Hero Honda net profit surges by 95%
Results highlights – India’s largest manufacturer of motorcycles, Hero Honda Motors second quarter results were ahead of the market’s expectation mainly on account of better margins. The company reported a strong surge of 95% in net profit to Rs 597.14 crore compared to the second quarter of financial year 2008-09.  A similar sharp surge came in the first quarter ending June, when net profit rose by 83 per cent to Rs 500.11 crore.
The growth in sales is 26.8% compared to the same quarter in previous financial year.  The company reported a strong total income of Rs4,059.4 crore. This was driven by huge volumes as the company sold more than one million units in the quarter.
Growth Factors – The festive season spread over two months during the quarter worked wonders for the company in terms of volume growth, which was also seen across all the segments in the automobile sector.
Decrease in raw material prices, depreciation, and the effective taxation rate at the Haridwar plant (from 28% in first quarter to 22.31% in second quarter).
Stock prices have been building up since August in accordance with strong market fundamentals and good earnings forecast. Prices touched a high of Rs.1724 in 3rd week of September and moved in the range of 1600-1700 ahead of the earnings announcement. Prices opened up on Thursday post announcement on rose up by 2.4% but were dragged down due overall weakness in the market. Prices corrected to close at Rs 1595, about 0.9% down from previous day on October 22, 2009. A better than expected performance failed to keep to prices at increased levels.
Caution – Though the company has achieved a strong volume growth in first half of FY2010, we believe that with the ongoing strikes at one of its major suppliers Rico Auto and few other auto ancillaries in the Gurgaon belt could lead to production constraints in second half of FY2010. Thus we believe that if the demand continues to remain strong, the ongoing agitations in the factories of its major suppliers could affect its production, thereby pushing down its sales volume on a quarterly basis.
Company expects an increase in prices of steel and aluminum between 5 to 10 per cent in the coming quarters as the economy revives. Increasing Interest rate can be threat to all the automobile players in the short term.
We believe given the sound management, consistent performance and expected increase in demand due to reviving economy makes it good long term bait for long term capital appreciation and stability of dividends. But all the above positive points are already factored in the current price. At the current market price of Rs1586, the stock trades at around 16.5x its FY2010E and 14.9x FY2011E Bloomberg consensus earnings of Rs97.6 and Rs108 respectively.

Results highlights – India’s largest manufacturer of motorcycles, Hero Honda Motors second quarter results were ahead of the market’s expectation mainly on account of better margins. The company reported a strong surge of 95% in net profit to Rs 597.14 crore compared to the second quarter of financial year 2008-09.  A similar sharp surge came in the first quarter ending June, when net profit rose by 83 per cent to Rs 500.11 crore.

The growth in sales is 26.8% compared to the same quarter in previous financial year.  The company reported a strong total income of Rs4,059.4 crore. This was driven by huge volumes as the company sold more than one million units in the quarter.

Growth Factors – The festive season spread over two months during the quarter worked wonders for the company in terms of volume growth, which was also seen across all the segments in the automobile sector.

Decrease in raw material prices, depreciation, and the effective taxation rate at the Haridwar plant (from 28% in first quarter to 22.31% in second quarter) led to the higher bottom line compared to the 26.8% increase in top line

Hero Honda vs. Index

Hero Honda vs. Index (source: BSEINDIA.COM)

Stock prices have been building up since August in accordance with strong market fundamentals and good earnings forecast. Prices touched a high of Rs.1724 in 3rd week of September and moved in the range of 1600-1700 ahead of the earnings announcement. Prices opened up on Thursday post announcement and rose up by 2.4% but were dragged down due overall weakness in the market. Prices corrected to close at Rs 1595, about 0.9% down from previous day on October 22, 2009. A better than expected performance failed to keep to prices at increased levels.

Caution – Though the company has achieved a strong volume growth in first half of FY2010, we believe that with the ongoing strikes at one of its major suppliers Rico Auto and few other auto ancillaries in the Gurgaon belt could lead to production constraints in second half of FY2010. Thus we believe that if the demand continues to remain strong, the ongoing agitations in the factories of its major suppliers could affect its production, thereby pushing down its sales volume on a quarterly basis.

Company expects an increase in prices of steel and aluminum between 5 to 10 per cent in the coming quarters as the economy revives. Increasing Interest rate can be threat to all the automobile players in the short term.

We believe given the sound management, consistent performance and expected increase in demand due to reviving economy makes it good long term bait for long term capital appreciation and stability of dividends. But all the above positive points are already factored in the current price. At the current market price of Rs1586, the stock trades at around 16.5x its FY2010E and 14.9x FY2011E Bloomberg consensus earnings of Rs97.6 and Rs108 respectively.

Full disclosure: No position at the time of this writing. Please do your own research before making an investment decisions for HEROHONDA.

Authors:

Vineet Patawari , B.Com (H), ACA, PGDM (IIM Indore)

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