Result review: Hero Honda

Result review: Hero Honda

For Q2FY2009, Hero Honda (HH) clocked 35.6% growth in net sales to Rs3,190 crore, which was marginally above our expectation of Rs3,085 crore.

Sales surged on the back of volumes, which grew 28.6% y-o-y and average realization per vehicle moved up 5.5% y-o-y primarily due to the change in sales mix and better performance by high-realization segments.

The company witnessed 86bp y-o-y increase in EBITDA margins owing to lower other expenditure. Operating profits rose 45% y-o-y.

Higher growth supported better utilization of its fixed asset where other expenditure and staff costs declined 96bp and 35bp respectively, in Q2FY09.

Net profit was higher by 49.9% at Rs306.3 crore mainly on account of higher other income of Rs66.2 crore (Rs39.3 crore), up 68.6% y-o-y.

Hero Honda’s overall marketshare in motorcycle segment improved by 190bp during H1FY09 to 50.6% (48.6% last year same period).

We believe in the prevailing uncertain market condition, the stock would continue to outperform on its strong rating of being a debt-free company with surplus cash and substantial investment in its book, which makes the company less malign.

On better-than-expected performance of the company, we have revised our EPS estimate to Rs57.8 (Rs54.1) for FY09E and Rs65.7 (Rs59.1) for FY2010E.

Better bottomline would also be aided by softening of raw material (aluminum and steel) prices in recent months.

Thus, we upgrade the stock to ACCUMULATE (Neutral), with a Target Price of Rs855, at which the stock would trade at 13x FY10E earnings.