Hero Honda
Ride on it
Benefits of recent budget and a new plant should bring the company firmly back on growth track
| Buy | Hero Honda Motor |
| BSE Code | 500182 |
| NSE Code | HEROHONDA |
| Bloomberg | HH@IN |
| Reuter | HROH.BO |
| 52-week High/Low | Rs 786 / 561 |
| Current Price | Rs 681 (as on 26th March 2008) |
Hero Honda Motor (HHML), a JV between the Hero Group (27% equity stake) and the Honda Motor Co. of Japan (26% equity stake), is India’s largest motorcycle manufacturer. The company enjoys an important synergy with its stake holder, Honda Motor Co.: the Hero Group's deep domain knowledge of the Indian market as well as the group's supplier network and Honda's expertise in four-stroke engine technology to produce efficient bikes.
HHML, has carved a niche in the competitive Indian market to churn out motorcycles with high fuel efficiency and low maintenance.
HHML has two world-class manufacturing plants in Daruhera and Gurgaon – a combined production capacity of 3.9m two wheelers annually. Its Splendor is the world's largest-selling motorcycle. Some of its other successful models include Passion Plus, CD Dawn, Glamour, Achiever and Karizma.
For the sixth consecutive year the company has achieved the unique distinction of being the world's No.1 two-wheeler company.
Major benificiary of budget 2008-09
The budget 2008-09 proposes to reduce the excise tax on motorcycles and scooters to 12% from 16% and central sales tax to 2% from 3%.
Moreover, the budget has also significantly reduced the individual tax on salaries increasing personal disposable incomes. This saving will result in additional disposable income which would result in them buying two wheelers, which were hitherto deferred.
These two measures are bound to have significant positive impact on the two-wheeler demand. HHML, being the largest player in this segment, will be the major beneficiary of this growth in demand.
Moreover, the 6th Pay Commission’s recommendations for central government employees’ pay hikes is also likely to put additional Rs 30000 crore (including arrears) in the hands of large number of government staff in FY 2009. This would be followed by hike in state government staff’s salaries also. This too is expected to spur spending on consumer goods and two-wheelers.
Subsequent to the Union Budget, HHML reduced the prices of its motorcycles in the range of Rs 1,000 - Rs 3,400 across all its models. This reduction of prices along with higher income at disposal for the individuals, will see increased volumes for the company.
Good profit margin expansion for the quarter ended December 2007
In the quarter ended December 2007, the company reported 3% sales growth to Rs 2743.07 crore courtesy its range bound sales volume. Its sales volume declined from 896113 units in quarter ended Dec ’06 to 893581 units in quarter ended Dec ’07. However its operating profit margin (OPM) surged by 260 bps to 13.9% on account of significant crash in its raw material cost. Its raw material cost, as % to sales net stock adjusted, declined by 250 bps to 70%. Its other expenditure declined by 60 bps to 12%. Its staff cost reduced by 30 bps to 4%. Thus it resulted in spurt by 27% to Rs 382.60 crore in its operating profit. Further its other income surged by 55% to Rs 52.10 crore. Also its interest income zoomed ahead by 57% to Rs 8.66 crore. Its depreciation cost grew by 9% to Rs 40.80 crore. PBT surged by 33% to Rs 402.56 crore. On accounting its tax provision, net profit settled with growth of 31% to Rs 275.01 crore.
In the nine month ended Dec ’07, the company reported marginal growth of 4% to Rs 7543.15 crore. It is attributed to decline by 1% to 2453067 units in its sales volume. Its OPM remained range bound at 12.4%. It led to meager growth of 4% to Rs 937.53 crore in its operating profit. Its raw material cost, as % to sales net stock adjusted, slipped by 50 bps to 72%. Its other expenditure rose by 40 bps to 12%. Its staff cost rose by 10 bps to 4%.
Its other income reduced by 10% to Rs 130.28 crore. Its interest income surged by 81% to Rs 27.69 crore. Its depreciation cost rose by 12% to Rs 116.84 crore. Its PBT rose marginally by 2% to Rs 978.66 crore. On accounting its tax provision, the growth was restricted to insignificant 1% to Rs 669.18 crore in its net profit.
Pawan Munjal, Managing Director & CEO, HHML said, "Given the industry slowdown scenario, we are very enthused by our robust financial numbers for the third quarter. However, this was not unexpected. We had undertaken some strategic initiatives since the beginning of this fiscal, including a conscious effort to rationalize costs across the board, and its results are now visible. Our bottom line has seen a consistent improvement, and we have been able to demonstrate that it is possible to keep gaining market share while maintaining a robust bottom line."
