HERO MOTOCORP LTD Result Update: Q3 FY 12

C.M.P: Rs. 1880.00 Target Price: Rs. 2124.00 BUY Date: Jan. 27 th 201 2

Stock Data: SYNOPSIS Sector: Automobile

Face Value Rs. 2.00 Hero MotoCorp Ltd. (formerly Hero 52 wk. High/Low (Rs.) 2248.00/1377.95 Honda Motors Ltd.) is the world's largest manufacturer of two-wheelers, Volume (2 wk. Avg.) 68000.00 based in India. BSE Code 500182 Market Cap (Rs in mn) 375436.00 During the quarter, the company has registered its highest ever quarterly Share Holding Pattern sales of 1589286 two-wheelers.

Hero MotoCorp Ltd. plans to set up two new plants- one in the South and the other in the West and a parts

distribution in Rajasthan.

During the quarter ended, the robust 1 Year Comparative Graph growth of Net Profit is increased by

42.90% to Rs. 6130.30 million.

Net Sales and PAT of the company are expected to grow at a CAGR of 21% & 10% over 2010 to 2013E respectively.

Hero MotoCorp two-wheelers are manufactured across three globally Hero MotoCorp BSE SENSEX benchmarked manufacturing units at Gurgaon, D haruhera and Haridwar.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 194011.50 28052.90 19279.00 96.54 19.47

FY 12E 237866.51 40213.90 24268.77 121.53 15.47

FY 13E 280682.48 47208.91 28970.20 145.07 12.96

Peer Group Comparison

Market Cap. Name of the company CMP(Rs.) (Rs.mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Hero Honda 1880.00 375436.00 96.54 19.47 12.70 5250.00

Bajaj Auto 1569.00 45401.69 121.10 12.96 9.25 400.00

TVS Motor 50.95 2420.57 4.90 10.40 2.42 120.00

Atlas Cycles 319.60 103.93 12.92 24.74 0.87 45.00

Investment Highlights

Q3 FY12 Results Update

During the quarter, the company disclosed a standalone profit of Rs. 6130.30 million as against of Rs. 4290.00 million for the quarter ended December 31, 2011. Net sales are increased by 16.85% to Rs. 60314.50 million from Rs. 51616.60 million in the same quarter previous year. Total income grew by 16.92% to Rs.61077.30 million from Rs.52236.90 million in the same quarter last year. Company EPS is stood at Rs. 30.70 for the quarter ended December 2011.

Quarterly Results - Standalone (Rs in mn)

As At Dec-11 Dec-10 %change

Net sales 60314.50 51616.60 16.85%

Net profit 6130.30 4290.00 42.90%

Basic EPS 30.70 21.48 42.90%

Break-up of Expenses

Hero MotoCorp outlined strategic plans

Hero MotoCorp outlined its strategic plans for the year, unveiling a range of its new generation of two wheelers- an all-new 110cc Passion X Pro, a 110cc masculine scooter, Maestro, and a thrilling new 125cc bike, Ignitor- to be launched in the Indian market over the next few months.

Company Profile

Hero MotoCorp Ltd. (formerly Hero Honda Motors Ltd.) is the world's largest manufacturer of two - wheelers, based in India. Hero MotoCorp Ltd, the new name of Hero Honda Motors Ltd after the Hero group & Honda Motor Company called off their 26-year-long association.

In 2001, the company achieved the coveted position of being the largest two- wheeler manufacturing company in India and also, the 'World No.1' two-wheeler company in terms of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to maintain this position till date.

In the 1980's the Company pioneered the introduction of fuel-efficient, environment friendly four-stroke motorcycles in the country. It became the first

3 company to launch the Fuel Injection (FI) technology in Indian motorcycles, with the launch of the Glamour FI in June 2006.

Its plants use world class equipment and processes and have become a benchmark in leanness and productivity.

Manufacturing

Hero MotoCorp 2-wheelers are manufactured across three globally benchmarked manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are located in the state of Haryana in northern India. The third and the latest manufacturing plant are based at Haridwar, in the hill state of Uttrakhand.

Product range

Hero MotoCorp offers wide range of two wheeler products that include motorcycles and scooters, and has set the industry standards across all the market segments.

