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Buy Hero Honda Motors - PINC Visit Note
Posted On : 2010-09-01 02:33:47( TIMEZONE : IST )
On track to cross 5mn mark
We met the management of Hero Honda (HH). The key take-aways are:
- HH management is upbeat on the prospects of the Indian2-wheeler industry and expects the industry to clock a growth rate of 15% during the current year.
Company currently has a capacity of 5.4mn units per year and is raising it to 5.7mn units by the end of the year. For a new plant, the company is going through the proposals of various state governments and expects to finalise the location soon.
- The Haridwar facility which is eligible for fiscal benefits churned out 1.2mn units during FY10 which is expandable to 1.8mn units. The plant sources 60% components from the facilities located in the tax incentive zone of Uttarakhand. Despite increase in production from this plant, the company does not expect further reduction in direct tax rates. The products currently manufactured at this facility are Splendor and Passion.
- Company has capex plan of Rs4.5bn for FY11 and roughly a third of this is for expansion at the Haridwar facility.
- HH procures raw material on the spot basis and has witnessed some softening in input prices in recent past.
- The company took a round of price hikes across all products inJun'10. The price hike was in the range of Rs500 to Rs1000across models. This increase was taken to pass on engine upgradation cost to comply with new emission norms and a hardening in input costs. The full benefits of the price hike will be visible during the current quarter. In addition prices for its flagship Splendor model were increased in August to the tune of Rs500.
PINC Views
We expect HH to clock volumes of 5.2mn units during FY11.Profitability of the company is likely to improve from the levels ofQ1FY11 due to pricing actions and lower input costs. The stock is currently trading at 15.7x and 13.9x FY11E and FY12E earnings respectively. Since, our last update the stock has corrected by over5%. We see current valuations to be attractive and upgrade the stock to a 'BUY' with target price of Rs2,049 discounting FY12Eearnings 16x.
