Hero Honda: Pressure season - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Hero Honda: Pressure season

Sep 18, 2002

Hero Honda (HROH), acclaimed the largest motorcycle manufacturer in the world, has been defying odds by posting impressive growth in both sales and profitability over the years. But it may not be a joy ride in the future given the scale of competitiveness in the industry. Against the industry growth of 29% CAGR over the last five years, HROH’s volumes have risen at a CAGR of 39% in the same period. As a result, there has been a marked improvement in the company’s market share in the motorcycle as well as the two-wheeler segment. For FY03, the management is confident of meeting the targeted volume growth of 26% as well.

But as the industry matures, there will more players eyeing incremental volumes. While capacity utilisation of major players has improved significantly, smaller players have gone on an expansion spree in the last three years. At some point in time in the future, these factors will have an impact on the sector in the form of falling price realisations and lower margins per vehicle sold. The current state of the tractor and cement sectors is a classic example of oversupply affecting growth.

Going by the recent trend, the Indian motorcycle segment is in similar growth curve i.e. close to maturity. Already players like Bajaj Auto have started to play the volume game by announcing special discounts on lower-end models like ‘Caliber’ and ‘Boxer’. This was followed by discount of Rs 1,000 per motorcycle announced by Hero Honda in 1QFY03. Every three months, the market is witnessing one new model launch. This is not a positive for Hero Honda, which itself has launched ‘Ambition’ recently. Given this backdrop, we do not foresee any sharp improvement in price realisation for Hero Honda. Operating margins at 15% in FY02 are expected to remain stable, if not fall in the future.

The company hopes to maintain margins through aggressive cost reduction. Hero Honda has addressed the issue of high import content in its models over the years by increasing indigenous components. Import cost per motorcycle has declined from Rs 4,039 in FY99 to Rs 2,176 in FY02, a compounded fall of 18% in the last four years. With lower import component, it is able to price its new models attractively and increase volumes without compromising on margins.

Another concern is that Honda has set up a 100% subsidiary in India for the manufacture of scooters in India. This company commenced operations in mid 2001 and has already garnered more than 10% market share. As per the agreement with Hero Honda, Honda can manufacture and sell motorcycles in India post FY05. This issue is of high significance given Hero Honda’s heavy reliance on the Japanese major. One is not sure about the fallout of the same and hence there is concern regarding the flow of technology from Honda Motor Company to Hero Honda in future.

While the past track record is one way of looking at a stock when making investment decisions, it is impractical to extrapolate similar growth in the future. The same applies to HROH as well. The stock currently trades at Rs 272 implying a P/E multiple of 12x FY02 earnings.

Equitymaster requests your view! Post a comment on "Hero Honda: Pressure season". Click here!

  

More Views on News

Hero MotoCorp Q4 Net Profit Jumps Over 40% On Strong Operating Performance (Views On News)

May 7, 2021

The company's EBITDA jumped 78.8% YoY on account of cost saving initiatives to offset higher commodity prices and input costs.

Hero MotoCorp's Manufacturing Halt and Electric Vehicle Shift (Company Info)

Apr 22, 2021

Key reasons why the stock of Hero MotoCorp is in focus today.

HERO MOTOCORP Announces Quarterly Results (3QFY21); Net Profit Up 23.2% (Quarterly Result Update)

Feb 10, 2021 | Updated on Feb 10, 2021

For the quarter ended December 2020, HERO MOTOCORP has posted a net profit of Rs 11 bn (up 23.2% YoY). Sales on the other hand came in at Rs 98 bn (up 39.7% YoY). Read on for a complete analysis of HERO MOTOCORP's quarterly results.

Tata Motors' Stock in Focus as Company Meets Global Investors (Views On News)

Jun 8, 2021

Tata Motors' meeting with marquee investors comes on the back of poor earnings.

Mahindra & Mahindra Shares Surge on Bagging Contract for Defense Equipment (Views On News)

Jun 4, 2021

Mahindra & Mahindra has signed a contract with the Ministry of Defence.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

HERO MOTOCORP SHARE PRICE


Jun 17, 2021 11:26 AM

TRACK HERO MOTOCORP

  • Track your investment in HERO MOTOCORP with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

HERO MOTOCORP - FORCE MOTORS COMPARISON

COMPARE HERO MOTOCORP WITH

MARKET STATS