>HERO HONDA: Result Update 1QFY2011

For 1QFY2011, Hero Honda (HH) reported decent performance on top-line front, while operating performance and bottom-line came in below expectation. OPM was impacted largely due to higher input cost, which in turn resulted in poor bottom-line performance. We revise our OPM estimates downwards to account for margin pressure due to the increasing raw material prices. Owing to the recent decline in the price, we recommend an Accumulate on the stock.

■ Top-line in line, net profit dips on input cost pressure: For 1QFY2011, HH registered 12% yoy growth in net sales to Rs4,297cr (Rs3,822cr), which was in line with our expectation. The growth was largely aided by the 10.3% yoy jump in volumes and marginal 1.5% yoy increase in net realisation (owing to hike in excise duty). HH reported 7.3% yoy dip in operating profits, where OPM fell by a substantial 298bp yoy on input cost pressure. OPM came in below expectation,
with raw material cost increasing by 345bp yoy. Thus, net profit came in below our expectation at Rs492cr, on lower-than-expected OPM.

■ Outlook and Valuation: We maintain our volume growth estimate and model the company to record around 12% CAGR in revenues over FY2010-12E, aided by around 9% CAGR in volumes during the period. We revise our OPM estimates downwards to account for margin pressure due to the increasing raw material prices. We expect net profit to register moderate CAGR of 7% over FY2010-12E on account of the tax benefits availed by HH at its Uttaranchal plant. However, we believe that this will not be able to compensate for the drop in market share and leaves limited room for earnings upgrade. We recommend an Accumulate with a Target Price of Rs1,966, at which level the stock would trade at 15.3x FY2012E earnings (10% discount to our Sensex target multiple of 17x).

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