortizing royalty payments to Honda Motors will end in FY15 and this will bolster profits. R&D spend is expected to go up as the company steps up its efforts to come out with new products post its split with Honda. Hero Motocorp also expects scooters to continue its healthy pace of growth and is hence looking to raise capacity to meet this demand. We will be updating our estimates on the company. Valuations though seem expensive and so investors should not buy the stock at the current price levels.

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