Result Flash on Hero Honda for 4QFY2011

Y/E March (Rs cr)	4QFY11	4QFY10	% chg (yoy)	Angel est	% diff
Net Sales	5,391	4,122	30.8	5,305	1.6
Operating Profit	830	712	16.6	590	40.6
Reported  OPM (%)	15.4	17.3	(187)bp	11.1	427bp
Adjusted OPM (%)	12.1	17.3	(520)bp	11.1	100bp
Reported PAT	502	599	(16.2)	484	3.7

Source: Company, Angel Research

Review

v  HH registered an in-line net sales growth for 4QFY2011, up by a strong 30.8% yoy and 4.4% qoq to Rs5,391cr. The growth was primarily driven by 22.6% yoy increase in volumes and 6.7% yoy increase in average net realisation following better product mix and price increases. On a sequential basis, volumes and realization grew by 1.8% and 2.6%, respectively.

v  As per the new licensing agreement with Honda Motor Co, Honda has given Hero Honda the rights and license to manufacture, assemble, sell and distribute certain products/parts and export license for certain products under the intellectual property rights which now forms a part of the intangible asset of Hero Honda and will be amortized over a period of forty two months starting from January 2011. As a result of this change, company reported an amount of ~Rs177cr under depreciation and amortization, which earlier used to be reported as a part of other expenditure.   

Adjusting for this change in accounting policy, operating margins came in 100bp ahead of our estimates at 12.1%. However, it declined 520bp on a yoy basis and 130bp on a qoq basis. Contraction in margin can be attributed to the increase in input costs which led to 574bp increase in raw-material costs for the company.

v  Net Profit for the quarter declined by 16.2% yoy to Rs502cr mainly due to the decline in operating margins. Further, increase in tax rate during the quarter also affected the bottom-line performance negatively.

Outlook

v  At Rs1600, HH is trading at 15x and 13.9x FY2012E and FY2013E earnings, respectively. We maintain our Neutral rating on the stock and shall come up with a detailed result update soon.

Quarterly Performance

Y/E March (Rs cr)	4QFY11	4QFY10	% chg	FY2011	FY2010	% chg
Net Sales	5,391	4,122	30.8	19,401	15,861	22.3
Consumption of RM	3,927	2,768	41.8	14,111	10,736	31.4
(% of Sales)	72.8	67.2	568.5	72.7	67.7
Staff Costs	168.0	146.0	15.1	619.0	560.3	10.5
(% of Sales)	3.1	3.5		3.2	3.5
Other Expenses	466.1	496.2	(6.1)	2,054	1,797	14.3
(% of Sales)	8.6	12.0		10.6	11.3
Total Expenditure	4,561	3,411	33.7	16,784	13,094	28.2
Operating Profit	830	712	16.6	2,617	2,767	(5.4)
OPM	15.4	17.3		13.5	17.4
Interest	8.1	(4.5)	(281.2)	(1.9)	(20.6)	(91.0)
Depreciation	237.4	48.7	387.9	402.4	191.5	110.2
Other Income	74.3	69.5	7.0	268.1	235.6	13.8
PBT (excl. Extr. Items)	659	737	(10.6)	2,485	2,832	(12.3)
Extr. Income/(Expense)	-	-	-	(79.8)	-	-
PBT (incl. Extr. Items)	659	737	(10.6)	2,405	2,832	(15.1)
(% of Sales)	12.2	17.9		12.4	17.9
Provision for Taxation	157.2	138.2	13.7	476.9	599.9	(20.5)
(% of PBT)	23.9	18.8		19.8	21.2
Reported PAT	502	599	(16.2)	1,928	2,232	(13.6)
PATM	9.3	14.5		9.9	14.1
Equity capital (cr)	39.9	39.9		39.9	39.9
EPS (Rs)	25.1	30.0	(16.2)	96.5	111.8	(13.6)

Source: Company, Angel Research

Key Financial Table

Y/E Mar (Rs cr)	FY2010	FY2011E	FY2012E	FY2013E
Net Sales	15,758	19,130	21,713	24,053
% chg	27.9	21.4	13.5	10.8
Adj Profit	2,082	2,162	2,134	2,294
% chg	76.3	3.8	(1.3)	7.5
OPM (%)	16.9	12.4	11.4	11.2
EPS (Rs)	104.2	108.3	106.9	114.9
P/E (x)	15.3	14.8	15.0	13.9
P/BV (x)	9.2	7.7	6.7	5.9
RoE (%)	57.3	56.8	47.9	45.1
RoCE (%)	64.1	53.3	47.6	45.7
EV/Sales (x)	1.6	1.3	1.1	1.0
EV/EBITDA (x)	9.8	11.4	10.6	9.4

Source: Company, Angel Research