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For Private Circulation Only Company Update
July 05, 2006
Hero Honda Motors (HHML) Endurance - Key to success CMP: INR 792
BOOK PROFIT
Sensex:
10,609
S&P Nifty:
3,128
52 Wk High INR:
950
52 Wk Low INR:
569
Face Value: INR:
2.0
Equity INR Mln.:
399
Mkt Cap: INR Mln.:
15,806
Financial Year End:
March
Codes BSE Code:
500182
Bloomberg Code:
HH@IN
Reuters Code:
HROH.BO
NSE Code:
HEROHONDA
BSE Group:
A
Group:
Munjal (Hero) Automobiles – Two-Wheelers
Industry:
Listings BSE, Kolkata, NSE
Shareholding Pattern (%)
Institutio ns 27.1%
Foreign 8.1%
Corporate 0.5%
Key Highlights: ü Hero Honda continues to lead the motorcycle market with a strong presence in economy and executive segment. Company leads by more than a million bikes ahead of the nearest competitor in India. ü Hero Honda diversifies from traditional motorcycle manufacturer to Scooter manufacturer. Company launched the first scooter in February 2006 called Pleasure 110cc priced at Rs. 36,240. ü Company will face margin pressure due to change in Product Mix leading to lower realization and increasing raw material prices. ü Company’s Financial Performance is in line with the industry during 2005-06. Company reported a sales growth of 17% on a YoY basis and 19% earnings growth for 2005-06. ü Company plans to launch eight new models during the current financial year including the variant. The line up will include a variant of Glamour, which will be fitted with fuel injection system. ü The company plans to set up a new plant in Jaipur with an investment of Rs. 300-320 Crs having initial capacity of 5 lakh units and can go up to 10 lakh units. The company has already ramped up capacity at its existing facility at Gurgaon and Dharuhera by around 4,50,000 thereby raising capacity to 3.2-mln units to meet its demand during the year. ü Hero Honda faces tough competition from key players in the industry. ü Growing Presence of HMSI’s (100% Subsidiary of Honda technological partner) is bound to impact Hero Honda Sales and profitability. Attractive Valuations: Hero Honda continues to lead the motorcycle segment and has forayed into the scooter segment to diversify its product profile. We see a fair value for the company at Rs. 802 per share on DCF basis (WACC–13%, Terminal growth – 2.5%) and PE multiple of 12.59X 2008E. We recommend a book profit on every upside. Comparative share price movement: 200
Promoters 55.0%
Sensex
175
1,000
150
750
125
500
100
250
Hero Honda Motors Limited
Jul-06
Jun-06
May-06
Apr-06
Mar-06
Feb-06
0 Jan-06
Oct-05
Sep-05
Aug-05
Jul-05
75
Khandwala Research
Hero Honda
Dec-05
Source: Cline, as on March 31, 2006
Analyst: Alpa Shah Tel No.: +91 22 2264 2300 Email: [email protected]
1,250 Vol (000's)
Nov-05
Public 9.4%
Khandwala Securities Limited
Top form:
The Indian two-wheeler industry is expected to remain in top gear. The key drivers are buoyant economy, increasing rural income, higher replacement demand, enhancing penetration, increasing distribution reach, rising oil prices, increasing competition (new models) and a greater headway in the export market (India being the No 1 two wheeler manufacturer in the world). We expect the Two-wheeler industry to grow at roughly 15% during the financial year 2006-07. This would be on account of motorcycle segment that is expected to grow at a rate of 18%. We believe that the motorcycle segment has an immense growth potential ü Stiff competition in the growing motorcycle segment resulting in expanded markets. Many new foreign players have entered into the market like Honda Motorcycle and Scooters India ltd and Suzuki have entered the market with new technology, different pricing options, value added features and services, resulting into a wider choice to the consumer. ü Price gap between the motorcycle and scooters/moped has narrowed down due to high cost involved in emission norms. ü Exports are expected to grow fastest in the motorcycle segment as 93% of the world two-wheeler market that is of motorcycles.
Outlook:
We believe that the players with strong distribution network, high volume and the capability to scale up their operations to meet the emerging domestic demand as well as export commitments along with the right kind of product mix would be the key beneficiaries in the medium term. Growth in the two wheeler industry in relation to GDP: 25.0% Two Wheeler Growth %
GDP
20.0%
15.0%
10.0%
5.0%
0.0% 2001
2002
2003
2004
2005
2006
2007E
Source: SIAM, CMIE & Khandwala Research
Khandwala Research
Hero Honda Motors Limited
2
Khandwala Securities Limited
Two wheeler Industry Segment wise:
FY2005
FY2006 Economy 33%
Premium 11%
Executive 48%
Executive 56%
Market Share of Key Players:
Economy 42%
Premium 10%
40.0% 2005
2006
32.0%
24.0%
16.0%
8.0%
0.0% Hero Honda
Khandwala Research
Bajaj Auto
TVS
Hero Honda Motors Limited
HMSI
Balance
Yamaha
3
Khandwala Securities Limited
CO M P A N Y BA C K G R O U N D Company Profile:
Hero Honda Motors (HHML) a JV company between the Hero group, the world’s largest bicycle manufacturers and the Honda Motor Company of Japan. HHML is the world's largest two wheeler manufacturing Company. Honda Motors Japan the Technical and Financial Collaborator holds 26% stake in the Company. Hero Honda product range today commands a market share of 48% making it a veritable giant in the industry. Add to that technological excellence, an expansive dealer network, and reliable after sales service. Customer satisfaction high, quality products, the strength of Honda technology and the Hero group's dynamism have helped HHML scale new frontiers and exceed limits. Hero Honda diversifies from traditional motorcycle manufacturer to Scooter manufacturer. Company launched the first scooter in February 2006 called Pleasure 110cc priced at Rs. 36,240.
