ICRA maintains valuation grade of 'C' for Hero Motocorp

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ICRA maintains valuation grade of 'C' for Hero Motocorp

ICRA Equity Research Service has come out with its report on Hero Motocorp (HMCL)'s Q3 FY12 results. The research firm has maintained the valuation grade of 'C' for HMCL on a grading scale of 'A to E', which indicates that the company is 'fairly valued' on a relative basis.

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ICRA Equity Research Service has come out with its report on Hero Motocorp (HMCL)'s Q3 FY12 results. The research firm has maintained the valuation grade of 'C' for HMCL on a grading scale of 'A to E', which indicates that the company is 'fairly valued' on a relative basis.

Q3 2011-12 Results

Revenues: HMCL's Q3 2011-12 Net Sales at Rs. 5,983.6 Crore grew by 16.9% YoY and 3.4% QoQ, supported by 11.3% YoY and 2.9% QoQ increase in sales volumes and 5.0% YoY and 0.5% QoQ increase in average realizations.

EBITDA Margins: HMCL's EBITDA margins at 15.0% in Q3 2011-12 declined marginally by 15 basis points (bps) QoQ but increased by 454 bps YoY. The YoY expansion in HMCL's core EBITDA margins, however, was relatively lower at 194 bps YoY on exclusion of the estimated royalty payments made by HMCL to its erstwhile partner Honda Motor Company (HMC, Japan) in Q3 2010-11.

Net Profits: HMCL's Q3 2011-12 PAT at Rs. 613.0 Crore grew by 42.9% YoY and 1.6% QoQ. Overall, HMCL's revenues and PAT touched a record high  in Q3 2011-12.

Since our last update (on October 19, 2011), HMCL's stock price has declined by 5.8%, S&P CNX Nifty has declined by 1.8% and the BSE Auto Index has declined by 2.0%. We find HMCL's current valuation (18.4 times FY12E earnings and 16.7 times FY13E earnings) to be at a premium to that of its peers as well as compared to the broader indices. We believe that HMCL's current valuations factor in the strong PAT growth recorded by the company over the last three quarters; the relatively greater clarity now about the business and financial implications on HMCL due to the cessation of its JV agreement with HMC; and the possible upside due to growth in future export volumes. Although HMCL's stock trades at a premium as compared to the broader indices, we believe the premium is justified in view of the relatively stable financial performance expectations from the company. Also the 2W segment is expected to maintain its steady performance, unlike the weaker performance expected from other automobile segments/ other sectors due to the prevailing macro-economic headwinds. Hence, we maintain the valuation grade of 'C' for HMCL on a grading scale of 'A to E', which indicates that the company is 'fairly valued' on a relative basis.

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To read the full report click on the attachment