HERO MOTOCORP LTD

Result Update: Q2 FY 12

0
C.M.P:
Target Price:
Date:

Rs. 2056.00
Rs. 2323.00
Oct. 19th 2011

BUY
SYNOPSIS

Stock Data:
Sector:
Face Value Rs.
52 wk. High/Low (Rs.)
Volume (2 wk. Avg.)
BSE Code
Market Cap (Rs in mn)

Automobiles
2.00
2231.70/1906.45
48000.00
500182
410583.20

Share Holding Pattern

Hero MotoCorp Ltd. (formerly Hero

Honda Motors Ltd.) is the world's
largest manufacturer of two- wheelers,
based in India.
Hero MotoCorp Ltd, the new name of
Hero Honda Motors Ltd after the Hero
group & Honda Motor Company called
off their 26-year-long association.
Hero MotoCorp Ltd. plans to set up
two new plants- one in the South and
the other in the West and a parts
distribution in Rajasthan.
During the quarter ended, the robust
growth of Net Sales is increased by
28.06% Rs. 58293.20 million.

1 Year Comparative Graph

Net Sales and PAT of the company are

expected to grow at a CAGR of 21%
and 8% over 2010 to 2013E
respectively.

Hero Honda

BSE SENSEX

Hero MotoCorp two-wheelers are

manufactured across three globally
benchmarked manufacturing units at
Gurgaon, Dharuhera and Haridwar.

Years

Net sales

EBITDA

Net Profit

EPS

P/E

FY 11

194011.50

28052.90

19279.00

96.54

21.30

FY 12E

238634.15

38162.83

23521.92

117.79

17.46

FY 13E

281588.29

44785.45

28085.88

140.64

14.62

Peer Group Comparison

Name of the company

CMP(Rs.)

Market Cap.
(Rs.mn.)

EPS(Rs.)

P/E(x)

P/Bv(x)

Dividend (%)

Hero Honda

2056.00

410583.20

96.54

21.30

13.89

5250.00

Bajaj Auto

1640.05

47550.24

119.59

13.74

9.68

400.00

TVS Motor

64.35

3057.19

4.44

14.49

3.06

120.00

Kinetic Motor

17.90

49.31

0.16

111.87

0.00

0.00

Investment Highlights

Q2 FY12 Results Update

During the quarter, the company disclosed a standalone profit of Rs. 6036.20
million as against of Rs. 5056.00 million for the quarter ended September 30,
2011. Net sales are increased by 28.06% to Rs. 58293.20 million from Rs.45519.50
million in the same quarter previous year. Total income grew by 27.62% to
Rs.59090.70 million from Rs.46303.00 million in the same quarter last year.
Company EPS is stood at Rs. 30.23 for the quarter ended June 2011.

Quarterly Results - standalone (Rs in mn)

As At

Sep-11

Sep-10

%change

Net sales

58293.20

45519.50

28.06%

Net profit

6036.20

5056.00

19.39%

Basic EPS

30.23

25.32

19.39%

Break-up of Expenses

Hero Honda changes name to Hero MotoCorp

The countrys largest two-wheeler maker Hero Honda Motors has changed its name
to Hero MotoCorp following the exit of its erstwhile Japanese promoter, Honda from
the company. The company received the necessary statutory approval from the
Registrar of Companies (RoC) for the changeover to the new name.

Plans to set up two new manufacturing units

Hero MotoCorp Ltd, the new avatar of Hero Honda Motors Ltd after the Hero group
and Honda Motor Company called off their 26-year-long association, plans to set
up new plants- one in the South and the other in the West- and a parts
distribution in Rajasthan. The plant would have an initial capacity of 750,000
units a year.

Company Profile
Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest
manufacturer of two - wheelers, based in India.
In 2001, the company achieved the coveted position of being the largest two-wheeler
manufacturing company in India and also, the 'World No.1' two-wheeler company in
terms of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to
maintain this position till date.
In the 1980's the Company pioneered the introduction of fuel-efficient, environment
friendly four-stroke motorcycles in the country. It became the first company to
launch the Fuel Injection (FI) technology in Indian motorcycles, with the launch of
the Glamour FI in June 2006.
Its plants use world class equipment and processes and have become a benchmark
in leanness and productivity.
Manufacturing
Hero MotoCorp two wheelers are manufactured across three globally benchmarked
manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which
are located in the state of Haryana in northern India. The third and the latest
manufacturing plant are based at Haridwar, in the hill state of Uttrakhand.
Product range
Hero MotoCorp offers wide range of two wheeler products that include motorcycles
and scooters, and has set the industry standards across all the market segments.