Product Profile:
Two Wheeler Motorcycle
- Executive Super Splendor
- Premium Karizma
Splendor+
Achiever
Glamour Glamour Fi
- Economy CD Dawn
Passion
CD Deluxe Scooter Pleasure Source: Khandwala Research; Company
Product Launches “2005-06”
Model
Segment
Launch
Engine
Price
Capacity Super Splendor – V Pleasure
Motorcycle Scooter
Mar 06 Feb 06
125cc 110cc
Remarks / Features
Rs.43, 500 Rs.36, 240
Better Style
Source: Khandwala Research; Company
Capacity Details:
Year
Installed Capacity
2004 – 2005
2,550,000
2005 – 2006P
3,200,000
2006 – 2007E
3,900,000
*New plant at Jaipur will have an initial capacity of 500,000 vehicles and is expected to be completed within one year. The capacity can be further increased to 1,000,000 vehicles. Source: Khandwala Research; Company
Khandwala Research
Hero Honda Motors Limited
4
Khandwala Securities Limited
FU T U R E P L A N S New Product Launches:
Models Passion variant Glamour variant
Segment Motorcycle Motorcycle
Expected
Remarks /
Launch
Features
2006-07 2006-07
Fuel Injection System
Note: * - Overall eight new model launches are expected during 2006 – 07 both in scooter and motorcycle segment(including variants) Source: Khandwala Research
Hero Honda launched the 125-cc Glamour on June 27, 06 with the new technology and priced it at Rs 49,990 or Rs 5,500 more than the same model with carburettor. The increase in price is steep and is warranted by other new features such as the fuel mileage indicator. Bajaj Auto is planning to introduce it in its high-end version Pulsar. With a similar technology. The motorcycle in which Bajaj Auto will introduce this technology is likely to be the 230cc, which is high end product and hence the additional cost of technology will be lower as a percentage to total price in comparison to Hero Honda’s Glamour.
Capex Plans:
The company is making an investment of around Rs13 Cr. to increase the capacity at its existing units at Gurgaon and Dharuhera in Haryana by 4.5 lakh vehicles at each plant. Expansions plan of 4,50,000 units at Gurgaon at an investment of Rs 47 crore have already been completed. And the expansion of additional 4,50,000 units is underway at Dharuhera plant at an investment of Rs 96 crore, which would be operational by August 2006. Company plans, to be set up a new plant in Jaipur with an initial capacity of 0.5 million units a year, that will require an investment of Rs 300-320 crore and is expected to be commissioned in a year. And is expandable to a capacity of 1million. The company eyes an Investment of Rs. 550 crores for the setting up a manufacturing unit for two- and three-wheelers. According to the proposal, the plant will produce 1.5 million two- and three-wheelers, for which the company has asked the state government for 300 acres of land in and around the Nalagarh area in Solan district.
Khandwala Research
Hero Honda Motors Limited
5
Khandwala Securities Limited
KEY HIGHLIGHTS Leader in the Motorcycle segment:
Hero Honda continues to lead the motorcycle market with a strong presence in economy and executive segment. Company leads by more than a million bikes ahead of the nearest competitor in India. During the year, Company has launched a variant of Super Splendor in the month of March 2006.
Strong presence in the Executive segment:
The company leads the executive segment with 70.8% market share that contributes to more than 50% of the total motorcycle market. 80.0% 70.8% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0%
15.4% 9.0%
10.0%
4.0%
0.8%
0.0% Hero Honda Motors
Bajaj Auto
TVS Suzuki
Yamaha Motors
LML
Source: Khandwala Research, Crisinfac
Entry in scooter market since February 2006:
Company
Feb-06
“ Growing Market Share”
Honda Motorcycle & Scooter India (Pvt) Ltd
Bajaj Auto Ltd* Hero Honda Motors Ltd
Mar-06
Apr-06
May-06
4.5% 3.7%
2.8% 8.8%
3.7% 8.9%
2.5% 11.0%
60.2%
61.9%
56.8%
55.6%
Kinetic Engineering Ltd
2.1%
2.2%
1.1%
1.0%
Kinetic Motor Company Ltd
5.2%
4.0%
4.5%
3.8%
LML Limited**
4.4%
0.0%
0.0%
0.0%
Majestic Auto Ltd
0.0%
0.0%
0.0%
0.0%
TVS Motor Company Ltd Total
19.9%
20.4%
25.0%
26.1%
100.0%
100.0%
100.0%
100.0%
Hero Honda diversifies from traditional high margin motorcycle manufacturer to Scooter manufacturer to diversify its product profile across the segments. However this may bring down the company’s overall margins. Strong Vendor base:
Hero Honda has a national network of 256 vendors including 69 ancillaries forming the backbone of the company’s plant operation. The company has an access to 70% of its materials (in value terms) by maintaining zero inventory levels.
