>HARIDWAR PLANT- HERO HONDA (MOTILAL OSWAL)

Haridwar plant - a shrine of technology

Hero Honda's state-of-the-art plant is spread over 275 acres (including 110 acres for auto ancillaries) in the holy city of Haridwar, Uttarakhand. It was commissioned in April 2008, with initial installed capacity of 500,000 units, which was rampedup to 1.5m units, and will be further ramped-up to 1.8m units by March 2010, the deadline to avail of fiscal incentives. It is one of the most technologically advanced and the greenest auto plant in India, far ahead of Hero Honda's other two plants.

Hero Honda's most profitable plant: The Haridwar plant is Hero Honda's most profitable, with estimated FY10 EBITDA margins of 17.5-18% against 16.5% for the company as a whole. This is due to fiscal incentives that the Haridwar plant enjoys coupled with a judicious product-manufacturing strategy. Hero Honda manufactures two of its most profitable products, Splendor and Passion, at Haridwar.

Vendor localization set to increase to 65% by 3QFY10: Between 35% and 40% of Hero Honda's vendors are based in Haridwar. Consequently the company cannot set-off excise duty paid on raw material procured from outside Haridwar due to excise exemption on the end product. However, its tier-I vendors are setting up facilities at Haridwar, due to be complete by September 2009, which will boost localization of vendors to 65%.

Valuation and view: We like Hero Honda due to its dominant position in the two-wheeler market, multiple earnings drivers, 31% EPS CAGR (FY09-11) and strong balance sheet with net cash of Rs257/share in FY10 and Rs342/share in FY11. We maintain FY10 earnings estimates at Rs100 (~56% growth) and for FY11 at Rs110.2 (~10% growth). The stock trades at 15.1x FY10E EPS and 13.7x FY11E EPS. Maintain Buy with target price of Rs1,762 (~16x FY11E EPS).

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