India Equity Retail Research | Automobile

HERO HONDA MOTORS LIMITED

Growth All Around!!!

INR: 1804
HOLD
Price Outlook (INR): 1988
Market Data Shares outs (Cr) Equity Cap (Rs. Cr) Mkt Cap (Rs. Cr) 52 Wk H/L (Rs) Face Value (Rs) Bloomberg Code Market Info: SENSEX NIFTY Price Performance
130 125 120 115 110 105 100 95 90 85 Nov-10 Jan-10 Jun-10 Jul-10 Feb-10 Mar-10 May-10 Aug-10 Sep-10 Oct-10 Dec-10 Jan-11 Apr-10

Company: Hero Honda Motors Ltd. is the world's largest manufacturer of two wheelers, based in India. The company is a joint venture between India's Hero Group and Honda Motor Company, Japan that began in 1984. Hero Honda is a world leader because of its excellent manpower, proven management, extensive dealer network, efficient supply chain and world-class products with cutting edge technology from Honda Motor Company, Japan. The teamwork and commitment are manifested in the highest level of customer satisfaction, and this goes a long way towards reinforcing its leadership status. Key Rationale: Continuously Improving Performance: Hero Honda has posted its strongest sales volumes of all time. It achieved sales of 5 lakh plus units twice in this fiscal. This has come at a time when the company was entangled in major controversies. The Q3FY11 performance has been the best quarter in terms of sales volumes Smooth separation: The promoters of the company have announced their split wherein the Hero group will buyout Hondas stake in the company. This is a major positive for the company in many aspects like exposure to export market and gradual decline then nil payment of royalty. The Hero group had been in talks with Honda from a long time since the earlier agreement had restricted Hero Honda motors from exporting in markets where Honda had a presence. Exports to Boost volumes: When the buyout is complete and agreement signed, Hero Honda will have access to export markets which it didnt have earlier. Currently Hero Honda exports only to South Asia and some part of Latin America. Export will start adding only in the long term after detail analysis of potential markets. but the companys competition views this as a major threat and have already started to make plans to aggressively market their products in the export markets. Valuations & Views: With festive season buying and adding clarity over the termination of JV issue the outlook for Hero Honda remains positive. At the CMP of Rs 1804, Hero Honda is trading at 18x its FY11E EPS of Rs 100 and at 14.7x its FY12E EPS of Rs 122. With the target price at Rs. 1988 using target multiple of 16.3xFY12E, we recommend Hold on the stock. Exhibit 1 : Key Financials
Particulars Sales EBITDA PAT EPS OPM NPM P/E P/BV EV/EBITDA ROE (%) ROCE (%) FY09 12319 1710 1282 64 14% 10% 18 9 20 32% 43% FY10 15861 2768 2232 112 18% 14% 17 10 12 62% 76% FY11E 18173 2317 2006 100 13% 6% 18 8 14 44% 53% FY12E 20535 3234 2440 122 16% 7% 15 6 11 37% 51%

Jan 10, 2010 19.97 39.94 36,035 2094/1497 2 HH IN

19224 5762

Hero Honda

BSE SENSEX

Share Holding pattern (%)

Particulars Promoters Institutions FIIs Public & Others Total Source: BSE Sep10 52.21 5.80 31.75 10.24 100 Jun10 52.21 5.99 31.16 10.64 100 Chg 0% -3.1% 1.9% -3.8%

Analyst : Dhruv Joshi dhruv.joshi@krchoksey.com 91-22-6696 5555

www.krchoksey.com 91-22-6696 5203 91-22-6691 9569

Source: Company Data, KRC Research

KRC Research is also available on Bloomberg KRCS<GO>, Thomson First Call, Reuters, Factset and Capital IQ

Hero Honda Motors Ltd.