Tough Competition from the technological Partner:
Hero Honda will face tough competition from Honda Motorcycle and Scooter India Ltd 100% Subsidiary of Honda (Technological Partner). As per our analysis we believe that Hero Honda and HMSI are sharing Market Share together from time to time. We believe that growing presence of HMSI in the two wheeler industry is bound to hit the profitability and growth of Hero Honda
Khandwala Research
Hero Honda Motors Limited
6
Khandwala Securities Limited
Change in Product Mix: “May result into low margins”
Segments
2005
2006
Motorcycle
97.6%
96.3%
- Economy
21.8%
27.0%
- Executive
71.2%
66.6%
- Premium
4.5%
2.7%
Scooter
0.0%
0.5%
Export Total
2.4%
3.2%
100.0%
100.0%
Source: Khandwala Research; Company
Movement in Margins:
70.0% OPM
Net Margins
RoCE
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2002
2003
2004
2005
2006
Source: Khandwala Research, Bombay Stock Exchange, Company
Khandwala Research
Hero Honda Motors Limited
7
Khandwala Securities Limited
FINANCIAL S U M M A R Y Profit & Loss Statement: Particulars
2005
2006E
Net Sales
74,216.5
Raw Material Cost
51,996.2
Employee Cost
2,679.7
3,206.1
3,670.3
4,413.6
5,163.9
Other Expenditure
7,854.2
9,730.7
11,520.8
13,598.6
15,910.3
11,686.4
13,680.0
15,496.9
17,713.9
20,725.3
1,369.0
1,527.3
1,929.0
2,387.0
2,995.0
893.8
1,146.2
1,410.0
1,595.0
1,650.0
Operating Profit Other Income Depreciation Interest PBT Current Tax
2007E
2008E
2009E
87,139.8
101,953.6
119,285.7
139,564.2
60,523.0
71,265.5
83,559.6
97,764.7
(10.9)
(61.3)
(61.3)
(61.3)
(61.3)
12,150.7
13,999.8
15,954.6
18,444.6
22,009.0
3,952.2
4,158.5
4,786.4
5,533.4
6,602.7
FBT
-
71.7
146.8
176.5
206.6
115.6
178.8
178.8
178.8
178.8
PAT
8,082.9
9,590.8
10,842.6
12,555.9
15,020.9
Dividend
3,994.0
3,994.0
3,994.0
4,700.0
5,500.0
565.2
565.2
565.2
659.2
771.4
3,523.7
5,031.6
6,283.4
7,196.7
8,749.6
Cash EPS (Rs.)
45.5
54.7
62.3
71.8
84.4
EPS (Rs.)
40.5
48.0
54.3
62.9
75.2
Deferred Tax
Tax on Dividend Profit to be carried forward
Balance Sheet: Particulars
2005
2006E
2007E
2008E
2009E
Sources of funds
16,951.4
22,285.6
28,917.1
36,514.1
45,723.9
Shareholders Funds
14,933.8
19,965.4
26,248.8
33,445.6
42,195.1
Share Capital Reserve Surplus Loan Funds Application of Funds
399.4
399.4
399.4
399.4
19,566.0
25,849.4
33,046.2
41,795.7
2,017.6
2,320.2
2,668.3
3,068.5
3,528.8
16,951.4
22,285.2
28,917.5
36,514.4
45,723.7
Fixed Assets
7,153.3
8,657.1
10,747.1
11,152.1
11,502.1
Investments
20,266.5
23,677.0
27,712.0
34,903.0
44,231.0
Net Working Capital
(9,459.4)
(9,039.9)
(8,532.6)
(8,531.7)
(9,000.4)
Deferred Tax Liabilities (Net)
(1,009.0)
(1,009.0)
(1,009.0)
(1,009.0)
(1,009.0)
-
-
-
-
-
Miscellaneous Expenditures
Khandwala Research
399.4 14,534.4
Hero Honda Motors Limited
8
Khandwala Securities Limited
Key Financial Ratios: Particulars
2005
2006E
2007E
2008E
2009E
Activity Analysis Ratio GFA Turnover Ratio
11.4
11.0
10.5
10.9
12.3
Asset Turnover Ratio
4.9
4.4
4.0
3.6
3.4
Working Cap. Turnover Ratio
-8.7
-9.4
-11.6
-14.0
-15.9
Inventory Turnover Ratio
31.9
32.3
32.3
32.0
32.3
Receivable Turnover Ratio
111.3
97.1
102.0
99.4
101.5
Debt/Equity Ratio
0.1
0.1
0.1
0.1
0.1
Current Ratio
0.4
0.4
0.4
0.5
0.5
Operating Margins
15.7%
15.7%
15.2%
14.9%
14.9%
Net Profit Margins
10.9%
11.0%
10.6%
10.5%
10.8%
Return on Equity
61.4%
55.0%
46.9%
42.1%
39.7%
Return on Assets
53.7%
48.9%
42.4%
38.4%
36.5%
Return On Capital Employed
62.7%
55.9%
48.1%
43.1%
40.6%
13.5
18.5
14.6
12.6
10.5
7.3
8.9
6.0
4.7
3.7
3.6%
2.3%
2.5%
3.0%
3.5%
0.68
0.49
0.65
0.75
0.88
Cash EPS
45.5
54.7
62.3
71.8
84.4
EPS
40.5
48.0
54.3
62.9
75.2
Capital Structure Ratio
Profitability Ratio
Capital Market Analysis Price to Earnings Ratio Price to Book Value Dividend Yield Sales to Market Cap. Per Share Data
Dividend Per Share Price (As on 03/07/06) Face Value
Khandwala Research
20.0
20.0
20.0
23.5
27.5
548.2
888.3
791.5
791.5
791.5
2.0
2.0
2.0
2.0
2.0
Book Value (Rs. Mln.)
