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Hero Motocorp: High depreciation dents profits - Views on News from Equitymaster
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Hero Motocorp: High depreciation dents profits
Aug 25, 2011

Hero Motocorp Ltd has announced its 1QFY12 results. The company has reported a growth of 32% YoY and 13.5% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 32% YoY during the quarter led by a 24% increase in sales volumes. The company sells over 1.5 m units during the quarter (1.2 m during the preceding quarter).
  • Operating margins increase marginally by 0.4% YoY to 14.4%, on the back of lower staff costs and other expenditure. Operating profits grow by 36% YoY during 1QFY12.
  • Net profit growth at 13.5% YoY is slower than the growth in operating profits on account of a surge in depreciation charges.


Financial performance summary
(Rs m) 1QFY11 1QFY12 Change
Units sold 1,234,039 1,529,577 23.9%
Net sales 42,966 56,833 32.3%
Expenditure 36,941 48,656 31.7%
Operating profit (EBDITA) 6,025 8,178 35.7%
EBDITA margin (%) 14.0% 14.4%  
Other income 561 916 63.3%
Depreciation 483 2,398 396.7%
Profit before tax 6,103 6,696 9.7%
Tax 1,187 1,117 -5.9%
Profit after tax/(loss) 4,917 5,579 13.5%
Net profit margin (%) 11.4% 9.8%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   99.9  
Price to earnings ratio (x)*   19.5  
(* on trailing twelve months earnings)

What has driven performance in 1QFY12?
  • Hero Motocorp reported a revenue growth of 32% YoY on the back of a 24% YoY increase in sales volumes. The company sold over 1.5 m units during the quarter and this was the highest unit sales for the company in any quarter. During the corresponding quarter last year, sales volumes stood at about 1.2 m units. Besides the existing portfolio, what helped the company report strong sales were four product launches during the quarter notably the New Glamour and Glamour FI and the refreshed Karizma and ZMR.

  • Hero Motocorp put up a strong performance at the operating level as profits grew by a healthy 36% YoY during the quarter. This was because operating margins increased marginally by 0.4% to 14.4%. Although raw material costs (as a percentage of sales) increased considerably by around 5%, because of a substantial drop in other expenditure and staff costs the company was able to see a rise in operating margins.

    Cost break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Raw materials 27,684 39,269 41.8%
    % sales 64.4% 69.1%  
    Staff cost 1,460 1,680 15.1%
    % sales 3.4% 3.0%  
    Other expenditure 4,962 4,661 -6.1%
    % sales 11.5% 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 13.5% YoY and this was largely due to the considerable surge in depreciation charges which increased fivefold this quarter. It should be noted that the same came in so high was 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 1,950, the stock is trading a multiple of 19.5 times its trailing twelve month earnings. 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. However, due to the uncertainty prevailing post the final break up, we maintain our cautious view on the stock.

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