Hold Honda Siel: Parag Parikh Financial Advisory Services

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Hold Honda Siel: Parag Parikh Financial Advisory Services

Parag Parikh Financial Advisory Services (PPFAS) has recommended hold rating on Honda Siel Power Products, in its August 2, 2011 research report.

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Parag Parikh Financial Advisory Services (PPFAS) has recommended hold rating on Honda Siel Power Products , in its August 2, 2011 research report.

"Honda Siel Power Products Ltd.(HSPP) came out with an average set of numbers for the quarter ended June 2011. On a quarterly y-o-y basis, Net Sales were about flat at ` 1,088.2 Mn while bottomline was down by 44% to ` 71.4 Mn. An overall rise in expenditures led to the decline in profits. Raw Material costs (as a % of Sales) went up by 290 bps to ` 708.1 Mn. At 60.5% of Sales this was at the higher end over the last seven quarters (range of 56% to 61%). The range looks small. However in a business which operates on a bottomline margin of roughly 6%, the above difference of 5% can lead to almost double the profit. An erosion of the same, can halve the profits. Employee costs and Other Expenses too went up by 20% and 10% YoY respectively. As a result, Operating Profits (as a % of Sales) came down by 640 bps from 16.1% to 9.7%. PAT stood at ` 71.4 Mn while EPS was ` 7."

"At the CMP of ` 398.55, the stock trades at a PE (TTM) of 16.8 times. While the price hasn't moved much, it is the earnings that have fallen (YoY) over the past two quarters which has lead to a higher PE. As explained above, the business is sensitive to Raw material costs. Till the time commodity costs keep ruling high, it may affect earnings of the Company. Also petrol (the prime input to run most of the Company's products) is getting expensive. This may affect demand. Given the timely onset of monsoons this season, industry sources comment that water pump sales have slowed down. So there may be headwinds in the near term. However over a longer period, we believe that the Company should do well."

"HSPP is backed by a strong parent. Timely introduction of new products from the parent portfolio should ensure growth in the coming years. Brushcutters launched a few years ago are doing well and Tillers (5.5HP category) will be launched soon. Moreover, macro story on the agriculture front continues to be so with a trend towards farm mechanization. Recommend a 'Hold' for now," says Parag Parikh Financial Advisory Services research report.

Non-Institutions holding more than 90% in Indian cos

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To read the full report click on the attachment