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Passion PRO

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Glamour

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Achiever

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Hunk

Karizma

Karizma ZMR

Financial Results
12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn)

FY10

FY11

FY12E

FY13E

Description

12m

12m

12m

12m

Net Sales

158605.10

194011.50

238634.15

281588.29

Other Income

2356.30

2681.40

3083.61

3391.97

Total Income

160961.40

196692.90

241717.76

284980.26

Expenditure

-130935.60

-168640.00

-203554.93

-240194.81

Operating Profit

30025.80

28052.90

38162.83

44785.45

Interest

206.20

18.50

48.50

56.26

Gross profit

30232.00

28071.40

38211.33

44841.71

Depreciation

-1914.70

-4023.80

-9455.93

-10590.64

Profit Before Tax

28317.30

24047.60

28755.40

34251.07

Tax

-5999.00

-4768.60

-5233.48

-6165.19

Net Profit

22318.30

19279.00

23521.92

28085.88

Equity capital

399.40

399.40

399.40

399.40

Reserves

34250.80

29161.20

52683.12

80768.99

Face Value

2.00

2.00

2.00

2.00

EPS

111.76

96.54

117.79

140.64

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn)

31-Mar-11

30-Jun-11

30-Sep-11

31-Dec-11E

Description

3m

3m

3m

3m

Net sales

53909.30

56833.30

58293.20

64705.45

Other income

743.40

884.10

797.50

861.30

Total Income

54652.70

57717.40

59090.70

65566.75

Expenditure

-45610.00

-48655.70

-49106.10

-55646.69

Operating profit

9042.70

9061.70

9984.60

9920.06

Interest

-81.00

31.90

44.90

49.39

Gross profit

8961.70

9093.60

10029.50

9969.45

Depreciation

-2373.90

-2397.90

-2784.90

-2924.15

Profit Before Tax

6587.80

6695.70

7244.60

7045.31

Tax

-1571.70

-1116.80

-1208.40

-1268.16

Net Profit

5016.10

5578.90

6036.20

5777.15

Equity capital

399.40

399.40

399.40

399.40

Face Value

2.00

2.00

2.00

2.00

EPS

25.12

27.94

30.23

28.93

Key Ratio

Particulars

FY10

FY11

FY12E

FY13E

No of Shares (in mn)

199.70

199.70

199.70

199.70

EBIDTA %

18.93%

14.46%

15.99%

15.90%

PBT %

17.85%

12.39%

12.05%

12.16%

PAT %

14.07%

9.94%

9.86%

9.97%

18.40

21.30

17.46

14.62

ROE - %

64.41%

65.22%

44.31%

34.60%

ROCE - %

90.46%

72.13%

69.27%

56.73%

0.02

0.50

0.29

0.20

13.67

14.64

10.76

9.17

Book Value (Rs.)

173.51

148.03

265.81

406.45

Price/Book Value

11.85

13.89

7.73

5.06

P/E ratio (x)

Debt Equity Ratio

EV/EBIDTA (x)

Charts:

Net sales & PAT

P/E Ratio (x)

Debt Equity Ratio

EV/EBITDA(X)

P/BV (X)

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Outlook and Conclusion

At the current market price of Rs.2056.00, the stock is trading at 17.46 x
FY12E and 14.62 x FY13E respectively.
Earning per share (EPS) of the company for the earnings for FY12E and FY13E
is seen at Rs.117.79 and Rs.140.64 respectively.
Net Sales and PAT of the company are expected to grow at a CAGR of 21% and
8% over 2010 to 2013E respectively.
On the basis of EV/EBITDA, the stock trades at 10.76 x for FY12E and 9.17 x
for FY13E.
Price to Book Value of the stock is expected to be at 7.73 x and 5.06 x
respectively for FY12E and FY13E.
We expect that the company will keep its growth story in the coming quarters
also. We recommend BUY in this particular scrip with a target price of
Rs.2323.00 for Medium to Long term investment.

