Hero Honda Motors; Raw Material Jolt - Maintain BUY, TP Rs2,097 - PINC Result Review

Raw Material Jolt

Hero Honda (HH) for the second quarter in a row posted a disappointing result with a decline in profitability. Despite company taking two price hikes in last two quarters, it failed to ease the raw material cost pressure. Against our expectation of a sequential improvement, margins declined by 70bps QoQ to 13.4%. As a result profits declined 15.3% YoY to Rs5.1bn, significantly lower than our expectation of Rs6.1bn.

Outlook: We expect HH to achieve volumes of 5.15mn units during FY11. Due to the company's inability to completely pass on the raw material cost, we have reduced our margin estimate for FY11 and FY12 by 170bps to 13.8% and 13.9% respectively. As a result, our earnings estimates for FY11 and FY12 are now lower by 9% each to Rs103 and Rs117 respectively.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 16xFY12E earnings. We maintain a 'BUY' rating on the stock with a revised target price of Rs2,097 (earlier Rs2,305) discounting FY12E earnings 18x.

Source : Equity Bulls

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