Thursday, March 18, 2010

Smooth going for Hero Honda Motors

The stock of Hero Honda Motors touched a new high of Rs 1,932.75 per share on Wednesday. At the current market price, the stock trades at 15.8 times its estimated earnings for 2011.

The analyst community is positive on the stock. “With increased ancillarisation and the 200 basis points increase in excise duty, margins on vehicles produced at Haridwar plant will be about 600 basis points (or six percentage points) higher than those at other plants,” In a note to clients on Monday, Jatin Chawla of IIFL Research wrote.

The Uttaranchal government increased excise duty to 10% from 8% in the Budget. Hero Honda’s Uttaranchal plant enjoys many tax incentives including 100% excise duty exemption for the first ten years, 100% income-tax exemption for the first five years and 30% income-tax exemption in the consequent five years.

Hero Honda plans to increase production from Uttaranchal plant to 37% of total volumes in FY2011 from 28% in FY2010. The company manufactures its high-margin product, Splendor, at its Uttarakhand plant, which provides substantial tax incentives. This would help Hero Honda’s operating profit margins and profitability, as overall tax rate will also decline.

Going forward, Hero Honda expects its sales volumes to rise 10% year on year in FY2011. Implementation of proposed GST should lead to decline in prices of vehicles in FY2012. This should boost demand and help improve volumes in FY2012.

Hero Honda’s sales volumes increased 16.1% year on year in February to 382096 units. However, sales fell 2% over January.Bajaj Auto and TVS Motor performed comparatively better. Bajaj’s Discover got a good response from the market.

Discover competes with Splendor, which accounts for about half of the company’s profits. Hero Honda’s relative market share against Bajaj Auto and TVS has dropped by 160 basis points in February over January. Some analysts attribute the loss of market share to lower base of competitors and maintain that further marginal loss cannot be ruled out.
Higher raw material costs are also a dampener for the stock.
IIFL has an ‘add’ rating on the stock with a 12 month target price of Rs 2,200 apiece. Investors could consider the stock on declines.

Source: DNAIndia.com

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