Hero Honda’s (HH) 1QFY2012 results were in-line with our estimates on the top-line front, but its EBITDA margin was below our expectation due to raw-material cost pressures. However, driven by increased other income and lower tax rate, net profit registered an in-line performance. While we broadly maintain our volume and revenue estimates, we upgrade our earnings estimates for FY2012E/FY2013E by 6%/4% to account for lower tax rate as guided by management. We remain Neutral on the stock, considering the uncertainty regarding access to technology and product development capability post the split with Honda Motor Co.
Raw-material cost pressures restrict operating performance; lower tax rate boosts the bottom line: HH registered in-line revenue growth of 32.3% yoy (5.4% qoq) to `5,683cr, led by a robust 23.9% yoy (5.2% qoq) jump in volumes and a 6.7% yoy (0.2% qoq) increase in average net realisation. Adjusted EBITDA margin (adjusted for royalty payments) declined by 275bp yoy (84bp qoq) to 11.3% against our estimates of 12.1%, as raw-material costs increased by 355bp yoy (190bp qoq). Net profit increased by 13.5% yoy (11.2% qoq) to `558cr, supported by higher other income and lower tax outgo.
Outlook and valuation: We broadly maintain our volume estimates and model the company to record a CAGR of ~14% in revenue over FY2011–13E, aided by ~11% CAGR in volumes during the period. We expect margins to remain under pressure on account of higher advertising, rebranding and R&D spends. As a result, net profit is expected to register a CAGR of ~10% over FY2011–13E. Further, due to intense competition in the two-wheeler segment, we believe HH’s market share will remain under pressure, leaving limited room for earnings upgrade. We remain Neutral on the stock.
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