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Buy Hero Honda - Margins blues; valuations attractive - Elara Capital
Posted On : 2010-08-08 02:31:25( TIMEZONE : IST )
- Hero Honda
- Rating : Buy
- Target Price : INR 2,185
- Upside : 20%
- CMP : INR 1,815 (as on 30 July 2010)
Margins dip below expectations, downgrade margin estimates
Hero Honda's (HH) Q1FY11 margins at 14% were below our expectations as the company was hit the most (amongst the companies under our coverage universe) from the recent rally in the input prices and costs related to change in emission norms. Unlike the competition, the company delayed its price hike to June'10, which checked the margins drop only partially. We believe, the Q1FY11 was the bottom for the company in terms of EBITDA margins as softening of commodity prices and recent price hike would make sure that the margins improve from here on. We factor in conservative EBITDA margins of 15.2% each for FY11E and FY12E.
Assured volume growth gives better visibility on earnings
The company has guided for a reasonable volume growth of 12-14%. Company's strong semi-urban and rural franchise, its performance on past guidance and our dealer interactions virtually assures us the volume growth of 12% for FY11E and 10% for FY12E, fairly conservative given that Bajaj Auto is guiding for 40% volume growth.
Special dividend checks the investment book growth
The company declared a special dividend of INR 80 per share in April'10 and thus the resultant cash outflow of INR 18.7 bn restricted the growth of investment book (vis-Ã -vis strong growth in BAL's investment book). Thus, the other income growth may not be as significant (BAL is expecting to more than double its other income in FY11E) for the company as earlier anticipated.
Outlook and valuation; maintain our positive stance
A heavy dip in EBITDA margins and volume growth constrained by supply issues, we believe, indicate a bottom in terms of earnings performance for the company in the current financial year. Going forward, production ramp up at Haridwar, softening of input prices (coupled with price hikes) should ensure good volume growth and margins expansion, respectively. We maintain our 'BUY' recommendation on the stock with revised price target of 2,185 valuing the company at 16x FY12 earnings (vis-Ã -vis 17x FY12 for BAL).