74.8
100.0
131.4
167.5
211.3
Market Cap (Rs. Mln.)
109,466
177,394
158,063
158,063
158,063
Hero Honda Motors Limited
9
Khandwala Securities Limited
VALUATIONS Valuations on the basis of Discounted Cash Flow (DCF): Particulars
2006E
2007E
2008E
2009E
2010E
2011E
(Rs. Mln)
Terminal Year
Net Profit
14,000
15,955
18,445
22,009
26,152
30,796
Less: Tax Paid
4,409
5,112
5,889
6,988
8,266
9,700
Add: Depreciation
1,146
1,410
1,595
1,650
1,705
1,750
(61)
(61)
(61)
(61)
(61)
(61)
Less: Other Income Op. Profit before changes in Working Cap.
1,527
1,929
2,387
2,995
3,670
4,236
9,148
10,262
11,703
13,615
15,860
18,548
Change in Working Cap. Net Cash from operating Activities
(419)
(507)
(1)
469
205
250
8,729
9,755
11,702
14,083
16,065
18,798
(2,650)
(3,500)
(2,000)
(2,000)
(2,000)
(2,000)
6,079
6,255
9,702
12,083
14,065
16,798
19,268
13
13
13
13
13
13
5,535
7,598
8,374
8,626
9,118
99,601
Add: Interest
Capex Free Cash Flow WACC DCF Terminal Value of the firm
19,268
138,852
Less: Debt
2,320
Add: Liquid Investments Terminal Value for the Equity shareholders
23,677 160,209
Value Per Share
802
Note: * Terminal Growth of 2.5% and WACC of 13%
Sensitive Analysis of DCF: Terminal Value WACC
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
10 11
877 820
914 849
955 883
1,002 920
1,055 961
1,117 1,009
1,189 1,063
12
773
797
825
855
888
926
968
13
734
754
777
802
830
860
894
14
700
718
738
759
782
807
835
15
672
688
704
722
742
763
787
Valuation on basis of PE Multiple: Buoyant economy, increasing rural income, higher replacement demand, enhancing penetration, increasing distribution reach, rising oil prices, increasing competition (new models) and a greater headway in the export market (India being the No 1 two wheeler manufacturer in the world) will lead to increasing demand for the two wheelers. We recommend a fair value of 802 for the stock on 12.59X 2008E on the basis that the company will grow inline with the industry on a future date.
Khandwala Research
Hero Honda Motors Limited
10
Khandwala Securities Limited
INDIA EQUITY RESEARCH
TEL. NO. +91 22 2264 2300
FAX NO. +91 22 2264 2797
Research Analyst
Sectors
E-mail
Dr. K. D. Mehru
Vice President
[email protected]
Ms. Alpa Shah
Automobiles
[email protected]
Mr. Ashish Ahuja
Cement
[email protected]
Mr. Dipesh Mehta
Information Technology
[email protected]
Mr. Hatim K Broachwala
Research Analyst
[email protected]
Mr. Jignesh H Makwana
Research Analyst
[email protected]
Mr. Sandeep Bhatkhande
Research Associate
[email protected]
Ms. Lydia Rodrigues
Research Executive
[email protected]
EQUITY DEALING
TEL NO. +91 22 2263 3811
FAX NO. +91 22 2263 3817
Ms. Rashmi Batra Mahajan
Asst. Vice President – Private Client Group
[email protected]
Mr. Prakash Rajdev
Chief Dealer
[email protected]
Mr. Pranav Khandwala
Manager
[email protected]
Mr. Pratik Khandwala
Manager
[email protected]
Mr. Hitesh Shah
Dealer
[email protected]
BRANCH OFFICE (PUNE)
TEL NO. +91 20 2567 1404
FAX NO. +91 20 2567 1405
Mr. Arvind G Laddha
Assistant Vice President
[email protected]
Mr. Ajay G Laddha
Assistant Vice President
[email protected]
Corporate Office:
Branch Office:
Vikas Building, Green Street, Fort, MUMBAI 400 023. Tel. No. (91) (22) 2264 2300 Fax No. (91) (22) 2261 5172 E-mail: [email protected]
C8/9, Dr. Herekar Road, Off. Bhandarkar Road, PUNE 411 004 Tel. No. (91) (20) 25671404 / 06 Fax. No. (91) (20) 25671405 Email: [email protected]
Web site: www.kslindia.com; www.kslinvestor.com The Research team of Khandwala Securities Limited on behalf of itself has prepared the information given and opinions expressed in this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, KSL or its group companies make no guarantee, representation or warranty, whether express or implied and accepts no responsibility or liability as to its accuracy or completeness of the data being provided. All investment information and opinion are subject to change without notice. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. KSL shall not be liable for any direct or indirect losses arising from the use thereof and the investors are expected to use the information contained herein at their own risk. KSL and its affiliates and / or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. KSL and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. The value of or income from any investment may be adversely affected by changes in the rates of currency exchange. The recipient means this document strictly for use only. None of the material provided herein may be reproduced, published, resold or distributed in any manner whatsoever without the prior explicit written permission of KSL.
