In order to minimize the negative impact of the rising interest rates, Hero Honda Motor
Limited (HHML) is aggressively focusing on the high-margined executive and premium segments. Its products such as Hunk, Karizma, Glamour, and CBZ X-treme are enjoying a good market.
As a result, despite the sluggish Indian auto sector, the company managed to post an 11.4% y-o-y growth in volumes to 894,244 units. The increased focus on the high-margined segments also helped it to improve its average realizations, thereby passing on a part of the raw material cost increase to the consumers.
Though the shift of production to the Haridwar plant has brought down the excise duty and tax rates, 75% of HHML’s cost is attributed to steel, aluminium, nickel, and rubber, the prices of which have gone up significantly since January 2008. As a result, we expect margins to be under pressure in the upcoming quarters.
At the current market price, the stock is trading at a forward P/E of 14.4x and 12.6x for FY09E and FY10E, respectively.
We have used the Discounted Cash Flow (DCF) method of valuation, assuming a WACC of 13.6% and a terminal growth of 5%. Our target price of Rs710 for FY09E does not offer any significant upside from the current levels. Thus, we reiterate our HOLD rating on the stock.