>Hero Honda (KR Choksey)

Hero Honda (HH) reported net sales of Rs 3,422.5 crore, up 23% y-o-y & 19% q-o-q. Operating Profits stood at Rs549.1 crore, increased by 33% y-o-y, improved realization along with reduction in commodity prices helped OPM to improve by 127bps. Net profit reported was Rs.402.2 crore, improved by 35% y-o-y and profit margins enhanced by 104 bps y-o-y to 11.8% on account of margin expansion and lower tax.

Higher than expected volumes enhanced the topline: Topline improved by 23% y-o-y to
Rs3,422.5 crore in Q4FY09 on the back of 13% growth in volumes and 9% growth in
realisation. Realisation improved by 7% y-o-y due to price hike in earlier this year and better product mix. HH outperformed the two-wheeler industry with a domestic market share of over 57%. HH witnessed a volume growth of 12% in FY09 whereas the industry grew by 5% y-o-y.

Robust operating performance: HH OPM stood at 16.0%, an improvement of 127 bps y-o-y.
The margin was 64 bps higher than our estimates due to higher than expected benefits from
the softening in raw material prices. Raw material cost as a percentage of sales declined
from 70.2% in Q3 to 68.9% in Q4FY09.

Net Income improved due to tax benefit from the Haridwar plant: Net profit stood at Rs402.2 crore, a growth of 35% y-o-y. The effective tax rate for the quarter was 28% due to tax benefits enjoyed in the Haridwar plant. Thus sharp growth on the Opearting performance and decline in the tax rate led to the expansion in the NPM by 104 bps y-o-y to 11.8%.

HH’s management is positive on maintaining the margins due to softening Raw Material prices and tax benefits enjoyed in the Haridwar plant. Management expects to cross over 3.7 million units to be sold in FY10.

Valuations & Views – We believe that the company performed reasonable well inspite of
the slowdown witnessed in the industry. HH’s with its focus on rural market and tie-ups
with regional NBFC’s for financing will help the company to maintain growth momentum till
medium term. HH is going to continue its focus in the rural markets as lot of money has
been pumped in by the government in the last couple of years. The Bharat Nirman, the
Rural Employment Generation Programme and the 6th Pay Commission money which is now
getting into the hands of the government employees will help HH to improve volumes. Raw
material prices are expected to remain low due to sluggish demand. Thus we expect HH’s
OPM to enhance by 80 bps y-o-y. To maximize the tax benefit at the Haridwar plant HH
plans to produce 1.2 million units from there by FY10. Thus this ramp up in the Haridwar
plant will help in margin expansion and profit growth of 25% y-o-y. At the CMP of Rs 1082,
HH is trading at 16.9x its FY09 EPS of Rs.64.2 and 13.9x its FY10E EPS of Rs. 77.8. We
recommend a Hold on the stock with target price of Rs 1192, giving an upside of 10%.

To see full report: HERO HONDA