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Hero Honda: Riding on a high - Views on News from Equitymaster
 
 
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  • Dec 7, 2000

    Hero Honda: Riding on a high

    Hero Honda continues to report robust growth in sales. For the month of November 2000 its volumes grew by 52% YoY to 97,270 units. For the period from April to November 2000, the company has sold 6,69,009 units as compared to 4,68,485 units for the same period in the previous year, a growth of 43% YoY. It is likely to cross the 1 m volume target in the current financial year.

    Hero Honda's market share has gone upto 48% for the period April-November 2000 as compared to 42% in FY2000. This increase in market share is commendable in the light of the fact that competition has intensified in the motorcycle market with the aggressive entry of Bajaj Auto.

    Demand for motorcycles continues to remain strong in the current financial year. The consumer preference for motorcycles over scooters continues. The share of motorcycles in India's two wheeler market went upto 55% during April-September 2000, while that of scooters declined to 26% for the same period. Scooter sales fell by 19% YoY during the same period.

    Volumes April-September
    2000
    Market
    share
    Scooters 478,312 26%
    Motorcycles 1,013,863 55%
    Mopeds 366,811 20%
    Two wheelers 1,858,986 100%

    However the fear of a slowdown in the motorcycle industry over the next year cannot be ruled out. This stems mainly from the fact that the agriculture production declined 2% in FY2000, and it is expected to clock in a growth of only around 0.9% in FY01E. This would result in lower rural incomes which drives the demand for goods and vehicles. Hence a slower momentum in demand for motorcycles is a likely scenario in FY2002.

    It is interesting to see how Hero Honda has managed to keep up its market share in the current year. Hero Honda has always tackled competition by coming out with new products which are fuel efficient and of superior quality. In FY2000, the company launched CBZ (ee), a four-stroke bike powered with a 156 cc engine. Within the motorcycle segment demand has shifted to 100 cc bikes and Hero Honda has been catering to this segment for a long time, its experience holds it in good stead. Its top selling brand 'Splendor" has a waiting period of about 3 weeks currently.

    Companies EPS (Rs) P/E (x) EPS growth (%) Gross margin (%) ROE (%) (ROCE) %
      (FY02E) (FY02E) (FY01E-FY02E) FY02E FY02E FY02E
    Hero Honda 85.2 10.2 33% 13.3% 36.1% 34.7%
    Bajaj Auto 42.4 6.3 -9% 8.9% 13.9% 12.0%
    TVS Suzuki 41.4 4.5 5% 9.5% 21.0% 18.2%

    The company has reported excellent results for 1HFY01. Its net profit for the 1HFY01 at Rs 1,205 m is a growth of 48% YoY. We are projecting an EPS growth of over 30% for the next three years for Hero Honda. Its excellent growth prospects, higher margins and returns as compared to its peers and attractive valuations make it the best available play in the two wheeler market today. Its premium valuations as compared to Bajaj Auto and TVS Suzuki seem justified in light of its better growth prospects.

    Hero Honda's stock price has taken a beating in the past year and a half due to fears regarding Honda's 100% subsidiary in India. This subsidiary is currently manufacturing scooters. It can start manufacturing motorcycles after a period of five years. These fears however have been overplayed. It is likely that Honda Motors could dilute its stake in this subsidiary in future by tying up with a leading scooter manufacturer. In China it operates through three separate joint ventures, so why not the same strategy for India.

    On the current price of Rs 873 it is trading at 10.2x FY02E EPS of Rs 85.2.

     

     

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