CD Dawn Splendor PRO

CD Deluxe Glamour

Pleasure Glamour PGM FI

Splendor + Achiever

Splendor NXG CBZ Xtreme

Passion PRO Hunk

Passion Plus Karizma

Super Splendor Karizma ZMR

Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY10 FY11 FY12E FY13E

Description 12m 12m 12m 12m

Net Sales 158605.10 194011.50 237866.51 280682.48

Other Income 2356.30 2681.40 3306.36 3703.13

Total Income 160961.40 196692.90 241172.87 284385.61

Expenditure -130935.60 -168640.00 -200958.98 -237176.69

Operating Profit 30025.80 28052.90 40213.90 47208.91

Interest 206.20 18.50 143.58 165.12

Gross profit 30232.00 28071.40 40357.48 47374.03

Depreciation -1914.70 -4023.80 -11394.72 -12762.09

Profit Before Tax 28317.30 24047.60 28962.76 34611.94

Tax -5999.00 -4768.60 -4693.98 -5641.75

Profit after Tax 22318.30 19279.00 24268.77 28970.20

Equity capital 399.40 399.40 399.40 399.40

Reserves 34250.80 29161.20 53429.97 82400.17

Face Value 2.00 2.00 2.00 2.00

EPS 111.76 96.54 121.53 145.07

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-11 30-Sep-11 31-Dec-11 31-Mar-12E

Description 3m 3m 3m 3m

Net sales 56833.30 58293.20 60314.50 62425.51

Other income 884.10 797.50 762.80 861.96

Total Income 57717.40 59090.70 61077.30 63287.47

Expenditure -48655.70 -49106.10 -50884.60 -52312.58

Operating profit 9061.70 9984.60 10192.70 10974.90

Interest 31.90 44.90 31.80 34.98

Gross profit 9093.60 10029.50 10224.50 11009.88

Depreciation -2397.90 -2784.90 -2986.50 -3225.42

Profit Before Tax 6695.70 7244.60 7238.00 7784.46

Tax -1116.80 -1208.40 -1107.70 -1261.08

Profit after Tax 5578.90 6036.20 6130.30 6523.37

Equity capital 399.40 399.40 399.40 399.40

Face Value 2.00 2.00 2.00 2.00

EPS 27.94 30.23 30.70 32.67

Key Ratio

Particulars FY10 FY11 FY12E FY13E No of Shares (in 199.70 199.70 199.70 199.70 mn) EBIDTA % 18.93% 14.46% 16.91% 16.82% PBT % 17.85% 12.39% 12.18% 12.33% PAT % 14.07% 9.94% 10.20% 10.32% P/E ratio (x) 16.82 19.47 15.47 12.96 ROE - % 64.41% 65.22% 45.08% 34.99%

ROCE - % 90.46% 72.13% 74.27% 60.43%

Debt Equity Ratio 0.02 0.50 0.29 0.20

EV/EBIDTA (x) 12.50 13.38 9.34 7.95

Book Value (Rs.) 173.51 148.03 269.55 414.62

Price/Book Value 10.84 12.70 6.97 4.53

Charts:

• Net sales & PAT

• P/E Ratio (x)

• Debt Equity Ratio

• EV/EBITDA(X)

• P/BV (X)

Outlook and Conclusion

At the current market price of Rs.1880.00, the stock is trading at 15.47 x FY12E and 12.96 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.121.53 and Rs.145.07 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 21% and 10% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 9.34 x for FY12E and 7.95 x for FY13E. Price to Book Value of the stock is expected to be at 6.97 x and 4.53 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY ’ in this particular scrip with a target price of Rs. 2124.00 for Medium to Long term investment.

Industry Overview

India, the world's second-fastest growing auto market, is in top-gear growth. The country is a hot destination for automobile manufacturers due to its robust economic growth, favorable demographics, higher disposable income, changing lifestyle and positive industrial eco-system. India is expected to become the third biggest automaker in the world within next decade, according to Diane H Gulyas, President, DuPont Performance Polymers. Owing to its vertical and horizontal integration with other key segments of the economy, the industry is said to be a major growth driver.

Market Dynamics

For FY 2011, Maruti Suzuki held a reasonable market share of 48.74 per cent while that of Hyundai was around 18.10 per cent. Tata Motors' market share stood at 12.92 per cent for the period. General Motors India (GMI) and Honda Siel cars India (HSCI) had a market share of 4.40 per cent and 2.97 per cent respectively during FY2011.

10 According to the data released by the Society of Indian Automobile Manufacturers (SIAM), Maruti held 43 per cent of the total Indian passenger-car market in the six months ended September 2011 as against Hyundai's 20 per cent pie.

Key Statistics

• SIAM expects India's car sales to grow 2-4 per cent in the fiscal year ending March 2012 while a growth of 13-15 per cent is projected in commercial vehicles' sales segment. • Car sales in September 2011 stood at 165,925 cars. • Sales of commercial vehicles (a key indicator of the country's economic activity), increased by 18.05 percent to 70,634, while motorcycle sales rose 19.93 percent to 933,465 of them in September. • Total sales of vehicles across categories witnessed a growth of 19.39 per cent to 1571,342 units in September 2011 from 1316,118 units in the corresponding period last year. • The sales of scooters increased by 50.74 per cent to 231,710 units (from 153,716 units in September 2010) while that of three-wheelers stood at 49,255 units (from 48,814 units in September 2010) in September 2011. • Overall automobile exports registered a growth rate of 32.31 per cent during April-December 2011. Passenger Vehicles registered growth at 21.01 percent in this period while two-wheelers, commercial vehicles and three wheelers segments recorded growth of 32.34 per cent, 35.91 per cent and 49.55 per cent respectively.

