Hero Honda second quarter net up 50%, beats profit estimates

Hero Honda second quarter net up 50%, beats profit estimates

Mumbai: Hero Honda Motors Ltd, the country's largest two-wheeler manufacturer, beat analyst forecasts posting a net profit of Rs306.30 crore for the quarter ended 30 September, a 50% increase over the corresponding period last year.

Company executives attributed the gains to an aggressive expansion of almost 40% in its distribution network, as well as a beefed-up product line. The auto maker, celebrating 25 years in operation, has a 55% share of the country’s two-wheeler market.

Hero Honda’s revenues, which include net sales and other operating income, expanded 35.6 % to Rs3,202 crore in the quarter gone by. It registered Ebitda (short for earnings before interest, tax, depreciation and amortization, or a measure of operational profitability) growth of 13.58% versus 12.20% a year.

Volume sales climbed 28.5% to 972,095 units. In the first half of fiscal 2009, Hero Honda has sold 91.7% more two-wheelers than in the same period last year. The company reported earnings per share of Rs15.34 for the quarter.

Shares of the company rose 2.69% to Rs826.15 on the Bombay Stock Exchange on Tuesday, a day the bourse’s auto index rose 1.65% and the benchmark index, Sensex, closed 4.5% up. The scrip has risen 18% this year at a time the Sensex shed nearly 50%.

A Mint poll of five analysts on 20 October had projected that Hero Honda’s sales would be up by 46.3% and volumes by 29.9%. The company has surpassed those estimates at a time when the industry copes with slowing demand due to high interest rates and a widespread credit squeeze, as also high input costs.

An analyst said operating margins at the auto maker were impressive. “I was expecting it to be 12.4% and what has come out is 13.58%. We have an ‘outperformer’ rating on the stock," said S. Ramnath, an analyst with Mumbai-based brokerage firm IDFC-SSKI Securities Ltd. SSKI’s earlier estimate had been “underperformer", a rating Ramnath attributed to projection of lower volume outlook for the second half of the year. SSKI now estimates a 9.8% year-on-year volume increase for Hero Honda this fiscal against its earlier projection of 7%.

Still, other analysts said it will be difficult for the company to sustain these levels of growth. “The company’s margins are surprisingly high but I really doubt it will last. The sales growth of 28.5% is an unsustainable volume," said Mahantesh Sabarad, an analyst with Centrum Broking Pvt. Ltd. “We are looking at a second-half decline in sales by 1% October to March. Pumping of inventory for the festive season will dry up sales ahead."

The margins could also spell good news for consumers, Sabarad said. “Two-wheeler manufacturers are the first to jump the gun when prices soften and since Hero Honda has been very aggressive on that front, we do expect that translating into some discounts being offered by the company in the forthcoming days, more so because of the sales flattening after the festive season," the Centrum analyst said.

Hero Honda chief financial officer Ravi Sud said that the firm is “well on track to surpass our last year’s October (festival season) sales of 535,000 vehicles" this year.