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Hero Honda: No villains for now! - Views on News from Equitymaster
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Hero Honda: No villains for now!
Oct 22, 2009

Performance summary
  • Topline grows 27% YoY for the quarter led by 22% growth in volumes.
  • Operating margins zoom to 18.3%, a jump of nearly 500 basis points, leading to a strong 71% growth in operating profits.
  • Bottomline growth comes in at even more impressive 95% as lower tax charges further add to the buoyancy.
  • Half yearly bottomline growth comes in at 90% YoY, led by 30% growth in topline.


(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Units sold 972,095 1,183,233 21.7% 1,866,339 2,302,222 23.4%
Net sales 32,021 40,594 26.8% 60,531 78,819 30.2%
Expenditure 27,672 33,153 19.8% 52,697 64,876 23.1%
Operating profit (EBDITA) 4,349 7,442 71.1% 7,834 13,943 78.0%
EBDITA margin (%) 13.6% 18.3%   12.9% 17.7%  
Other income 539 687 27.5% 931 1,112 19.4%
Interest (net) (83) (61) -26.9% (133) (116) -13.1%
Depreciation 466 503 7.9% 888 959 8.0%
Profit before tax 4,505 7,686 70.6% 8,010 14,211 77.4%
Extraordinary income/(expense) - -   - -  
Tax 1,442 1,715 19.0% 2,218 3,239 46.0%
Profit after tax/(loss) 3,063 5,971 95.0% 5,792 10,973 89.5%
Net profit margin (%) 9.6% 14.7%   9.6% 13.9%  
No. of shares (m) 199.6 199.6   199.7 199.7  
Diluted earnings per share (Rs)*         90.1  
Price to earnings ratio (x)*         17.9  
(* on trailing twelve months earnings)

What has driven performance in 2QFY10?
  • Hero Honda has continued with its robust performance on the volumes front. It managed to grow its motorcycles volumes by 21% during the quarter. This was once again higher than the growth rate of 16% achieved by the overall motorcycles segment in the same period. In fact, nearly three-fourths of the growth achieved by the segment was contributed by Hero Honda. This more than anything underlines the company’s dominance in the segment.

  • Important to add that the company’s closest rival could manage a growth of just 5% in domestic motorcycles sales. However, we would like to caution that outperformance of such a magnitude may not be sustainable in the future but at the same time, given Hero Honda’s strong presence and the potential that exists in the market place, growth in the region of 10%-12% over the long term cannot be ruled out as well.

    Sales break-up (2QFY10)
      2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Domestic            
    Motorcycles 910,706 1,105,782 21.4% 1,762,327 2,154,783 22.3%
    Scooter/scooterette 35,895 53,524 49.1% 61,363 99,519 62.2%
    Total 946,601 1,159,306 22.5% 1,823,690 2,254,302 23.6%
    Exports            
    Motorcycles 23,821 22,733 -4.6% 40,976 45,548 11.2%
    Scooter/scooterette 1,673 1,194 -28.6% 1,673 2,372 41.8%
    Total 25,494 23,927 -6.1% 42,649 47,920 12.4%
    Grand total 972,095 1,183,233 21.7% 1,866,339 2,302,222 23.4%
    Source: SIAM

  • While the topline growth may have surprised us, an even bigger surprise came in the form of the strong expansion that the company managed to bring about in its operating margins. The same zoomed to 18.3%, an increase of nearly 500 basis points as compared to same quarter last year. This also led to its operating profits growing by an impressive 71% YoY. Raw material expenses emerged as the main contributor towards margin expansion, falling by more than 400 basis points as a percentage of sales. The company seems to have benefited from a fall in prices of most commodities like metals and plastics as the same ruled at high levels during same quarter last year. Besides, drop in other expenditure as a percent of sales has also benefited the company.

    Cost break-up…
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 23,183 27,636 19.2% 43,637 53,533 22.7%
    % sales 72.4% 68.1%   72.1% 67.9%  
    Staff cost 1,103 1,387 25.8% 2,142 2,772 29.4%
    % sales 3.4% 3.4%   3.5% 3.5%  
    Other expenditure 3,386 4,130 22.0% 6,918 8,571 23.9%
    % sales 10.6% 10.2%   11.4% 10.9%  

  • With the company’s effective tax rate falling to 22% from levels of 32%, its bottomline received a further boost and has come in higher by a strong 95% YoY during the quarter. Furthermore, with the company notching up good numbers for the second quarter in succession, half yearly bottomline has also witnessed an impressive growth of 90% YoY.

What to expect?
At the current price of Rs 1,612, the stock is trading a price to cash flow multiple of 14x its expected FY12 cash flow per share. The company has made a near mockery of our projections, managing to achieve nearly 90% of our projected earnings for the current fiscal year in the first half itself. This certainly necessitates an upward revision in our target price. But with the stock having run up significantly in the past few months, the upside from the current levels may not be too much in the medium term. However, those who are already holding the stock should continue to do so as we are positive on the company’s long term growth prospects.

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