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Hero Honda: Faces input pressures - Views on News from Equitymaster

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Hero Honda: Faces input pressures
Jul 30, 2010

Hero Honda Ltd has announced its 1QFY11 results. The company has reported a growth of 12% YoY and a decline of 2% YoY in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • Topline grows 12% YoY for the quarter led by 10% growth in volumes. The company sold over 1.2 m units during the quarter.
  • Operating margins slump by 3% YoY to 14% on the back of higher raw material costs. Operating profits decline by 7% YoY.
  • Net profits decline by 2%, a lower fall as compared to the operating profits. Higher other income and lower tax outgo are key reasons for the same.

(Rs m) 1QFY10 1QFY11 Change
Units sold 1,118,987 1,234,039 10.3%
Net sales 38,292 42,966 12.2%
Expenditure 31,790 36,941 16.2%
Operating profit (EBDITA) 6,501 6,025 -7.3%
EBDITA margin (%) 17.0% 14.0%  
Other income 425 534 25.8%
Interest expense/(income) (55) (27) -51.3%
Depreciation 456 483 5.9%
Profit before tax 6,525 6,103 -6.5%
Tax 1,524 1,187 -22.1%
Profit after tax/(loss) 5,001 4,917 -1.7%
Net profit margin (%) 13.1% 11.4%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   111.3  
Price to earnings ratio (x)*   16.8  
(* on trailing twelve months earnings)

What has driven performance in 1QFY11?
  • Hero Honda reported a revenue increase of 12% YoY on the back of a 10% YoY increase in volumes sales. During the quarter, the company sold over 1.2 m units. This is the highest ever sales volumes recorded by the company in a particular quarter. During the preceding quarter, i.e. 4QFY10, the company sold about 1.18 m units, translating into a QoQ rise of 4%. This is definitely an encouraging figure. However, the growth in sales volumes is nowhere close to what it was last year. During 4QFY10 and 1QFY10, sales volumes on a year on year basis increased by about 19% and 25% respectively. As we had mentioned in our earlier quarter’s result analysis, the possibility of the company reporting strong volumes growth would be lower on the back of a higher base effect. However, as per the company’s management, the volume growth would have been higher had it not been for the supply constraints.

    In addition, the company’s gross revenues rose at a faster pace of 13% YoY. However, it seems though that the company has not been able to pass on the price hikes completely, as excise duty has risen by 100 basis points to 7.1% as compared to last year. Intensifying competition could be the key reason for the same. It may be noted that the company had hiked prices of its bikes during the month of June. As such, the full effect of the same could be seen in the current quarter.

  • At the operating level, the company’s profits decreased by 7% YoY. Higher raw material costs, which increased by 18% YoY in absolute terms, was the main reason for the same. As a percentage of net sales, their share rose to 71.2% as compared to 67.6% last year. This has been the phenomenon witnessed by most of the auto companies. However, it is quite possible that since the pressure on input costs has begun to decrease, we could see margins flattening out over the rest of the year. In addition to higher input costs, costs to comply with the new emission norms also seem to have impacted the company at the operating level.

    Cost break-up...
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 25,897 30,594 18.1%
    % sales 67.6% 71.2%  
    Staff cost 1,385 1,450 4.7%
    % sales 3.6% 3.4%  
    Other expenditure 4,508 4,897 8.6%
    % sales 11.8% 11.4%  

  • Hero Honda’s profits declined by 2% YoY as compared to a 7% YoY decline in operating profits. Higher other income and a lower tax outgo were reasons for the same.

What to expect?
At the current price of Rs 1,870, the stock is trading a price to cash flow multiple of 14.3 times our estimated FY12 cash flow per share and at about 16.3 times our estimated FY12 earnings per share (ResearchPro subscribers, kindly click here. Keeping in mind the management’s comments on this quarter’s performance coupled with the possibility of the company’s margins improving in the rest of the year (on the back of lower input costs), we believe there is some upside to the profits. Valuations though look a bit stretched even after the improved profitability is taken into account. We continue to remain cautious on the stock.

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