Hero Honda: Deserves re-rating - Views on News from Equitymaster

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Hero Honda: Deserves re-rating

Oct 3, 2000

Hero Honda, India's leading motorcycle company continues to do very well. For the 1QFY01 the company's sales grew by 48% YoY, resulting in a an increase in its market share. Currently the company is enjoying a market share of 48% as compared to 42% in FY2000.The company has managed to do well as it has been continuously coming out with new products in the market. This being despite higher competition from newer entrants to this market. The motorcycle industry is the only one in the automobile segment to have had a worth while performance over the past few years and Hero Honda has continued to grow and maintain its leadership in this segment. The share of motorcycles in India's two wheeler market has gone up from 41% in FY99 to 47.5% in FY2000, while that of scooters has declined from 39% in FY99 to 33% in FY2000.

However despite this the company's share price has not done well in the past year and has come off by 31% YoY. The news regarding Honda Motors 100% subsidiary in India seems to have been overplayed, resulting in a sharp de-rating in Hero Honda's scrip. Though the future plans of this subsidiary are a cause of concern, considering the cordial relationship that the Hero group and Honda Motors have shared in the past, it seems unlikely that this would have an adverse impact on the company.

On valuation terms as compared to its peers in the industry like TVS Suzuki and Bajaj Auto, Hero Honda seems much more attractive due to its higher EPS growth in future and better prospects. TVS Suzuki in future would face higher costs and loss in market share, while Bajaj Auto's scooters continue to report declining volumes. Hence though on P/E basis Hero Honda seems more expensive however keeping in mind the prospects for each company, TVS and Bajaj Auto deserve the lower valuations. Hero Honda is not saddled with any of these problems and is expected to see good growth in profits over the next two years. Also the fact that it continues to enjoy the highest ROE and ROCE amongst its peers makes it more attractive. In the past Hero Honda has traded at over 20x future earnings and hence the current valuations seems low when compared to this.

(FY2000)EPS (Rs)
P/E (x)
EPS growth (%)
margin (%)
Hero Honda81.510.330.0%13.4%43.3%38.7%
Bajaj Auto57.65.66.0%12.5%19.2%16.7%
TVS Suzuki53.83.217.0%10.4%27.4%19.1%

Keeping in mind the future prospects, Hero Honda deserves a re-rating. The concerns regarding the 100% subsidiary have battered the stock more than its deserves to be punished.

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