Thursday, March 4, 2010

HeroHonda Strong Sales Estimates Accumulate at 1800; Target: Rs 1,870

Hero Honda Motors Ltd.

Reco: ACCUMULATE

CMP: Rs. 1,802

Target Price: Rs. 1,870

Strong volume outlook, we expect upgrades in FY11

We came back positive from our meeting with the management of Hero Honda (HH) on (1) volume outlook – no impact visible of below expected rabi output/lack of significant pre-buying before budget (2) lower raw material cost pressure and (3) pricing discipline in case the industry volume fails to meet the current expectations for FY11. We would like to highlight that the key players of industry are looking at double digit volumes growth in FY11 with Hero Honda being the most conservative in terms of guidance.

Management is aiming a volume growth of 10% in FY11 over (our estimates of 8.5%), driven by strong underlying demand (share of rural sales has touched 44%), new model launches along with upgrades/variants. We expect management to increase its focus on premium bikes, where its market share has declined front around 30% six months back to currently around 16%.

We have upgraded our FY10 volume estimates by 3% to 4.6mn units. Consequently, we have upgraded our FY11 volume estimates by 3% to 5mn units (representing 8.5% volume growth). We have upgraded our FY10 and FY11 estimates by 3.5% to Rs 110.1 and Rs 124.6 respectively. At Rs 1,811, the stock trades at PER of 14.5x and EV/EBIDTA of 9x our FY11E estimates. We maintain our ACCUMULATE rating on the stock with a target price of Rs 1,870 (up by 4%), valuing the company at 15x PER and 10x EV/EBIDTA our FY11 estimates. 

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