New plant closer to vendor base
HHML is setting up a state-of-the-
Unlike other two-wheeler manufacturers, the location, being in proximity to its present vendor base, HH's suppliers would be least disturbed and well integrated. The choice of location was also based on other factors, including the present support infrastructure available and the tax concessions offered by the Government to set up manufacturing units in the hill states. These concessions include a 100% excise exemption for ten years and a 100% income tax exemption for the first five years and 30% for the next five, among other benefits.
By FY10 this plant would be scaled up to 1.5m units. This would take the company's capacity to 4.4m units by end-FY08 and then to 5.4m by FY10.
Young India to benefit the company
The current age of the Indian population is estimated at 25 years and is expected to be 31 years by 2025. For at least the next 20 years, India is expected to be the youngest nation of the world. The greater proportion of youth in the total population, coupled with their swelling income levels, is expected to drive two wheeler growth.
Outlook and valuation
After sluggishness for the past two years, Hero Honda is expected to get back on growth track from next year.
In FY 2008 we expect the company to register sales and net profit of Rs 10272.48 crore and Rs 876.22 crore respectively. On equity of Rs 39.94 crore and face value of Rs 2 per share, EPS works out to Rs 43.9. This EPS is expected to rise to Rs 52.7 in FY 2009 on sales of Rs 11710.62 crore (up 14%) and net profit of Rs 1051.47 crore (up 20%). The share price trades at Rs 681. While the P/E on FY 2008 EPS works out to 15.5, it falls to 12.9 on FY 2009 EPS.
| | 0503(12) | 0603 (12) | 0703 (12) | 0803 (12P) | 0903 (12P) |
| Net Sales | 7421.65 | 8713.98 | 9899.96 | 10272.48 | 11710.62 |
| OPM (%) | 15.8 | 15.7 | 11.8 | 11.9 | 12.6 |
| OP | 1168.64 | 1364.45 | 1173.04 | 1224.11 | 1475.54 |
| Other inc. | 136.90 | 156.28 | 189.85 | 175.28 | 192.81 |
| PBDIT | 1305.54 | 1520.73 | 1362.89 | 1399.39 | 1668.35 |
| Interest | -1.09 | -6.13 | -22.99 | -37.69 | -48.99 |
| PBDT | 1306.63 | 1526.86 | 1385.88 | 1437.08 | 1717.34 |
| Dep. | 89.38 | 114.62 | 139.78 | 156.61 | 180.10 |
| PBT | 1217.25 | 1412.24 | 1246.1 | 1280.47 | 1537.24 |
| EO | 68.55 | 0.00 | 0.00 | 0.00 | 485.77 |
| PBT after EO | 1148.70 | 1412.24 | 1246.1 | 1280.47 | 1051.47 |
| Tax | 406.78 | 440.9 | 388.21 | 404.25 | 0.00 |
| PAT | 741.92 | 971.34 | 857.89 | 876.22 | 1051.47 |
| EPS * | 40.6 | 48.6 | 43.0 | 43.9 | 52.7 |
| * Annualized on current equity of Rs 39.94 crore. | |||||
| Hero Honda Motor: Results |
| | 0712 (3) | 0612 (3) | Var (%) | 0712 (9) | 0612 (9) | Var (%) | 0703 (12) | 0603 (12) | Var (%) |
| Net Sales | 2743.07 | 2666.05 | 3 | 7543.15 | 7260.38 | 4 | 9899.96 | 8713.98 | 14 |
| OPM (%) | 13.9 | 11.3 | | 12.4 | 12.5 | | 11.8 | 15.7 | |
| OP | 382.60 | 301.92 | 27 | 937.53 | 904.38 | 4 | 1173.04 | 1364.45 | -14 |
| Other inc. | 52.10 | 33.58 | 55 | 130.28 | 145.34 | -10 | 189.85 | 156.28 | 21 |
| PBDIT | 434.70 | 335.50 | 30 | 1067.81 | 1049.72 | 2 | 1362.89 | 1520.73 | -10 |
| Interest | -8.66 | -5.51 | 57 | -27.69 | -15.30 | 81 | -22.99 | -6.13 | 275 |
| PBDT | 443.36 | 341.01 | 30 | 1095.50 | 1065.02 | 3 | 1385.88 | 1526.86 | -9 |
| Dep. | 40.80 | 37.58 | 9 | 116.84 | 104.27 | 12 | 139.78 | 114.62 | 22 |
| PBT | 402.56 | 303.43 | 33 | 978.66 | 960.75 | 2 | 1246.1 | 1412.24 | -12 |
| Tax | 127.55 | 94.25 | 35 | 309.48 | 297.86 | 4 | 388.21 | 440.9 | -12 |
| PAT | 275.01 | 209.18 | 31 | 669.18 | 662.89 | 1 | 857.89 | 971.34 | -12 |
| EPS * | 55.1 | 41.9 | | 44.7 | 44.3 | | 43.0 | 48.6 | |
| * Annualized on current equity of Rs 39.94 crore. | |||||||||
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