Hero Honda: Foggy outlook

Rising raw material costs have hurt margins, but the company has not announced a price rise yet to mitigate the impact

Hero Honda recorded highest-ever sales in the September quarter at 505,553 units, up 43 per cent year-on-year (y-o-y). But the growth was lower than peers. The company continued to lose market share, which fell 150 basis points to around 48 per cent, according to Standard Chartered research.

With a price rise early in the quarter, the company saw realisations rise nearly three per cent. This boosted revenues by 12 per cent to over Rs 4,500 crore, in line with estimates. Raw material costs increased 20 per cent and dragged earnings before interest, tax, depreciation and amortisation (Ebitda) margins by 500 basis points to 13.4 per cent.

Unlike competitors, Hero Honda hasn’t announced any further price rise to lower the impact of rising raw material costs after its solitary action early last quarter. This blurs the outlook and has led to several downgrades of 2010-11earnings estimates. However, analysts said these pressures could be the result of the impending purchase of Honda’s stake by the Hero group promoters.

The stock, while underperforming the Sensex, has held up well and has risen 1.7 per cent during the last one month. Without the Honda badge, the brand may suffer domestically. But, opening up of the export market will help the company follow Bajaj Auto’s phenomenal trail in other emerging markets (including Africa and Latin America).

At Rs 1,826.05, the stock trades at a price to earnings (PE) valuation of about 15x 2011-12 earnings per share estimates.