Hold Hero Honda, target Rs 837: Prime Broking

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Prime Broking has maintained hold rating on Hero Honda Motors with target price of Rs 837.

 

Prime Broking research report on Hero Honda Motors

 

HIGHLIGHTS Sales revival expected in H2FY08

 

After registering a dip in motorcycle sales of 3.3% y-o-y for the first five months of FY08 on the back of rising interest rates, we expect sales to revive with the coming festive season and improved financing on the back of stabilizing interest rates and improved liquidity situation. Based on our interaction with the management, past industry trend and favourable demographics (rising young population and disposable incomes), we expect revenues and PAT to grow at a CAGR of 9.5% and 14.0% respectively over FY07-FY09E.

 

Clear market leader

 

Despite a dip in sales, HHML has been able to maintain its leadership with a share of approx 41% in the last three years and has outperformed the industry in the first five months of FY08.

 

Inventory levels have stabilized to historical average

 

After witnessing a build up in channel inventories in the last fiscal, inventory levels have started stabilizing in the range of 15-20 days and are expected to remain at those levels post the festive season.

 

Margins to improve marginally; but to remain largely under pressure

 

Margins are expected to improve marginally once Uttarakhand plant becomes operational and on expectation of stabilizing raw material cost and shift towards higher-end bikes. However, intense competition and royalty blues will continue to cloud any major improvement.

 

CAPEX funded internally

 

HHML plans to fund its capex on the new plant and other expansions through cash generated out of its business and remain a debt-free company going forward. 

 

RISKS & CONCERNS

 

Increased royalty payments, further increase in interest rate and inflation, non availability of credit, unfavourable monsoon, rising input costs, aged product line-up and intensifying competition are the major concerns for the company. At the current stock price of Rs768, HHML's projected FY08 EPS of Rs46.3 is discounted 16.6x and projected FY09 EPS of Rs55.8 is discounted 13.8x. The company has investments of more than Rs 90 per share and generates cash of Rs 55-60 per share annually. We recommend a HOLD on HHML with a price target of Rs 837 (9% upside) based on 15x FY09E earnings.