Highlights of New MoU Signed Between the Promoters: Existing Products to Continue: Hero Honda will retain its existing product portfolio till the end of the JV i.e. till 2014. This means that the Hero Group will continue to sell their blockbuster products like Passion and Splendor, which to date contribute about 70%-80% of the companys sales. Freedom To Export: Under the new understanding hero Honda will be able to export its products to other countries of interest. Earlier hero Honda was restricted to not export its products where Honda had a presence. Currently Hero Honda exports its products to South America and South-East Asia. Henceforth the company will be able to sell its products in its potential export markets. but exports will only begin after detailed study and understanding of different markets. Independence to set Up Own R&D: Hero Honda will have the freedom to set up its own R&D facilities to develop new products. It will also be able to buy technology from others which it cannot right now. Currently it only gets technology and products that Honda supplies under the original agreement. Whether it will set up its own R&D centre or buy technology and design from others it still unknown. Brand Name to Change Over Time: According to the new MoU, Hero Honda will be branded by a separate by a different name in years to come. But the approximate time frame is still very unclear. Royalty Payments to subside then end: Royalty payment to Honda will reduce from the coming quarter onwards. This was made clear after many had speculated that the royalty payments to Honda would increase to around 6%-8% from the current 2%-3%. The management also stated that royalty payments will stop very soon without specifying any particular timeframe. Exhibit 2 : Q2FY11 Result Snapshot
Particulars Volumes Net Sales Total Expenditure Raw Material Consumed Stock Adjustment Employee Expenses Other Expenses EBIDTA (Excl OI) Operating Margin Other Income EBIDTA (Incl OI) Operating Margin Interest Depreciation PBT Tax Tax Rate Reported Profit After Tax Net Profit Margin EPS Source: Company, KRC Research Q2FY11 1285944 4552 3944 3386 -76 150 484 608 13% 78 686 15% -2 61 627 122 19% 505 11% 25.32 Q2FY10 1183235 4059 3316 2769 -5 139 413 743 18% 69 812 20% -6.1 50 768 172 22% 596 15% 30

(Rs In Crore)
Y-o-Y 9% 12% 19% 22% 1420% 8% 17% -18% -495 bps 13% -16% -493 bps -67% 22% -18% -29% -294 bps -15% -359 bps -16% Q1FY11 1234039 4296 3694 3084 -25 145 490 602 14% 53 655 15% -3 48 610 119 20% 491 11% 24.63 Q-o-Q 4% 6% 7% 10% 204% 3% -1% 1% -66 bps 47% 5% -18 bps -33% 27% 3% 3% -5 bps 3% -34 bps 3% Significant drop in profit due to increase in expenses. Margins impacted mainly due to increase in raw material prices. Increase in RM expenses due to increase of prices of commodities. Comment Good Growth seen in volumes despite controversies.

Exhibit 3: Quarterly Volume Growth

Segment Total Q2FY11 1285944 Q2FY10 1183235 Y-o-Y 33% Q1FY11 1234039 M-o-M 19% YTD FY11 3948013 YTD FY10 3413594 Y-o-Y 16%

KRChoksey - Retail Research

Hero Honda Motors Ltd.

Other Key Rationales: Volume Growth To Continue: Significant growth has been observed sales volumes and this is likely to continue since most of the concerns that customer were facing due to a foggy image that they had about the JV have all been cleared by the management. With Hero Honda continuing to get products and technology from Honda as well as the clause that will allow Hero Honda to purchase technology form other technology suppliers also the option to set up its own R&D facility only means more options and choices for the customers. Exhibit 4 : Volume Trend (Financial Year)
600000 500000 400000 300000 200000 100000 0 April

August

2010-2011

2009-2010

2008-2009

Source: Company, KRC Research

To Remain Market Leader: Hero Honda will remain the market leader in the two wheeler segment even after the Hero group buys out its partners stake in the JV. The buyout will not affect the companys sales in near terms. But Hero Hondas R&D has always been the key cause of concern for most investor. Thus by making it clear that the company will be able to purchase technology from other supplier as well the company has placed itself in a safe position. Exhibit 4 : Market Share, YTDFY11

6% 13%

40%

15%

Hero Honda

Bajaj Auto

26%

TVS Motor

HMSI

Others

KRChoksey - Retail Research

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M ay

July

N ov

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June

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Hero Honda Motors Ltd.

Technicals
Last Price 14 50 day EMA day EMA 1798 1896 1878 1891

C 200 day EMA

The stock is moving rangebound. The support for the stock exists at around 1730 levels. The MACD indicator for the stock is moving sideways in Positive zone. Investors can buy the stock at declines.
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