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Hero Honda: Heroic indeed! - Views on News from Equitymaster

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Hero Honda: Heroic indeed!
Jul 29, 2008

Performance summary
  • The company has posted a 16% YoY growth in topline for 1QFY09 on the back of 11% YoY growth in volumes
  • Tight control on costs has enabled the company to expand EBITDA margins by 120 basis points, resulting in 29% YoY jump in operating profits
  • Higher other income and benign depreciation charges have further propelled the bottomline growth to 44% for 1QFY09 on a YoY basis.


(Rs m) 1QFY08 1QFY09 Change
Net sales 24,480 28,435 16.2%
Expenditure 21,845 25,025 14.6%
Operating profit (EBDITA) 2,635 3,410 29.4%
EBDITA margin (%) 10.8% 12.0%  
Other income 389 467 20.1%
Interest (net) 90 50 -44.5%
Depreciation 376 422 12.2%
Profit before tax 2,737 3,505 28.1%
Extraordinary income/(expense) - -  
Tax 839 777 -7.4%
Profit after tax/(loss) 1,898 2,729 43.7%
Net profit margin (%) 7.8% 9.6%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   52.6  
Price to earnings ratio (x)*   13.9  

What has driven performance in 1QFY09?
  • Hero Honda, celebrating its silver jubilee could not have asked for a better start to the fiscal. Battling adverse industry conditions such as rising interest rates and shortage of funds, it managed to clock a volume growth of 11% YoY during 1QFY09. Domestic motorcycles sales, the key driver of its volumes grew by nearly 12% YoY on the back of traction across all the segments. What is more, the company also managed to improve upon its already impressive market share and take the same to a strong 55% in the motorcycles space. Scooter segment also contributed to the sales, logging in an impressive 39% YoY growth. Thanks to an enriched product mix, growth in value terms at 16% YoY came in higher than the growth in volumes. It should be noted that the company’s new plant at Haridwar has already commenced production and the same has significantly boosted the company’s capacity.

    Sales break-up (1QFY09)
      1QFY08 1QFY09 % change
    Domestic      
    Motorcycles 763,135 851,621 11.6%
    Scooter/scooterette 18,269 25,468 39.4%
    Total 781,404 877,089 12.2%
    Exports      
    Motorcycles 21,169 17,155 -19.0%
    Scooter/scooterette 280 - -100.0%
    Total 21,449 17,155 -20.0%
    Grand total 802,853 894,244 11.4%
    Source: CMIE

  • It is not only the topline performance but the fact that Hero Honda has been able to expand operating margins in a strong inflationary environment is also commendable. The company’s operating margins have expanded by 1.2% during the quarter and this has led to a 29% YoY growth in operating profits. Raw material expenses have risen at a slightly lower rate than the topline and this has been the key reason behind the margin expansion. While growth in staff costs has also come in lower than topline growth, other expenses have grown at a slightly higher rate than the topline, seemingly on the back of increased brand building exercise.

    cost break up
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 17,847 20,454 14.6%
    % sales 72.9% 71.9%  
    Staff cost 966 1,039 7.5%
    % sales 3.9% 3.7%  
    Other expenses 3,032 3,532 16.5%
    % sales 12.4% 12.4%  

  • Besides strong operating performance what has led to the strong growth in the company’s bottomline is the significantly lower tax outgo. The company’s tax rate during the quarter has fallen significantly to 22.2% as opposed to 30.6% in the corresponding previous quarter. This is due to tax sops available to the company at its new plant in Haridwar. This has further boosted the bottomline, enabling it to record a strong 44% YoY. Besides, lower interest expenses and a modest growth in depreciation charges has also helped matters.

What to expect?
At the current price of Rs 736, the stock is trading at a multiple of 8 times our estimated FY11 cash flow per share. We are indeed enthused by the company’s performance especially against the backdrop of tough environment. Tax sops at the new plant could not have come at a better time as it gives the company some relief from the escalating operating costs that were threatening to cause a big dent on margins. We remain positive on the medium term growth prospects of the company.

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