Industry Overview
The Indian automobile industry, the seventh largest in the world, has demonstrated a
phenomenal growth. The industry has grown significantly over the last ten years,
during which industry volumes have increased by 3.2 times, from a level of 4.7 million
numbers to 14.9 million numbers, according to Vishnu Mathur, Director General,
Society of Indian Automobile Manufacturers (SIAM).
The industry, by virtue of its deep connects with several key segments of the economy,
occupies a prominent place in the countrys growth canvas. It exhibits a strong
multiplier effect and has the ability to be the key driver of economic growth. A robust
transportation system plays a key role in a country's rapid economic and industrial
development, and the well-developed Indian automotive industry justifies this catalytic
role by producing a wide variety of vehicles, which include passenger cars, light,
medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters,
motorcycles, mopeds, three wheelers, tractors etc.

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Auto Industry in India Growth Drivers

The automobile sector in India has been experiencing significant growth in the last few
years on the back of factors that include:

Favorable demographic distribution with rising working population and middle

class Urbanisation

Rising affluence of the average consumer as per capita income rises - According
to McKinsey, the middle class in India will grow from 50 million to 550 million
by 2025. With a tremendous growth in wealth as the economy grows, there will
be significant increases in spending on discretionary items and consumer
durables

Increasing disposable incomes in rural agri-sector

Overall GDP growth, with a rise in industrial and agricultural output

Introduction of ultra-low-cost cars

Increasing maturity of Indian original equipment manufacturers (OEMs)

Availability of a variety of vehicle models meeting diverse needs and preferences

robust production

Greater affordability of vehicles

Easy finance schemes

Favourable government policies

Indian Automobile market Key statistics

India's automobile industry, currently estimated to have a turnover of US$ 73 billion,
accounts for 6 per cent of its GDP, and is expected to hit a turnover of US$ 145 billion
by 2016.
The automobile industry currently contributes 22 per cent to the manufacturing GDP
and 21 per cent of the total excise collection in the country, according to Mr Praful
Patel, Minister, Heavy Industries and Public Enterprises. In 2010-11, the total
turnover and export of the automotive Industry in India reached a new high of US$ 73
billion and US$ 11 billion respectively. The cumulative announced investments
reached US$ 30 billion during this period. He also said that the forecasted size of the

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Indian Passenger Vehicle Segment is nearly 9 million units and that of 2 wheelers,
close to 30 million units by 2020.
India achieved the position of the top growing passenger car market in the world
during the January-June period in 2011, overtaking the US, which grew at 14.40 per
cent, according to SIAM. In passenger vehicles, India was the fastest growing market
at 18.20 per cent during the six month period.
India's automobile industry is expected to grow by 11 to 13 per cent in the fiscal year
ending March 2012, according to Pawan Goenka, President, SIAM. The industry body
said that Indian automakers sold 143,370 cars in June 2011.
The four-wheel passenger vehicle market has grown impressively at the hands of the
new middle class, and there is huge opportunity, as market penetration remains low.
Domestic market share for 2010-11
Indias automobile industry is growing fast, but two wheelers remain a dominant
category. More than 78 percent of motor vehicles on the road are two-wheelers, their
popularity driven by low price, high fuel mileage, and an ability to drive efficiently
through dense traffic. The share of different types of vehicles during 2010-11 was
passenger vehicles (16.25), commercial vehicles (4.36), three wheelers (3.39), and two
wheelers (76.00).
Recent Investments/ Trends
The auto industry has made huge investments in the country. As per 2008-09, the
total investment of auto industry in India was Rs 60,952 crore (US$ 13.89 billion).
Another Rs 78,000 crore (US$ 17.78 billion) of new investments have been announced
by the auto industry out of which some have already been made and the rest will come
up over the next 2-3 years. The industry, therefore, is keeping pace with the growing
demand for vehicles in all segments.
The Karnataka government has cleared investment proposals amounting to more than
Rs 8,662 crore (US$ 19.74 billion), which include the plans of Honda Motorcycle India
plans for a manufacturing unit in the State. Mr Murugesh Nirani, Karnataka

