Hold Hero Honda - End of a Dream Run - PINC Result Review

End of a Dream Run

Hero Honda (HH) reported disappointing performance for Q1FY11 with a decline in profits after a dream run lasting ten quarters. Increase in the raw material cost due to engine upgradation and company's inability to pass the same to customers led to a 300bps contraction in margins at 14%. Average realisations on a sequential basis remained flat despite 6% increase in raw material cost. Reported profits declined by 2% to Rs4.9bn.

Outlook: We expect HH to achieve volumes of 5.2mn units during FY11. Price increase taken by the company in June-10 and recent softening in input prices will help the company to improve margins from current levels. We expect profitability to improve to 15.5-16.5% in coming quarters. However this will be lower than our earlier estimates of 17%. We are revising our earning estimates downward by 9% to Rs113.8 and Rs128.1 for FY11 and FY12 respectively.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 16.5xFY11E and 14.6xFY12E earnings. At these valuations, the stock captures the near term potential of the business. We downgrade the stock to a 'HOLD' with a revised target price of Rs2,049 (earlier Rs2,270)discounting FY12E earnings 16x.

Source : Equity Bulls

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