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Hero Honda’s Haridwar plant…The roll-out of variants is expected to keep the momentum going.

Parvatha Vardhini C

Shareholders of Hero Honda can continue to hold the stock. At the current market price of Rs 752, the stock trades at a price-earnings multiple of about 13 times its annualised April-September ‘08 earnings.

While this valuation appears stiff in relation to the market, the company’s good performance in a challenging macro-economic environment and good prospects for volume growth and margin expansion justify the premium valuation that it enjoys.

However, considering the volatility in the broader markets, it may be wise to accumulate the stock on dips than consider fresh exposures at this point in time.

Hero Honda is one of the better-positioned players in the two-wheeler industry. In a year (April 07-March 08) characterised by a slowdown in the two-wheeler segment and rising interest rates, the company has managed to hold its ground, recording flat volumes compared to a year ago.

Other two-wheeler majors such as Bajaj and TVS saw a fall of about 19 per cent in volumes during this period.

The company has continued its good run into the first half of this year as well, recording a volume growth of 20 per cent in the April-September 08 period.

Even if discounted for the effect of a lower base, the volume growth has been significant, considering that Bajaj’s domestic volumes in the two-wheelers segment have remained flat during this period and TVS’s has grown only by 5 per cent.

One reason for this continued growth in volumes could be launches/model variants brought out by the company. Relatively new bikes like the CBZ Xtreme, variants of the Super Splendor and Glamour, and the 150cc Hunk seem to have kept consumer interests ticking. The roll-out of variants is expected to keep the momentum going in the second half of the current year as well.

The company plans to introduce the Passion Pro, the new CBZ Xtreme, a self-start version of the Splendor NXG and a refreshed Pleasure during this period.

The April 07-March 08 period witnessed a trend of shifting consumer preferences from bikes at the entry level to executive and premium segment bikes.

In line with this change, Hero Honda also saw a year-on-year drop in sales volumes in the entry segment bikes in this period.

But the figures for the first six months of the current financial year show a reversal of this trend.

Sales volumes of bikes with engine capacity between 75 and 125cc for the company have grown by 20 per cent Y-o-Y during this period. This could be due to buoyant demand from the largely untapped rural markets. For peers Bajaj and TVS though, this segment continues to show fall in volumes.

The revival in entry segment volumes (at a time when the industry is witnessing paucity in demand for such bikes) is a shot in the arm for Hero Honda.

For one, it signifies customer preference for a ‘Hero Honda’ bike over the other choices available in the market at this level.

This affiliation augurs well for the company too as this segment is its bread and butter business. Going forward, this trend will enable the company follow a two-pronged growth strategy.

One, to continue to concentrate on the entry segment unlike other players which have shifted focus to the higher capacity segments.

Though this segment is not very attractive in terms of margins, the company will benefit from higher volumes and economies of scale.

And, two, to obtain the advantage of better margins and higher realisations as well — by extending their product line into the higher segments.

For the half year ended September 2008, Hero Honda recorded a commendable 26 per cent Y-o-Y growth in net sales and a 47 per cent growth in net profits.

In the last one year, the industry has been faced with challenges such as high interest rates and non-availability of adequate finance.

Today, the peaking out of interest rates has gained further credence, thanks to the repo rate cuts. A cut in interest rates at this point, will bolster demand.

Profits will also receive a leg up (on account of lower tax outgo) from the commencement of operations at the Uttarakhand plant, which enjoys a ten-year tax holiday.

Compared to the first quarter, the second quarter has already witnessed improved margins (from 12.2 to 13.6 per cent), thanks to softening commodity prices.

The declining trends in prices of commodities such as steel, aluminium and rubber and a sound product mix with executive and premium segment bikes in its basket will aid further margin expansion over the next few quarters as well.

More Stories on : Two/Three Wheelers | Stocks | Recommendation | Hero Honda Motors Ltd

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