13

Industries Minister, has said that Honda Motorcycles and Scooter India would be
investing Rs 1,350 crore (US$ 307.7 million) in Narsapur Industrial area of Kolar
district of the State.
Demand for two-wheelers from six of the eight domestic mobike manufacturers rose
16 per cent in June to more than 880,000 units, compared to 761,000 units in June
2010.
Australia is looking at possibilities of building better relations between its world-class
firms and rapidly growing Indian automotive industries with an objective to create new
export opportunities.
Pune-based Force Motors has signed an agreement with Daimler AG, under which
Daimler will supply technology for the development of a multi-purpose vehicle (MPV)
by Force Motors
Swedish automobile manufacturer Volvo Cars Corp is looking at introducing corporate
editions of its luxury sedans S60 and S80 to shore up volumes in the Indian
automobile market.
French car maker PSA Peugeot Citroen has selected a site near Sriperumbudur, to the
west of Chennai, in Tamil Nadu for setting up its car plant. The company is planning
to invest Rs 4,000 crore (US$ 911.72 million) in an integrated automobile project.
Toyota has launched its first made-for-India small car, the EtiosLiva, in the intensely
competitive hatchback segment. The car, priced between Rs 399,000 and 599,000
(US$9,094 and 13,653), will compete with Maruti Suzuki Swift, Hyundai i20,
Volkswagen Polo and Ford Figo.
Auto industry in India Government Initiatives
With the gradual liberalisation of the automobile sector since 1991, the number of
manufacturing units in India has grown progressively.
Currently, 100 per cent Foreign Direct Investment (FDI) is permissible under
automatic route in this sector including passenger car segment. The import of

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technology/technological upgradation on the royalty payment of 5 per cent without

any duration limit and lump sum payment of US$ 2 million is also allowed under
automatic route in this sector.
The automobile industry is relicensed, and import of components is freely allowed.
With an objective of accelerating and sustaining growth in the automotive sector and
to steer, co-ordinate and synergize the efforts of all stakeholders, the Automotive
Mission Plan (AMP) 2006-2016 was prepared. The plan aims at making India global
automotive hub. The AMP 2006-2016 aims at doubling the contribution of automotive
sector in GDP by taking the turnover to US$ 145 billion and providing additional
employment to 25 million people by 2016.
In the long term, the government has expressed plans to follow a two pronged strategy
for spurring automotive Research &Development (R&D). The first is aimed at
addressing the existing infrastructure gap in the field domain of automotive testing
and homologation through the Departments flagship National Automotive Testing and
R&D Infrastructure Project(NATRiP), which is being implemented at a cost of Rs 2,288
crores (US$ 521.5 million), and is expected to be completed by the end of 2012. The
second part of the strategy is aimed at leveraging the investments being made in
NATRiP facilities for collaborative R&D with the industry, especially for the small and
medium enterprises (SMEs) in the auto component space.
Further, with the recent announcement of the launch of the National Mission for
Electric Mobility and the setting up of the National Council and Board for Electric
Mobility, Mr. Patel emphasised on the commitment of the government for early
adoption of electric vehicles, including hybrid vehicles, and the manufacturing of these
vehicles and their components.
The government is considering setting up two automotive manufacturing hubs spread
over 10,000 acres each in central and eastern India. The new hubs, aimed at
consolidating India's position as an important destination for low-cost automotive
production, will be in addition to the three existing zones Haryana, Maharashtra
and Tamil Nadu.

15

Auto Industry in India Road Ahead

The automotive industry is at the core of Indias manufacturing economy - India is all
set to become one of the worlds most attractive automotive markets for both
manufacturers and consumers. The resulting benefits to society, such as economic
growth, increased jobs, and stability for families employed by the automotive industry,
are significant.
The long-term potential for growth of the auto industry is very favorable, on account of
low vehicle penetration in the country. As income levels rise and easy finance is
available, the industry will continue to see a healthy growth rate. SIAM estimates that
the growth of the auto industry in FY12 will be in the region of 12-15 per cent.

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Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

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