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Hero Motocorp: Boosted by strong sales

Oct 19, 2011

Hero Motocorp Ltd has announced its 2QFY12 results. The company has reported a growth of 28% YoY and 19% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 28% YoY during the quarter led by a 20% increase in sales volumes. The company sells over 1.5 m units during the quarter (around 1.3 m during 2QFY11).
  • Operating margins increase by 2.4% YoY to 15.8%, on the back of lower staff costs and significant reduction in other expenditure. Operating profits grow by 51% YoY during 2QFY12.
  • Net profit growth at 19% YoY is slower than the growth in operating profits on account of a surge in depreciation charges.

Financial performance summary
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Units sold 1,285,944 1,544,315 20.1% 2,519,963 3,073,892 22.0%
Net sales 45,520 58,293 28.1% 88,486 115,127 30.1%
Expenditure 39,440 49,106 24.5% 76,381 97,762 28.0%
Operating profit (EBDITA) 6,079 9,187 51.1% 12,105 17,365 43.5%
EBDITA margin (%) 13.4% 15.8%   13.7% 15.1%  
Other income 804 842 4.8% 1,365 1,758 28.8%
Depreciation 608 2,785 358.4% 1,090 5,183 375.4%
Profit before tax 6,276 7,245 15.4% 12,380 13,941 12.6%
Tax 1,220 1,208 -1.0% 2,407 2,325 -3.4%
Profit after tax/(loss) 5,056 6,036 19.4% 9,973 11,615 16.5%
Net profit margin (%) 11.1% 10.4%   11.3% 10.1%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         104.8  
Price to earnings ratio (x)*         19.9  
(* on trailing twelve months earnings)

What has driven performance in 2QFY12?
  • Hero Motocorp reported a revenue growth of 28% YoY on the back of a 20% YoY increase in sales volumes. The company sold over 1.5 m units during the quarter and had sold around the same number of units in 1QFY12 as well. During the corresponding quarter last year, sales volumes stood at about 1.2 m units. For the half year period, the company reported sales growth of 30% YoY. Besides the existing portfolio, what helped the company report strong sales during 1HFY12 were four product launches notably the New Glamour and Glamour FI and the refreshed Karizma and ZMR. Further, the company began despatches of its new 150 cc bike called ‘Impulse’ which is the country’s only dual purpose on-road-off-road bike.

  • Hero Motocorp put up a strong performance at the operating level as profits grew by a healthy 51% YoY during the quarter. This was because operating margins increased by 2.4% to 15.8%. While raw material costs (as a percentage of sales) fell by around 0.2%, it was the substantial drop in other expenditure that enabled the company to expand its operating margins.

    Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12
    Raw materials 33,100 42,237 27.6% 63,694 84,685
    % sales 72.7% 72.5%   72.0% 73.6%
    Staff cost 1,498 1,794 19.7% 2,948 3,439
    % sales 3.3% 3.1%   3.3% 3.0%
    Other expenditure 4,842 5,075 4.8% 9,739 9,638
    % sales 10.6% 8.7%   11.0% 8.4%

  • 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 19% YoY and this was largely due to the considerable surge in depreciation charges. It should be noted that the same came in high because the company decided in 4QFY11 to amortise the license fee payment that it will pay to Honda over the next 14 quarters. Further, the sharp depreciation in the rupee also contributed to the increase in these charges.

What to expect?
At the current price of Rs 2,081, the stock is trading a multiple of 11.4 times our estimated FY14 cash flow per share. 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. Despite headwinds in the auto industry in the form of higher interest rates and fuel prices, the company has managed to perform well during the quarter and a strong rural demand has been one of the factors that has bolstered growth in sales. Plus, the fact that two-wheelers are less expensive and more fuel efficient than passenger vehicles has also led to good growth. The company has performed much better than our estimates and we shall have to upgrade our numbers for the full year. Despite that, current valuations do not leave much on the table for investors.

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