Khandwala Research
Hero Honda Motors Limited
11
July 05, 2006
Hero Honda Motors (HHML) Endurance - Key to success CMP: INR 792
BOOK PROFIT
Sensex:
10,609
S&P Nifty:
3,128
52 Wk High INR:
950
52 Wk Low INR:
569
Face Value: INR:
2.0
Equity INR Mln.:
399
Mkt Cap: INR Mln.:
15,806
Financial Year End:
March
Codes BSE Code:
500182
Bloomberg Code:
HH@IN
Reuters Code:
HROH.BO
NSE Code:
HEROHONDA
BSE Group:
A
Group:
Munjal (Hero) Automobiles – Two-Wheelers
Industry:
Listings BSE, Kolkata, NSE
Shareholding Pattern (%)
Institutio ns 27.1%
Foreign 8.1%
Corporate 0.5%
Key Highlights: ü Hero Honda continues to lead the motorcycle market with a strong presence in economy and executive segment. Company leads by more than a million bikes ahead of the nearest competitor in India. ü Hero Honda diversifies from traditional motorcycle manufacturer to Scooter manufacturer. Company launched the first scooter in February 2006 called Pleasure 110cc priced at Rs. 36,240. ü Company will face margin pressure due to change in Product Mix leading to lower realization and increasing raw material prices. ü Company’s Financial Performance is in line with the industry during 2005-06. Company reported a sales growth of 17% on a YoY basis and 19% earnings growth for 2005-06. ü Company plans to launch eight new models during the current financial year including the variant. The line up will include a variant of Glamour, which will be fitted with fuel injection system. ü The company plans to set up a new plant in Jaipur with an investment of Rs. 300-320 Crs having initial capacity of 5 lakh units and can go up to 10 lakh units. The company has already ramped up capacity at its existing facility at Gurgaon and Dharuhera by around 4,50,000 thereby raising capacity to 3.2-mln units to meet its demand during the year. ü Hero Honda faces tough competition from key players in the industry. ü Growing Presence of HMSI’s (100% Subsidiary of Honda technological partner) is bound to impact Hero Honda Sales and profitability. Attractive Valuations: Hero Honda continues to lead the motorcycle segment and has forayed into the scooter segment to diversify its product profile. We see a fair value for the company at Rs. 802 per share on DCF basis (WACC–13%, Terminal growth – 2.5%) and PE multiple of 12.59X 2008E. We recommend a book profit on every upside. Comparative share price movement: 200
Promoters 55.0%
Sensex
175
1,000
150
750
125
500
100
250
Hero Honda Motors Limited
Jul-06
Jun-06
May-06
Apr-06
Mar-06
Feb-06
0 Jan-06
Oct-05
Sep-05
Aug-05
Jul-05
75
Khandwala Research
Hero Honda
Dec-05
Source: Cline, as on March 31, 2006
Analyst: Alpa Shah Tel No.: +91 22 2264 2300 Email: [email protected]
1,250 Vol (000's)
Nov-05
Public 9.4%
Khandwala Securities Limited
Top form:
The Indian two-wheeler industry is expected to remain in top gear. The key drivers are buoyant economy, increasing rural income, higher replacement demand, enhancing penetration, increasing distribution reach, rising oil prices, increasing competition (new models) and a greater headway in the export market (India being the No 1 two wheeler manufacturer in the world). We expect the Two-wheeler industry to grow at roughly 15% during the financial year 2006-07. This would be on account of motorcycle segment that is expected to grow at a rate of 18%. We believe that the motorcycle segment has an immense growth potential ü Stiff competition in the growing motorcycle segment resulting in expanded markets. Many new foreign players have entered into the market like Honda Motorcycle and Scooters India ltd and Suzuki have entered the market with new technology, different pricing options, value added features and services, resulting into a wider choice to the consumer. ü Price gap between the motorcycle and scooters/moped has narrowed down due to high cost involved in emission norms. ü Exports are expected to grow fastest in the motorcycle segment as 93% of the world two-wheeler market that is of motorcycles.
Outlook:
We believe that the players with strong distribution network, high volume and the capability to scale up their operations to meet the emerging domestic demand as well as export commitments along with the right kind of product mix would be the key beneficiaries in the medium term. Growth in the two wheeler industry in relation to GDP: 25.0% Two Wheeler Growth %
GDP
20.0%
15.0%
10.0%
5.0%
0.0% 2001
2002
2003
2004
2005
2006
2007E
Source: SIAM, CMIE & Khandwala Research
Khandwala Research
Hero Honda Motors Limited
2
Khandwala Securities Limited
Two wheeler Industry Segment wise:
FY2005
FY2006 Economy 33%
Premium 11%
Executive 48%
Executive 56%
Market Share of Key Players:
Economy 42%
Premium 10%
40.0% 2005
2006
32.0%
24.0%
16.0%
8.0%
0.0% Hero Honda
Khandwala Research
Bajaj Auto
TVS
Hero Honda Motors Limited
HMSI
Balance
Yamaha
3
Khandwala Securities Limited
CO M P A N Y BA C K G R O U N D Company Profile:
Hero Honda Motors (HHML) a JV company between the Hero group, the world’s largest bicycle manufacturers and the Honda Motor Company of Japan. HHML is the world's largest two wheeler manufacturing Company. Honda Motors Japan the Technical and Financial Collaborator holds 26% stake in the Company. Hero Honda product range today commands a market share of 48% making it a veritable giant in the industry. Add to that technological excellence, an expansive dealer network, and reliable after sales service. Customer satisfaction high, quality products, the strength of Honda technology and the Hero group's dynamism have helped HHML scale new frontiers and exceed limits. Hero Honda diversifies from traditional motorcycle manufacturer to Scooter manufacturer. Company launched the first scooter in February 2006 called Pleasure 110cc priced at Rs. 36,240.
