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Hero Honda: A poor operating performance - Views on News from Equitymaster

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Hero Honda: A poor operating performance
Nov 2, 2010

Hero Honda Ltd has announced its 2QFY11 results. The company has reported a growth of 12% YoY and a decline of 15% YoY in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • Revenues grow by 12% YoY during the quarter led by a 9% increase in sales volumes. The company sold over 1.3 m units during the quarter.
  • Operating margins fall by 4.9% YoY to 13.4%, on the back of higher raw material costs. Operating profits decline by 18% YoY during 2QFY11.
  • Net profits decline by 15% YoY on the back of a poor operating performance.
  • During 1HFY11, revenues rise by 12% YoY on the back of a 10% YoY increase in volumes. Profits during the period decline by 9% YoY.

Financial performance summary
(Rs m) 1QFY10 1QFY11 Change 1QFY10 1QFY11 Change
Units sold     1,183,235     1,285,944 8.7%     2,302,222   2,519,983 9.5%
Net sales 40,696 45,520 11.9% 78,988         88,486 12.0%
Expenditure 33,254 39,440 18.6% 65,045         76,381 17.4%
Operating profit (EBDITA)   7,442   6,079 -18.3% 13,943         12,105 -13.2%
EBDITA margin (%) 18.3% 13.4%   17.7% 13.7%  
Other income       687       784 14.0%   1,112 1,318 18.5%
Interest expense/(income)        (61)        (21) -66.1%     (116)     (47) -59.1%
Depreciation       503       608 20.7%       959 1,090 13.7%
Profit before tax   7,686   6,276 -18.3% 14,211         12,380 -12.9%
Tax   1,715   1,220 -28.9%   3,239 2,407 -25.7%
Profit after tax/(loss)   5,971   5,056 -15.3% 10,973 9,973 -9.1%
Net profit margin (%) 14.7% 11.1%   13.9% 11.3%  
No. of shares (m)         199.7 199.7  
Diluted earnings per share (Rs)*         106.8  
Price to earnings ratio (x)*         17.5  
(* on trailing twelve months earnings)

What has driven performance in 2QFY11?
  • Hero Honda reported a revenue growth of 12% YoY on the back of a 9% YoY increase in sales volumes. The company sold about 1.3 m units (its highest ever in a quarter) during the quarter ended September 2010. During the preceding quarter, sales volumes stood at 1.2 m units. The company’s excise duty was up by 100 basis points to 7.1%, indicating that the company found it difficult to pass on the prices to customers. This is despite the hike in prices during the month of June this year. The average realisation per unit was higher by 2.7% YoY during the quarter.

  • At the operating level, Hero Honda’s profits declined sharply by 18% YoY. This in on the back of a 19% YoY rise in operating expenses leading to a 4.9% YoY decline in operating margins, which stood at 13.4% during the quarter. Raw material costs rose by 20% YoY in absolute terms and stood at about 73% of sales as compared to 68% last year.

    Cost break-up...
    (Rs m) 2QFY10 2QFY11 Change
    Raw materials           27,636           33,100 19.8%
    % sales 67.9% 72.7%  
    Staff cost             1,387             1,498 8.0%
    % sales 3.4% 3.3%  
    Other expenditure             4,231             4,842 14.4%
    % sales 10.4% 10.6%  

  • On the back for a poor operating performance, Hero Honda’s profits declined by 15% YoY. The decline in profits would have been even worse had it not been for the lower tax outgo.

What to expect?
At the current price of Rs 1,865, the stock is trading a price to cash flow multiple of 14.3 times our estimated FY12 cash flow per share and at about 16.3 times our estimated FY12 earnings per share (ResearchPro subscribers, kindly click here. At current levels, we do not expect the upside to be significant and as such have a cautious view on the stock from a medium term perspective.

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