Hero Honda: Way to go

The firm has grown profitably in a difficult environment and should continue to do so.

When the going gets tough, the tough gets going. That’s probably what the Rs 10,332 crore Hero Honda has being doing over the past several months. Despite a challenging environment, the two-wheeler maker has managed to keep growing. Which is why the stock has been an outperformer for over a year now — it was among the top three Sensex performers in 2008, gaining 15 per cent. Once again, the company has turned in some good numbers for the December 2008 quarter.

Although it sold fewer motorcycles during the quarter than it did in the same time in the previous year, it made up with higher sales of scooters, which pushed up total two-wheeler sales by 3.5 per cent. That helped the top line grow by about 4.7 per cent. Also, the company was able to take a couple of price hikes in the past few months and besides, it didn’t also pass on the entire 4 per cent cut in excise duties across products.

What’s more, the growth has been profitable with the operating profit margin(OPM) for the quarter up 60 basis points to 4.5 per cent, beating the Street’s expectations. Some of that came from a smaller raw materials bill, which could fall further in subsequent quarters.

Unless the environment recovers, volumes could taper off in the next few months. However, even in a weak market, Hero Honda has picked up market share — it now commands 56 per cent of the motorcycle market and has gained in the premium segment,where Bajaj Auto is the dominant player.

That’s mainly because of its strong brands –the company launched seven brands including variants in the December 2008 quarter. Its strong presence in rural markets, especially in the north, has helped and close to a third of the firm’s bikes are sold in the northern part of the country. Also, a smaller share of its vehicles are sold with the help of finance schemes — the share of sales through this route has fallen to 35 per cent from 55-60 per cent about a year back.

Hero Honda is expected to end 2008-09 with revenues in the region of 11,700 crore, an increase of around 13 per cent over last year. The increase in the net profit could be higher by about 22-23 per cent over the Rs 968 crore posted in 2008-09. At the current price of Rs 834, the stock trades at around 12 times estimated 2009-10 earnings and although it won’t be a smooth ride for the next few months, the stock should continue to outperform the market.