Product Profile:
Two Wheeler Motorcycle
- Executive Super Splendor
- Premium Karizma
Splendor+
Achiever
Glamour Glamour Fi
- Economy CD Dawn
Passion
CD Deluxe Scooter Pleasure Source: Khandwala Research; Company
Product Launches “2005-06”
Model
Segment
Launch
Engine
Price
Capacity Super Splendor – V Pleasure
Motorcycle Scooter
Mar 06 Feb 06
125cc 110cc
Remarks / Features
Rs.43, 500 Rs.36, 240
Better Style
Source: Khandwala Research; Company
Capacity Details:
Year
Installed Capacity
2004 – 2005
2,550,000
2005 – 2006P
3,200,000
2006 – 2007E
3,900,000
*New plant at Jaipur will have an initial capacity of 500,000 vehicles and is expected to be completed within one year. The capacity can be further increased to 1,000,000 vehicles. Source: Khandwala Research; Company
Khandwala Research
Hero Honda Motors Limited
4
Khandwala Securities Limited
FU T U R E P L A N S New Product Launches:
Models Passion variant Glamour variant
Segment Motorcycle Motorcycle
Expected
Remarks /
Launch
Features
2006-07 2006-07
Fuel Injection System
Note: * - Overall eight new model launches are expected during 2006 – 07 both in scooter and motorcycle segment(including variants) Source: Khandwala Research
Hero Honda launched the 125-cc Glamour on June 27, 06 with the new technology and priced it at Rs 49,990 or Rs 5,500 more than the same model with carburettor. The increase in price is steep and is warranted by other new features such as the fuel mileage indicator. Bajaj Auto is planning to introduce it in its high-end version Pulsar. With a similar technology. The motorcycle in which Bajaj Auto will introduce this technology is likely to be the 230cc, which is high end product and hence the additional cost of technology will be lower as a percentage to total price in comparison to Hero Honda’s Glamour.
Capex Plans:
The company is making an investment of around Rs13 Cr. to increase the capacity at its existing units at Gurgaon and Dharuhera in Haryana by 4.5 lakh vehicles at each plant. Expansions plan of 4,50,000 units at Gurgaon at an investment of Rs 47 crore have already been completed. And the expansion of additional 4,50,000 units is underway at Dharuhera plant at an investment of Rs 96 crore, which would be operational by August 2006. Company plans, to be set up a new plant in Jaipur with an initial capacity of 0.5 million units a year, that will require an investment of Rs 300-320 crore and is expected to be commissioned in a year. And is expandable to a capacity of 1million. The company eyes an Investment of Rs. 550 crores for the setting up a manufacturing unit for two- and three-wheelers. According to the proposal, the plant will produce 1.5 million two- and three-wheelers, for which the company has asked the state government for 300 acres of land in and around the Nalagarh area in Solan district.
Khandwala Research
Hero Honda Motors Limited
5
Khandwala Securities Limited
KEY HIGHLIGHTS Leader in the Motorcycle segment:
Hero Honda continues to lead the motorcycle market with a strong presence in economy and executive segment. Company leads by more than a million bikes ahead of the nearest competitor in India. During the year, Company has launched a variant of Super Splendor in the month of March 2006.
Strong presence in the Executive segment:
The company leads the executive segment with 70.8% market share that contributes to more than 50% of the total motorcycle market. 80.0% 70.8% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0%
15.4% 9.0%
10.0%
4.0%
0.8%
0.0% Hero Honda Motors
Bajaj Auto
TVS Suzuki
Yamaha Motors
LML
Source: Khandwala Research, Crisinfac
Entry in scooter market since February 2006:
Company
Feb-06
“ Growing Market Share”
Honda Motorcycle & Scooter India (Pvt) Ltd
Bajaj Auto Ltd* Hero Honda Motors Ltd
Mar-06
Apr-06
May-06
4.5% 3.7%
2.8% 8.8%
3.7% 8.9%
2.5% 11.0%
60.2%
61.9%
56.8%
55.6%
Kinetic Engineering Ltd
2.1%
2.2%
1.1%
1.0%
Kinetic Motor Company Ltd
5.2%
4.0%
4.5%
3.8%
LML Limited**
4.4%
0.0%
0.0%
0.0%
Majestic Auto Ltd
0.0%
0.0%
0.0%
0.0%
TVS Motor Company Ltd Total
19.9%
20.4%
25.0%
26.1%
100.0%
100.0%
100.0%
100.0%
Hero Honda diversifies from traditional high margin motorcycle manufacturer to Scooter manufacturer to diversify its product profile across the segments. However this may bring down the company’s overall margins. Strong Vendor base:
Hero Honda has a national network of 256 vendors including 69 ancillaries forming the backbone of the company’s plant operation. The company has an access to 70% of its materials (in value terms) by maintaining zero inventory levels.
