We understand that year-to-date (YTD) retail sales for Hero Honda were up 18% y-o-y versus industry growth of 9.8% and our FY09 growth estimate of 7.3%.
The company is able to buck the slow growth trend in the industry on the back of its strong product portfolio, relatively lower reliance on consumer finance and weak competition. The fact that retail sales growth was higher than the wholesale sales growth of 17% negates our earlier fear of channel stuffing.
Our interaction with dealers also confirmed that they had not commenced inventory build-up (in anticipation of the festive season in September-October 2008) until July 2008.
We do not see any threat to Hero Honda’s net margins because we expect the aggregate 3.0-3.5% price increase (taken in two parts) coupled with lower tax rate due to fiscal benefits from the Haridwar plant to offset input cost pressure on the EBITDA line.
We upgrade Hero Honda to BUY from Reduce after our extensive across-the-chain checks with suppliers, transporters, dealers and financers revealed that there is a potential upside to our FY09 volume estimates.
We are increasing our FY09 and FY10 EPS estimates by 6.9% and 9.1% respectively – almost entirely on higher volume expectations.
Strong retail-level sales, a significant up-tick in cash purchases, entry of new consumer finance players and confirmation of a lack of channel-stuffing up to July give us confidence that the worst is behind us and volumes should be strong going forward.