4QFY2010 Result Update I Automobile

April 19, 2010

Hero Honda
Performance Highlights
For 4QFY2010, Hero Honda (HH) registered 20% yoy growth in Net Sales to Rs4,093cr (Rs3,412cr), and a 49% surge in Net Profit to Rs599cr (Rs402cr) that was above our expectations. The company reported robust performance on the Operating front, owing to higher operating efficiency and a yoy dip in the Raw Material cost. Going ahead, the company expects to maintain its market share, following the launch of motorcycles over the next few quarters to combat competition. On the bourses, the stock price has seen a decline in the last few sessions and is currently trading below its fair valuations. Hence, we recommend an Accumulate rating on the stock. Top-line in-line; Bottom-line exceeds expectations: For 4QFY2010, Hero Honda (HH) clocked a 20% growth in Net Sales to Rs4,093cr (Rs3,412cr), which was in line with our estimates. EBITDA Margins increased by 89bp yoy, owing to lower Raw Material costs, which fell by 142bp yoy and accounted for 67.6% of Sales (69.1% in 4QFY2009), and due to better Operating leverage during the quarter. HH reported a 49% surge in Net Profit to Rs599cr (Rs402cr) during 4QFY2010, owing to an improvement in the OPM and a lower Tax provision arising from the commencement of its Haridwar plant. Outlook and Valuation: We expect HH to record around a 10% CAGR in Revenues over FY2010-12E, aided by around an 8% CAGR in Volumes during the period. We estimate the OPM to decline to around 16.3% (16.9%) in FY2012E, due to the increasing Raw Material prices (aluminum and steel). We expect the Net Profit to register a CAGR of 8% over FY2010-12E, on account of the Tax benefits availed by HH at its new plant in Uttaranchal. We have revised our EPS estimates marginally upwards to Rs120.3 (Rs113 earlier) for FY2011E and to Rs130.3 (Rs123), following the better-than-expected 4QFY2010 performance by the company. We recommend Accumulate the stock, with a Target Price of Rs2,085, owing to the recent decline in the stock price. Key Financials
Y/E March (Rs cr) Net Sales % chg Net Profit % chg OPM (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Accumulate
CMP Target Price
Investment Period Stock Info Sector Market Cap (Rs cr) Beta 52 WK High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Shareholding Pattern (%) Promoters MF/Banks/Indian FIs FII/NRIs/OCBs Indian Public Abs. (%) Sensex HH 3m (0.5) 13.5 1yr 57.9 70.8 55.0 7.2 30.0 7.8 3yr 27.8 189.8 Automobile 37,881 0.7 2,094/1,061 73835 2 17,401 5,204 HROH.BO HH@IN

Rs1,897 Rs2,085
12 Months

FY2009 12,319 19.2 1,282 32.4 13.9 64.2 29.6 10.0 37.8 42.1 2.5 20.1

FY2010E 15,758 27.9 2,232 74.1 16.9 111.8 17.0 10.0 58.9 61.6 2.0 12.5

FY2011E 17,332 10.0 2,403 7.7 16.5 120.3 15.8 7.9 56.1 58.0 1.7 11.4

FY2012E 19,009 9.7 2,602 8.3 16.3 130.3 14.6 6.6 49.4 51.6 1.5 10.2 Vaishali Jajoo
Tel: 022 4040 3800 Ext: 344 E-mail: [email protected]