Tough Competition from the technological Partner:
Hero Honda will face tough competition from Honda Motorcycle and Scooter India Ltd 100% Subsidiary of Honda (Technological Partner). As per our analysis we believe that Hero Honda and HMSI are sharing Market Share together from time to time. We believe that growing presence of HMSI in the two wheeler industry is bound to hit the profitability and growth of Hero Honda
Khandwala Research
Hero Honda Motors Limited
6
Khandwala Securities Limited
Change in Product Mix: “May result into low margins”
Segments
2005
2006
Motorcycle
97.6%
96.3%
- Economy
21.8%
27.0%
- Executive
71.2%
66.6%
- Premium
4.5%
2.7%
Scooter
0.0%
0.5%
Export Total
2.4%
3.2%
100.0%
100.0%
Source: Khandwala Research; Company
Movement in Margins:
70.0% OPM
Net Margins
RoCE
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2002
2003
2004
2005
2006
Source: Khandwala Research, Bombay Stock Exchange, Company
Khandwala Research
Hero Honda Motors Limited
7
Khandwala Securities Limited
FINANCIAL S U M M A R Y Profit & Loss Statement: Particulars
2005
2006E
Net Sales
74,216.5
Raw Material Cost
51,996.2
Employee Cost
2,679.7
3,206.1
3,670.3
4,413.6
5,163.9
Other Expenditure
7,854.2
9,730.7
11,520.8
13,598.6
15,910.3
11,686.4
13,680.0
15,496.9
17,713.9
20,725.3
1,369.0
1,527.3
1,929.0
2,387.0
2,995.0
893.8
1,146.2
1,410.0
1,595.0
1,650.0
Operating Profit Other Income Depreciation Interest PBT Current Tax
2007E
2008E
2009E
87,139.8
101,953.6
119,285.7
139,564.2
60,523.0
71,265.5
83,559.6
97,764.7
(10.9)
(61.3)
(61.3)
(61.3)
(61.3)
12,150.7
13,999.8
15,954.6
18,444.6
22,009.0
3,952.2
4,158.5
4,786.4
5,533.4
6,602.7
FBT
-
71.7
146.8
176.5
206.6
115.6
178.8
178.8
178.8
178.8
PAT
8,082.9
9,590.8
10,842.6
12,555.9
15,020.9
Dividend
3,994.0
3,994.0
3,994.0
4,700.0
5,500.0
565.2
565.2
565.2
659.2
771.4
3,523.7
5,031.6
6,283.4
7,196.7
8,749.6
Cash EPS (Rs.)
45.5
54.7
62.3
71.8
84.4
EPS (Rs.)
40.5
48.0
54.3
62.9
75.2
Deferred Tax
Tax on Dividend Profit to be carried forward
Balance Sheet: Particulars
2005
2006E
2007E
2008E
2009E
Sources of funds
16,951.4
22,285.6
28,917.1
36,514.1
45,723.9
Shareholders Funds
14,933.8
19,965.4
26,248.8
33,445.6
42,195.1
Share Capital Reserve Surplus Loan Funds Application of Funds
399.4
399.4
399.4
399.4
19,566.0
25,849.4
33,046.2
41,795.7
2,017.6
2,320.2
2,668.3
3,068.5
3,528.8
16,951.4
22,285.2
28,917.5
36,514.4
45,723.7
Fixed Assets
7,153.3
8,657.1
10,747.1
11,152.1
11,502.1
Investments
20,266.5
23,677.0
27,712.0
34,903.0
44,231.0
Net Working Capital
(9,459.4)
(9,039.9)
(8,532.6)
(8,531.7)
(9,000.4)
Deferred Tax Liabilities (Net)
(1,009.0)
(1,009.0)
(1,009.0)
(1,009.0)
(1,009.0)
-
-
-
-
-
Miscellaneous Expenditures
Khandwala Research
399.4 14,534.4
Hero Honda Motors Limited
8
Khandwala Securities Limited
Key Financial Ratios: Particulars
2005
2006E
2007E
2008E
2009E
Activity Analysis Ratio GFA Turnover Ratio
11.4
11.0
10.5
10.9
12.3
Asset Turnover Ratio
4.9
4.4
4.0
3.6
3.4
Working Cap. Turnover Ratio
-8.7
-9.4
-11.6
-14.0
-15.9
Inventory Turnover Ratio
31.9
32.3
32.3
32.0
32.3
Receivable Turnover Ratio
111.3
97.1
102.0
99.4
101.5
Debt/Equity Ratio
0.1
0.1
0.1
0.1
0.1
Current Ratio
0.4
0.4
0.4
0.5
0.5
Operating Margins
15.7%
15.7%
15.2%
14.9%
14.9%
Net Profit Margins
10.9%
11.0%
10.6%
10.5%
10.8%
Return on Equity
61.4%
55.0%
46.9%
42.1%
39.7%
Return on Assets
53.7%
48.9%
42.4%
38.4%
36.5%
Return On Capital Employed
62.7%
55.9%
48.1%
43.1%
40.6%
13.5
18.5
14.6
12.6
10.5
7.3
8.9
6.0
4.7
3.7
3.6%
2.3%
2.5%
3.0%
3.5%
0.68
0.49
0.65
0.75
0.88
Cash EPS
45.5
54.7
62.3
71.8
84.4
EPS
40.5
48.0
54.3
62.9
75.2
Capital Structure Ratio
Profitability Ratio
Capital Market Analysis Price to Earnings Ratio Price to Book Value Dividend Yield Sales to Market Cap. Per Share Data
Dividend Per Share Price (As on 03/07/06) Face Value
Khandwala Research
20.0
20.0
20.0
23.5
27.5
548.2
888.3
791.5
791.5
791.5
2.0
2.0
2.0
2.0
2.0
Book Value (Rs. Mln.)
