PINC Research has recommended hold rating on Hero Honda Motors with a target of Rs 1806, in its July 21, 2011 research report.
“Hero Honda (HH) Q1FY12 operating results were below expectation as adjusted margin at 11.3% was 70bps below our estimate. However, increase in other income and a lower tax rate helped the company post a net profit of Rs5.58bn, ahead of our estimate of Rs5.4bn. The contraction in margins was attributable to a sharp increase in raw material cost.”
“HH had a remarkable quarter in terms of volumes with a 23.9% YoY growth to 1.5mn units. The company clocked a volume of 0.5mn units in each of the three months. Domestic motorcycle sales were up 23.1% to 1.4mn units. Scooter segment continues to generate traction with a growth of 35.8% YoY to 98k units. With emphasis on exports post Honda exit, overseas volumes were up 26.9% to 38k units. Although HH took a price hike at the start of the quarter, average realisations were up only by Rs90 to Rs37.2k/ unit. However, raw material cost per vehicle jumped by Rs750 (2.8%) QoQ to Rs27.8k/unit. Raw material cost as a percentage of sales at 74.7% was highest ever reported by the company. Adjusted for royalty payments, margins contracted 275bps YoY (84bps QoQ) to 11.3% and were significantly below our estimate of 12%. With yields on treasury investments hardening, other income jumped 65% YoY to Rs884mn. Tax rate during the quarter at 16.7% was 330bps below our estimate. Contributed by these two factors, net profit at Rs5.58bn was 3% higher than our estimate inspite of a below par operating performance.”
“On the backdrop of the volume performance of Q1FY12, we continue to maintain a volume estimate of 6.1mn units in FY12 as against the management guidance of 6mn units. Although margin during the quarter was disappointing, we expect an improved performance in the coming quarter aided by price hikes and some softening in commodity prices. Hence we maintain our earnings estimate for FY12 and FY13 at Rs111 and Rs129 respectively. The stock is currently trading at 13.9x its FY13E earnings. We maintain a ‘HOLD’ rating on the stock with a target price of Rs 1806 discounting FY13E earnings 14x,” says PINC Research report.
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