Please refer to important disclosures at the end of this report

Sebi Registration No: INB 010996539

Hero Honda I 4QFY2010 Result Update

Top-line in-line, riding on robust volumes: For 4QFY2010, Hero Honda (HH) clocked a 20% growth in Net Sales to Rs4,093cr (Rs3,412cr), which was in line with our estimates. Sales increased primarily on the back of a strong 18.9% growth in Volumes and a marginal rise in the yoy average Realisations of around Rs34,492 per bike (compared to Rs34,192 last year). Operating Margins improved by 89bp, on the back of a decline in Raw Material costs, decent Top-line growth and optimal operating leverage. As a result, the Bottom-line spurted by 49% to Rs599cr (Rs402cr) during the quarter, surpassing our expectation of Rs545cr. Margins improve on better operating leverage: During 4QFY2010, HHs EBITDA Margins increased by 88bp yoy, owing to lower Raw Material costs, which fell by 142bp yoy and accounted for 67.6% of Sales (69.1% in 4QFY2009) and better Operating leverage during the quarter. Other Expenditure increased by 46bp yoy during the quarter, due to higher Advertising expenditure. HH reported 26.7% yoy increase in Operating Profit to Rs682cr (Rs538cr) in 4QFY2010. Net Profit exceeds expectations: HH reported a 49% surge in Net Profit to Rs599cr (Rs402cr) during 4QFY2010, owing to the improvement in the OPM and a lower Tax provision arising from the commencement of its Haridwar plant. Other Income, which mainly comprised of treasury gains, increased by 80.6% yoy to Rs99.2cr (Rs54.9cr) for 4QFY2010, and aided the Bottom-line growth during the quarter. Market share reduced in FY2010; future outlook cautious: HHs domestic Motorcycle Segment market share of 53.9% at the end of FY2010 has come down from about 63.1% at the end of FY2009. The company has guided to clock five million motorcycles Sales Volume in FY2011E. The Scooter Segment recorded an overall Volume growth of 37.2% yoy during FY2010, with its new launch, Pleasure, selling about 17,500 units per month. Exhibit 1: Motorcycle Segment Volume
Units 1,300,000 1,100,000 900,000 700,000 500,000 1QFY2007 2QFY2007 3QFY2007 4QFY2007 1QFY2008 2QFY2008 3QFY2008 4QFY2008 1QFY2009 2QFY2009 3QFY2009 4QFY2009 1QFY2010 2QFY2010 3QFY2010 4QFY2010 % 100 80 60 40 20 0 (20)

Market Share(RHS)

Volume(LHS)

% yoy growth(RHS)

Source: SIAM, Angel Research

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Exhibit 2: 4QFY2010 Performance

Y/E March (Rs cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity capital (cr) EPS (Rs) Source: Company, Angel Research 4QFY2010 4,092.6 2,768.4 67.6 146.0 3.6 496.2 12.1 3,410.6 682.0 16.7 (4.5) 48.7 99.2 737.0 737.0 18.0 138.2 18.8 598.8 14.6 39.9 30.0 4QFY2009 3,411.8 2,356.5 69.1 119.0 3.5 398.0 11.7 2,873.4 538.4 15.8 (9.6) 44.4 54.9 558.6 558.6 16.4 156.4 28.0 402.2 11.8 39.9 20.1 48.9 48.9 (11.6) 24.7 46.0 18.7 26.7 88.5 (53.6) 9.7 80.6 31.9 31.9 22.7 % chg 20.0 17.5 FY2010 15,758.2 10,736.4 68.1 560.3 3.6 1,796.9 11.4 13,093.6 2,664.6 16.9 (20.6) 191.5 338.0 2,831.7 2,831.7 18.0 599.9 21.2 2,231.8 14.2 39.9 111.8 FY2009 12,319.1 8,742.0 71.0 448.7 3.6 1,416.7 11.5 10,607.4 1,711.8 13.9 (31.7) 180.7 218.7 1,781.5 1,781.5 14.5 499.7 28.1 1,281.8 10.4 39.9 64.2 74.1 74.1 20.1 (34.9) 6.0 54.5 59.0 59.0 23.4 55.7 26.8 24.9 % chg 27.9 22.8

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Key Highlights
Haridwar plant to ramp-up production HH commenced expansion plans at its Haridwar in Uttarakhand, with the first plant commissioned in April 2008 with an initial capacity of 500,000 units. The company aims to increase its total installed capacity to 5.7 million (from 5.4 million) by August 2010. This will be done through an incremental investment of Rs130cr at its third and newest plant at Haridwar. This plant also avails of tax benefits, including a 100% Excise exemption for 10 years, and a 100% Income Tax exemption for the first five years and 30% for the next five years. The company has two plants in the Gurgaon area, besides the one at Haridwar, which enjoy tax benefits. Due to the increasing production levels at the Haridwar plant, the company's overall tax rate for 2009-10 has come down to 21.2% from 28% in the previous fiscal.

