Hero MotoCorp dips as analysts worry of bumpy road ahead
Hero MotoCorp shares skidded over 6% on Thursday after investors were disappointed with the India's largest two-wheeler maker's lower-than-expected fourth quarter results.
Nachiket Kelkar
Moneycontrol.com
Hero MotoCorp shares skidded over 6% on Thursday after investors were disappointed with the India's largest two-wheeler maker's lower-than-expected fourth quarter results. There is also a concern over its slow ramp-up in increasing R&D spends and rising competition, especially from its erstwhile partner Honda.
In fiscal 2012, two-wheeler sales in India rose 14% from a year ago to over 13 million units and are expected to grow 11-13% in fiscal 2013, according to Society of Indian Automobile Manufacturers. Hero MotoCorp sold 6.24 million two-wheelers last fiscal, a growth of 15.4% year-on-year. It has guided for 6.8 million unit sales in the current fiscal and expects 9-10% industry growth. It sold a record 5,51,557 units in April, highest ever for any month. But there are concerns if it will manage to sustain the growth as Honda aggressively pushes into Hero's 100 cc motorcycle turf in future.Hero had parted ways with Japan's Honda in 2010 and 2011-12 was the company's first solo fiscal. Post the break-up, Honda, through its wholly owned unit, Honda Motorcycle and Scooter India, has become aggressive and will soon launch its 110 cc motorcycle Dream Yuga, directly competing with Hero's largest selling Splendor. Despite this, Hero's R&D spend to net sales was 0.3% in FY2012 and a ramp-up in R&D remains slow, says Kotak Institutional Equities."We believe in-house R&D is critical for Hero to make swift changes to its product portfolio as Honda plans to target the executive segment with a number of 100 cc products over the next few years," the brokerage says, maintaining a "sell" on Hero MotoCorp on expensive valuations. On Wednesday, Hero MotoCorp reported a fourth quarter net profit of Rs 604 crore, up 20% year-on-year. The company's total turnover was up 12% from a year ago to Rs 6,035 crore in Jan-March.Analysts had expected a profit of Rs 616 crore, on revenue of Rs 5,985 crore, according to a CNBC-TV18 poll.35% of Hero Moto's production was from its Haridwar plant in FY12 and that will go up to 40% in the current fiscal year. Production from this plant is 100% tax exempt till March next year. But from fiscal 2014 onwards, the company will get only 30% tax benefit. So there will be additional pressure on earnings as tax rate will go up to 22% from around 16% this fiscal.Here are some more analyst reactions to Hero MotoCorp's results and the road ahead:Citigroup: Increasing competitive pressures are evident, as a result of which we think it will be difficult for the stock to re-rate meaningfully from current levels. Hero's market share in the domestic motorcycle industry was 30 bps higher year-on-year, but flattish sequentially. In the overall domestic two-wheeler industry, market share slipped 150 bps from a year ago - ceded, we believe, primarily to Honda. Rating: Sell. Target: Rs 1,748.Emkay: Current valuations are ignoring the rising competitive intensity. We continue to have concerns with concentrated product portfolio and lack of clarity on R&D. Rating: Downgrade to Reduce from Accumulate. Target: Rs 2,245.IDBI Capital: Fears of dividend payout turned out to be true with interim dividend of Rs 45 a share, and management indicating lower payout ratio going ahead at 40%, versus 115% and 121% in FY10, 11. That apart, Honda's increased aggression is likely to hit Hero Moto more, at least initially, as Honda's focus seems to be on the executive segment, which is bread-n-butter for Hero. Rating: Reduce. Target: Rs 1,955.Nirmal Bang: We expect the volume growth to moderate to 10.1% in FY13 versus15.4% growth witnessed in FY12. Also there is low earnings growth visibility over FY13/FY14. Rating: Sell. Target: Rs 1,956.Religare Institutional: Post the recent run-up, the stock is trading at 15 times FY13 estimates. However, we remain structurally positive on Hero Moto, our preferred pick in the two-wheeler space. Rating: Buy. Target: Rs 2,450.Hero MotoCorp shares were down 6.8% at Rs 2,091.90 in noon trade.nachiket.kelkar@moneycontrol.com Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
