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Hero Honda: In a different league - Views on News from Equitymaster

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Hero Honda: In a different league

Oct 21, 2008

Performance summary
  • Topline grows an impressive 36% YoY during the quarter on the back of a 29% jump in volumes.

  • Operating margins expand by 120 basis points in 2QFY09 led by significant reduction in other expenses.

  • Bottomline growth during the quarter stands at an imposing 50% on a YoY basis.

  • Half yearly bottomline grows 47% YoY on the back of 26% YoY growth in sales.



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Units sold 756,633 972,095 28.5% 1,559,486 1,866,339 19.7%
Net sales 23,521 32,021 36.1% 48,001 60,456 25.9%
Expenditure 20,606 27,672 34.3% 42,452 52,697 24.1%
Operating profit (EBDITA) 2,915 4,349 49.2% 5,549 7,759 39.8%
EBDITA margin (%) 12.4% 13.6%   11.6% 12.8%  
Other income 393 539 37.2% 782 1,006 28.7%
Interest (net) 101 83 -17.3% 190 133 -30.1%
Depreciation 384 466 21.3% 760 888 16.8%
Profit before tax 3,024 4,505 49.0% 5,761 8,010 39.0%
Extraordinary income/(expense) - -   - -  
Tax 980 1,442 47.1% 1,819 2,218 21.9%
Profit after tax/(loss) 2,043 3,063 49.9% 3,942 5,792 46.9%
Net profit margin (%) 8.7% 9.6%   8.2% 9.6%  
No. of shares (m) 199.6 199.6   199.7 199.7  
Diluted earnings per share (Rs)*         57.7  
Price to earnings ratio (x)*         14.3  
(* on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • Topline growth during the quarter was driven by the motorcycles segment, where growth stood at 29% YoY. Although the growth is impressive by any stretch of imagination, the backdrop against which it was achieved makes it all the more commendable. Tough conditions prevailed in the domestic industry during the quarter as credit squeeze and high interest rates acted as demand dampeners. The company countered these adverse movements my expanding its distribution network deeper into the country’s hinterland as also launching new models. If the volume growth is any indication, the move paid off handsomely. Just to put things in perspective, Hero Honda accounted for more than 80% of the overall growth in the motorcycle segment during the quarter. The company’s exports also grew handsomely, registering a growth of 20% YoY during the quarter.

    cost break up
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 17,013 23,183 36.3% 34,860 43,637 25.2%
    % sales 72.3% 72.4%   72.6% 72.2%  
    Staff cost 870 1,103 26.7% 1,837 2,142 16.6%
    % sales 3.7% 3.4%   3.8% 3.5%  
    Other expenditure 2,724 3,386 24.3% 5,755 6,918 20.2%
    % sales 11.6% 10.6%   12.0% 11.4%  

  • Since the operating margins of the company are quite sensitive to changes in cost structure, a small reduction in overall costs help boost the operating profits by a strong 49% YoY. Key contributors to reduction were staff costs and other expenses. The company also did a good job of keeping raw material expenses in check during the quarter despite inflationary pressures.

  • With both interest expenses as well as depreciation charges under check, bottomline growth during the quarter followed the pattern of growth in operating profits and edged higher by a strong 50% YoY.

What to expect?
    At the current price of Rs 824, the stock is trading at a multiple of nearly 9 times its expected FY11 cash per share. We are pleasantly surprised by the company’s superior performance especially on the volumes and the realisations front and hence would make appropriate changes to our assumptions in order to reflect the same. We would come out with an updated report shortly.

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