>Hero Honda (KR Choksey)

INVESTMENT RATIONALE

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%.

KEY DEVELOPMENTS

• HH has chalked out Rs.350 crore capacity expansion and modernization plan in FY10 to upgrade plants and to develop two-wheelers engines conforming the emission norms of 2010

• During FY09, the company posted 3.72 million vehicles sales and aims to reach 4 million mark in FY10. To maximize tax benefit at Haridwar plant HH plans to produce 1.2 million units by FY10

• Commencement of Haridwar plant during the fiscal was another advantage for the company as 100% tax exemption benefit for this plant for 5 years started in this fiscal

To see full report: HERO HONDA