Indian Automobile Industry: Major Developments & Investments

Seoul-based Hyundai Motor Company has launched its cheapest car model 'Eon' in Indian markets to give in a face-off to Maruti Suzuki India Ltd and the company expects to sell 140,000-150,000 Eon cars a year.

With a view to add a model that could vie for international markets, India's largest utility vehicle maker Mahindra and Mahindra Ltd (M&M) has introduced a new sport utility vehicle (SUV) XUV500; nine years after the launch of Scorpio.

11 Marking its first motor export from India, Toyota Kirloskar Motor Pvt. Ltd (TKM) would commence export of the 'Etios' series sedan and hatchback to South Africa in March 2012. The company is targeting emerging economies to increase its sales.

Swedish company Volvo's Indian bus-making unit has unveiled its plan to invest around Rs 4 billion (US$ 80 million) over 2011-15 to increase its annual output to 5000 buses and revenue to Rs 490 billion (US$ 1 billion) by 2015 to cater to the burgeoning Indian market.

German luxury car makers are on their toes to achieve top slot in the Indian markets and they would enhance their sales network by 2012 to a great extent to accomplish the same. While Mercedes Benz will add 8 dealerships in 2012, Audi plans to increase the number of sales outlets from 13 to 25 in 2012. Also, BMW is working on a project to triple its dealerships by 2015. The company plans to add 18 of them by October 2012 to take the total number to 40.

Formula One (F1) on the track

Taking a huge step in motor sports segment, India is conducting Grand Prix F1 race at the end of October 2011 in Greater Noida where 12 international teams (all based out of Europe) would participate.

The 5.14 km track was designed by the German track designer Hermann Tilke & built by the Noida-based construction company Jaypee Group. The Jaypee Group, which acquired the rights for the race in India, employed over 6,000 workers & 300 engineers to build the track and arena, which is spread over 850 acres, and will accommodate around 120,000 viewers. Jaypee Sports International Ltd (JPSI) has spent around Rs. 1,800 crore (US$ 365 million) on the project, which includes paying licensing fees to Fédération Internationale de l'Automobile (FIA), the sport's governing body.

Government Initiatives

The Indian government is in the process of forming a National Automotive Board (NAB) which would become a formal set-up to look into the issue of recall of vehicles and hence improve manufacturing standards. The prospective body, to oversee technical

12 and safety aspects of vehicles, will have representatives from all the nodal ministries and automotive bodies such as the Automotive Research Association of India (ARAI).

In a first-of-its-kind public-private partnership, automotive components manufacturer Tata AutoComp Systems Ltd has signed a memorandum of understanding (MoU) with the government of Gujarat for imparting vocational training to rural youth to widen employment opportunities for them. The agreement, focused to fill-in the skilled manpower shortage faced by the auto industry, would facilitate revamp of the State's Industrial Training Institutes (ITIs), launch of skill development programmes and introduction of modular employable skills (MES) courses. Tata AutoComp will train nearly 1,500 youth in Gujarat annually through this MoU.

Also, the government of Gujarat has provided 600 acre plot in Sanand to the European car-maker PSA Peugeot Citroen to set up its manufacturing facility.

In order to bring-in new and efficient vehicles on the Indian roads, SIAM has endorsed a regular, concrete scrappage policy to the government which says that all vehicles (cars, commercial vehicles and two-wheelers) made before 1996 should be scrapped. According to SIAM, such a policy would also help control pollution and harmful emissions.

Meanwhile, following the discussions between the visiting Myanmar Minister of Industry Soe Thein and Mr Praful Patel, Minister of Heavy Industries and Public Enterprises Tata Motors has proposed to set-up a bus-assembly facility in the neighbouring country along with supply of passenger vehicles to them. The discussions entailed mutual industrial collaboration between the two nations.

Road Ahead

Luxury car makers are keen on Indian markets as the sales for the same are expected to touch 150,000 units by 2020. Indian luxury car market is growing at an annual rate of 70 per cent and is expected to cross 20,000 units by the end of 2011 in terms of sales. Hence, the concerned majors are looking at Tier-II cities for new dealerships along with opening second or third outlet in top 10 metros.

13 According to industry experts, India is poised to become the third largest car market by 2020 after the US and China.

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Firstcall India Equity Research: Email – [email protected] C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods A. Rajesh Babu FMCG H.Lavanya Oil & Gas Ashish Kushwaha Diversified

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