Hero Honda: On a roll

Its bikes should remain as popular in 2009-10 but current valuations capture all the good news.

It’s been quite a splendid 2008-09 for Hero Honda with the two wheeler maker ending the year with a market share in motorcycles of 57 per cent and two wheeler volumes up 12 per cent over 2007-08. The company has grown above the industry rate, taking away market share from competitors; in the 100 cc entry segment for instance, it now commands a share of 80 per cent with Bajaj Auto consciously moving out of the space and other players not able to make an impact.

However, Honda Motorcycles and Scooters India(HMSI) is entering the entry segment and although the Hero Honda management doesn’t perceive any threat to its share, it could lose some ground. In the executive segment (125cc-150 cc), too, Hero Honda has gained share over the past year with models like the Splendor Plus continuing to do well. However, Bajaj Auto is now rolling out several new models —the XCD 135 cc has had a good start —-and Hero Honda needs to protect its 70 per cent share in this space perhaps with additional launches. The management has been guarded in its outlook for 2009-10 saying the quarters ahead could be tough since the economy is still not out of the woods. Moreover, financing has almost dried up though that typically hurts it less than it does players like Bajaj Auto. In short, the Hero Honda management sees single digit growth in volumes this year.

Despite that, operating margins should sustain at current levels of 14 per cent given that steel prices have fallen significantly as have prices for other raw materials and also because the management does not intend to pass on the cost benefits to buyers in the form of lower prices. The Hero Honda stock was one of the top performers of 2008 and since January, this year, has rallied smartly much like its peers in the auto space. At 1,029, however, the stock trades at close to15 times estimated 2009-10 earnings and leaves little cushioning for any unexpected weakness in demand.