Hero Moto.: Robust second quarter - Views on News from Equitymaster

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Hero Moto.: Robust second quarter

Oct 22, 2014

Hero Motocorp Ltd announced second quarter results of the financial year 2014-2015 (2QFY15). The company has reported a 21% YoY growth in sales, while net profits have grown by 59% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 21% YoY during the quarter led by a 19.5% YoY growth in volumes.
  • Operating margins contract by 1% to 13.5% on account of a rise in raw material costs and other expenditure (as percentage of sales).
  • Net profit surge by 59% YoY due to the substantial reduction in depreciation charges and higher other income.

Standalone financials: A snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
No. of two wheelers sold 1,416,276 1,692,523 19.5% 2,975,558 3,407,777 14.5%
Net sales 57,262 69,153 20.8% 118,857 139,522 17.4%
Expenditure 48,935 59,805 22.2% 101,378 120,702 19.1%
Operating profit (EBDITA) 8,327 9,348 12.3% 17,479 18,820 7.7%
EBDITA margin (%) 14.5% 13.5%   14.7% 13.5%  
Other income 1,155 1,935 67.6% 2,277 3,063 34.5%
Depreciation 2,869 750 -73.9% 5,613 3,665 -34.7%
Interest 30 49 66.9% 59 79 34.0%
Profit before tax 6,583 10,484 59.3% 14,084 18,139 28.8%
Tax 1,769 2,851 61.2% 3,785 4,878 28.9%
Profit after tax / (loss) 4,814 7,634 58.6% 10,300 13,261 28.8%
Net profit margin (%) 8.4% 11.0%   8.7% 9.5%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         120.4  
Price to earnings ratio (x)*         25.8  

What has driven performance in 2QFY15?
  • Hero Motocorp reported a 21% YoY growth in sales during the quarter on the back of 19.5% YoY growth in volumes. Thus, the growth in revenues was a product of both volumes as well as realisations. Growth was largely aided by motorcycles this time, whose volumes were up by 20% YoY. Scooter volumes grew at a relatively lower pace of 13% YoY largely on account of capacity constraints.

  • Operating margins contracted by 1% to 13.5% during the quarter. Higher raw material costs and other expenditure (as a percentage of sales) led to the dip in margins, while staff costs remained under control. Other expenditure was higher as increased competitive pressure meant that there was a rise in ad spends. As a result, operating profits grew by 12% YoY. That said, the company has put in place a cost rationalisation program over the next five years which is expected to result in cost savings every year.

  • Net profits grew by a healthy 59% YoY due to the 74% YoY fall in depreciation charges and higher other income. Since the amortization of royalty payments to Honda ended in 1QFY15, there was a substantial reduction in depreciation. Other income was also up by a considerable 68% YoY.
What to expect?
At the current price of Rs 3,111, the stock is trading a multiple of 14.3 times our estimated FY17 cash flow per share. Going forward, Hero Motocorp expects 10-11% growth for the 2 wheeler industry in FY15. Scooters will continue to grow at a strong pace and while the company had been facing some constraints, the new capacity at Neemrana which has come on stream is expected to bolster volumes. The company has also lined up some new product launches. The company has outlined a capex program which will largely be towards ramping capacity to 9 m units. In addition to this, the exercise of amortizing royalty payments to Honda Motors has come to an end and this will bolster profits. Valuations though seem expensive and so investors should not buy the stock at the current price levels.

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