Outlook and Valuation

The Two-wheeler Segment registered an improvement in Sales in FY2010, on the back of the various measures adopted by the government to revive the Auto Sector, coupled with the positive developments on the macro-economic front. We believe that although the substantial ownership base of Two-wheelers has reduced the headroom for higher double-digit growth rates, the increased Replacement demand is expected to sustain Volumes. The rural markets are also expected to register better growth on account of the new demand arising from the relevant rural population. Thus, we estimate the Two-wheeler Segment to maintain its growth momentum and to register around a 9% CAGR in Volumes over the next few years. We expect HH to record around a 10% CAGR in Revenues over FY2010-12E, aided by around an 8% CAGR in Volumes during the period. We estimate the OPM to decline to around 16.3% (16.9%) in FY2012E, due to the increasing Raw Material prices (aluminum and steel). We expect the Net Profit to register a CAGR of 8% over FY2010-12E, on account of the Tax benefits availed by HH at its new plant in Uttaranchal. We have revised our EPS estimates marginally upwards to Rs120.3 (Rs113 earlier) for FY2011E and to Rs130.3 (Rs123), following the better-thanexpected 4QFY2010 performance by the company. We recommend Accumulate the stock, with a Target Price of Rs2,085, owing to the recent decline in the stock price. Exhibit 3: Trading above average P/E
25.0 20.0 15.0 10.0 5.0 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
Source: C-line, Angel Research

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Exhibit 4: Premium/Discount in HH P/E v/s Sensex P/E

0.60 0.40 0.20 0.00 (0.20) (0.40) (0.60) (0.80) Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10
Source: C-line, Angel Research

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Profit & Loss Statement

Y/E March Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary (Expense)/Inc. PBT Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (Rs) Fully Diluted EPS (Rs) % chg 10.2 1.6 234.1 17.6 1,246 80.8 1,327 388.2 29.3 858 777 7.9 38.9 38.9 FY2007 9,895 9,895 8,741 7,173 149.6 299.0 1,119 1,153 11.7 139.8 1,014 FY2008 10,335 10,335 4.5 9,005 7,406 152.2 321.2 1,126 1,330 15.3 12.9 160.3 1,170 15.4 11.3 2.0 242.8 16.2 1,410 13.2 88.7 1,499 442.4 29.5 968 879 13.1 8.5 44.0 44.0 13.1 FY2009 12,319 12,319 19.2 10,607 8,742 448.7 1,417 1,712 28.7 13.9 180.7 1,531 30.9 12.4 (31.7) 218.7 12.3 1,781 26.3 1,781 499.7 28.1 1,282 1,282 45.8 10.4 64.2 64.2 45.8 FY2010 15,758 15,758 27.9 13,094 10,736 560.3 1,797 2,665 55.7 16.9 191.5 2,473 61.5 15.7 (20.6) 338.0 11.9 2,832 59.0 2,832 599.9 21.2 2,232 2,232 74.1 14.2 111.8 111.8 74.1 FY2011E 17,332 17,332 10.0 14,477 11,834 260.0 572.0 1,811 2,855 7.1 16.5 240.0 2,615 5.7 15.1 3.5 354.9 12.0 2,966 4.8 2,966 563.6 19.0 2,403 2,403 7.7 13.9 120.3 120.3 7.7

Rs crore
FY2012E 19,009 19,009 9.7 15,920 13,069 285.1 608.3 1,958 3,089 8.2 16.3 255.9 2,833 8.3 14.9 2.9 372.6 11.6 3,203 8.0 3,203 600.5 18.8 2,602 2,602 8.3 13.7 130.3 130.3 8.3