74.8
100.0
131.4
167.5
211.3
Market Cap (Rs. Mln.)
109,466
177,394
158,063
158,063
158,063
Hero Honda Motors Limited
9
Khandwala Securities Limited
VALUATIONS Valuations on the basis of Discounted Cash Flow (DCF): Particulars
2006E
2007E
2008E
2009E
2010E
2011E
(Rs. Mln)
Terminal Year
Net Profit
14,000
15,955
18,445
22,009
26,152
30,796
Less: Tax Paid
4,409
5,112
5,889
6,988
8,266
9,700
Add: Depreciation
1,146
1,410
1,595
1,650
1,705
1,750
(61)
(61)
(61)
(61)
(61)
(61)
Less: Other Income Op. Profit before changes in Working Cap.
1,527
1,929
2,387
2,995
3,670
4,236
9,148
10,262
11,703
13,615
15,860
18,548
Change in Working Cap. Net Cash from operating Activities
(419)
(507)
(1)
469
205
250
8,729
9,755
11,702
14,083
16,065
18,798
(2,650)
(3,500)
(2,000)
(2,000)
(2,000)
(2,000)
6,079
6,255
9,702
12,083
14,065
16,798
19,268
13
13
13
13
13
13
5,535
7,598
8,374
8,626
9,118
99,601
Add: Interest
Capex Free Cash Flow WACC DCF Terminal Value of the firm
19,268
138,852
Less: Debt
2,320
Add: Liquid Investments Terminal Value for the Equity shareholders
23,677 160,209
Value Per Share
802
Note: * Terminal Growth of 2.5% and WACC of 13%
Sensitive Analysis of DCF: Terminal Value WACC
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
10 11
877 820
914 849
955 883
1,002 920
1,055 961
1,117 1,009
1,189 1,063
12
773
797
825
855
888
926
968
13
734
754
777
802
830
860
894
14
700
718
738
759
782
807
835
15
672
688
704
722
742
763
787
Valuation on basis of PE Multiple: Buoyant economy, increasing rural income, higher replacement demand, enhancing penetration, increasing distribution reach, rising oil prices, increasing competition (new models) and a greater headway in the export market (India being the No 1 two wheeler manufacturer in the world) will lead to increasing demand for the two wheelers. We recommend a fair value of 802 for the stock on 12.59X 2008E on the basis that the company will grow inline with the industry on a future date.
Khandwala Research
Hero Honda Motors Limited
10
Khandwala Securities Limited
INDIA EQUITY RESEARCH
TEL. NO. +91 22 2264 2300
FAX NO. +91 22 2264 2797
Research Analyst
Sectors
Dr. K. D. Mehru
Vice President
[email protected]
Ms. Alpa Shah
Automobiles
[email protected]
Mr. Ashish Ahuja
Cement
[email protected]
Mr. Dipesh Mehta
Information Technology
[email protected]
Mr. Hatim K Broachwala
Research Analyst
[email protected]
Mr. Jignesh H Makwana
Research Analyst
[email protected]
Mr. Sandeep Bhatkhande
Research Associate
[email protected]
Ms. Lydia Rodrigues
Research Executive
[email protected]
EQUITY DEALING
TEL NO. +91 22 2263 3811
FAX NO. +91 22 2263 3817
Ms. Rashmi Batra Mahajan
Asst. Vice President – Private Client Group
[email protected]
Mr. Prakash Rajdev
Chief Dealer
[email protected]
Mr. Pranav Khandwala
Manager
[email protected]
Mr. Pratik Khandwala
Manager
[email protected]
Mr. Hitesh Shah
Dealer
[email protected]
BRANCH OFFICE (PUNE)
TEL NO. +91 20 2567 1404
FAX NO. +91 20 2567 1405
Mr. Arvind G Laddha
Assistant Vice President
[email protected]
Mr. Ajay G Laddha
Assistant Vice President
[email protected]
Corporate Office:
Branch Office:
Vikas Building, Green Street, Fort, MUMBAI 400 023. Tel. No. (91) (22) 2264 2300 Fax No. (91) (22) 2261 5172 E-mail: [email protected]
C8/9, Dr. Herekar Road, Off. Bhandarkar Road, PUNE 411 004 Tel. No. (91) (20) 25671404 / 06 Fax. No. (91) (20) 25671405 Email: [email protected]
Web site: www.kslindia.com; www.kslinvestor.com The Research team of Khandwala Securities Limited on behalf of itself has prepared the information given and opinions expressed in this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, KSL or its group companies make no guarantee, representation or warranty, whether express or implied and accepts no responsibility or liability as to its accuracy or completeness of the data being provided. All investment information and opinion are subject to change without notice. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. KSL shall not be liable for any direct or indirect losses arising from the use thereof and the investors are expected to use the information contained herein at their own risk. KSL and its affiliates and / or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. KSL and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. The value of or income from any investment may be adversely affected by changes in the rates of currency exchange. The recipient means this document strictly for use only. None of the material provided herein may be reproduced, published, resold or distributed in any manner whatsoever without the prior explicit written permission of KSL.
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Hero Honda Motors Limited
11
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