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Hero Honda: Top of the heap! - Views on News from Equitymaster
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Hero Honda: Top of the heap!
Jul 29, 2009

Performance summary
  • Net sales witness a strong growth of 34% YoY as volumes rise 25% YoY
  • Operating profits grow at an enviable rate of 87% YoY as lower raw material costs lead to near 500 basis points expansion in operating margins.
  • Stellar operating profits translate into an equally robust bottomline growth of 83% YoY

(Rs m) 1QFY09 1QFY10 Change
Net sales 28,510 38,224 34.1%
Expenditure 25,025 31,723 26.8%
Operating profit (EBDITA) 3,486 6,501 86.5%
EBDITA margin (%) 12.2% 17.0%  
Other income 392 425 8.3%
Interest expense/(income) (50) (55) 9.9%
Depreciation 422 456 8.0%
Profit before tax 3,505 6,525 86.1%
Tax 777 1,524 96.2%
Profit after tax/(loss) 2,729 5,001 83.3%
Net profit margin (%) 9.6% 13.1%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   75.6  
Price to earnings ratio (x)*   21.7  
(* on trailing twelve months earnings)

What has driven performance in 1QFY10?
  • Hero Honda witnessed a strong topline growth of 34% YoY during 1QFY10 on the back of a stellar 25% YoY increase in volume sales. The company managed to beat the industry, which saw a 12% YoY growth, yet again. It also reached a market share of 59% and crossed the 1 m volume mark during the quarter. Factors such as strong brands, investments in brand building, market expansion and new launches has helped the company witness one of its best quarterly performances ever. Hunk, CBZ, Passion and Splendor, its key brands were the main volume drivers during the quarter. Hero Honda has performed better than our estimates.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 20,454 25,897 26.6%
    % sales 71.7% 67.7%  
    Staff cost 1,039 1,385 33.3%
    % sales 3.6% 3.6%  
    Other expenditure 3,532 4,441 25.7%
    % sales 12.4% 11.6%  

  • The company’s operating margins improved from 12% to 17% during 1QFY10. Drop in prices of key commodities like steel, aluminium and plastics led to a decline in the raw material costs to 68% of sales from 72% during the last quarter. Further, cost rationalisation taken during the quarter also boosted the margin expansion.

  • Hero Honda reported its best ever quarterly earnings as it recorded net profits to the tune of Rs 5 bn. The net profits surged 83% YoY led by strong performance at the operating levels. The net margins saw an expansion of 3.5% YoY to touch 13%. The company has done well than our estimates.

What to expect?
At the current price of Rs 1640, the stock is trading at 14.3 times our estimated FY12 cash flow per share. The company has continued with its consistently robust topline performance driven by volume growth across segments and markets. As per the company, sales are expected to witness a gain of 7.5% this year and cross 4 m units. A strong business model coupled with favourable industry scenario and market leadership makes Hero Honda a strong play in the 2-wheeler segment. However, the valuations are on the higher side. Thus, caution is advisable before investing.

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