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Balance Sheet
Y/E March SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,649 635 1,014 189.9 151.2 1,974 913 35.8 266.7 610.8 1,479 (566) 2,763 1,756 783 974 408.5 182.5 2,567 937 131.1 191.2 614.5 1,825 (888) 3,244 2,310 943 1,367 120.5 206.5 3,369 1,013 219.6 317.2 476.8 2,053 (1,039) 4,024 3,030 1,134 1,896 90.9 206.5 3,406 2,373 1,273.2 394.0 705.8 3,759 (1,386) 4,007 3,333 1,374 1,959 83.3 206.5 4,507 1,946 830.7 390.0 725.4 3,488 (1,542) 5,008 39.9 2,430 2,470 165.2 128.2 2,763 39.9 2,946 2,986 132.0 125.4 3,244 39.9 3,761 3,801 78.5 144.4 4,024 39.9 3,744 3,784 78.5 144.4 4,007 39.9 4,745 4,785 78.5 144.4 5,008 FY2007 FY2008 FY2009 FY2010 FY2011E

Rs crore
FY2012E 39.9 5,712 5,751 78.5 144.4 5,974 3,656 1,630 2,026 73.1 206.5 5,676 1,973 757.0 427.7 788.4 3,773 (1,800) 5,974

Cash Flow Statement

Y/E March Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments (Inc.)/Dec. in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2007 1,327 139.8 309 763 388.2 625 (474.4) 88 27.0 234.1 (125) 20.6 455 (1,098) (622) (122.9) 159 36 FY2008 1,499 160.3 (339) (334) 442.4 1,212 (356.7) (593) 78.8 242.8 (628) 33.2 397 (919) (489) 95.3 36 131 FY2009 1,781 180.7 (364) (227) 499.7 1,325 (289.5) (802) (103.3) 218.7 (976) 53.5 444 (758) (260) 88.5 131 220 FY2010 2,832 191.5 (1,473) (1,007) 599.9 1,956 (484.5) (37) (90.5) 338.0 (274) 467 (1,096) (629) 1,053.7 220 1,273 FY2011E 2,966 240.0 293 185 563.6 2,751 (295.1) 1,101) 0.3 354.9 (1,041) 1,869 (4,022) (2,152) (442.5) 1,273 831

Rs crore
FY2012E 3,203 255.9 (219) (157) 600.5 2,797 (312.3) (1,169) (34.0) 372.6 (1,143) 1,402 (3,130) (1,728) (73.7) 831 757

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Int.) (0.7) (1.6) 629.6 (0.9) (1.9) 584.8 (0.9) (2.1) (1.2) (1.7) (1.1) (1.8) 754.4 (1.1) (2.1) 993.6 6.6 9.3 9.1 39.0 (22.2) 6.1 10.5 11.2 41.8 (28.6) 6.1 9.5 6.6 42.2 (33.7) 5.9 8.9 6.1 38.9 (45.4) 5.4 9.7 5.2 40.6 (53.0) 5.4 9.5 5.2 39.3 (47.3) 39.9 25.6 34.7 38.9 25.8 32.2 42.1 29.0 37.8 61.6 71.3 58.9 58.0 50.7 56.1 51.6 44.1 49.4 10.2 0.7 4.1 29.4 29.4 11.3 0.7 3.5 28.2 28.2 12.4 0.7 3.6 31.9 31.9 15.7 0.8 4.8 59.6 59.6 15.1 0.8 5.0 61.3 61.3 14.9 0.8 4.0 49.0 49.0 38.9 38.9 50.0 17.0 123.7 44.0 44.0 56.5 19.0 149.5 64.2 64.2 73.2 20.0 190.3 111.8 111.8 121.3 80.0 189.5 120.3 120.3 132.3 60.0 239.6 130.3 130.3 143.1 70.0 288.0 48.7 38.0 15.3 0.9 3.1 31.2 13.0 43.1 33.6 12.7 1.0 2.9 26.6 10.9 29.6 25.9 10.0 1.1 2.5 20.1 8.5 17.0 15.6 10.0 4.2 2.0 12.5 8.3 15.8 14.3 7.9 3.2 1.7 11.4 6.5 14.6 13.3 6.6 3.7 1.5 10.2 5.3 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

April 19, 2010

Hero Honda I 4QFY2010 Result Update

Research Team Tel: 022-4040 3800

E-mail: [email protected]

Website: www.angeltrade.com

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Disclosure of Interest Statement 1. 2. 3. Analyst ownership of the stock Angel and its Group companies ownership of the stock Angel and its Group companies Directors ownership of the stock

Hero Honda No No No

4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors..

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April 19, 2010