Hero Honda Stock Update -19th june 2009 | Hero Honda | Hero Honda Stock

Company Name	-	Hero Honda Motors Ltd
Research Firm	-	Emkay Research
Research Analyst	-	Chirag Shah
Recommendation	-	Accumulate

Emkay Research is bullish on Hero Honda Motors limited.

We came from our meeting with the management of Hero Honda with respect to the impact of monsoon, product and branding strategy and the preparedness for increasing competiton in the executive motocycle segment. We have upgraded our FY10E volumes estimates by 1.7% to 4,084,568 units and lowered other income estimates to factor in lower treasury yield. As a result, we have upgraded our FY10E and FY11E earnings estimates by 1.7% and 1.8% to Rs 85.5 and Rs 96 respectively. More importantly, the current volume estimates are based on expectation of subdued monsoon. We expect an additional volumes of around 4to 5% in case there is normal monsoon and good crop output. We maintain our ACCUMULATE rating with a target price of Rs 1445.

Key extracts of the meeting are as follows

Impact of monsoon

While a subdued monsoon will have an impact on overall demand, the company does not expect any significant impact on market share. HH is confident of achieving 4.1 mn units of sales despite a subdued monsoon. We believe that in case of a normal monsoon, the company can increase it sales to 4% to 5%. This should result in earnings upgrade of atleast 6% to 7%.

Treasury income

We have revised downwards our average yield estimates by 120 bps. We have now based our estimates on average yield of 7.8% against our earlier estimates of 9%. We have downgraded our other income estimates by 11% to Rs 2500 mn for FY10.

Changing customer preference

While there is a slight increase in the weight assigned to aesthetics/power quotients of motorcycles in semi urban/rural areas, the process has not really gather pace as it was expected. Hence there continues to be demand for tried and test offering that meet the basic criteria of ruggedness, endurance, mileage and brand value. HH does not expect any significant change in the customer preference in the semi urban/reural areas in the medium term.

Volume guidance

HH is confident of achieving sales of 4.1 mn units with Haridwar expected to produce 1.2 mn units. More importantly, the guidance is based on expectation of subdued monsoon.

Scooters

The company expects that the sales of ‘Pleasure’ to peak around 18, 000 units in its current form. To maintain the momentum, HH would require augmenting the product portfolio with variants/upgrades/new launches.

New launches

HH hinted for introduction of three to four variants/upgrades and a new offering during next 10 months.

Valuation and View

We have upgraded our FY10E volumes estimates by 1.7% to 4,084,568 units and lowered other income estimates to factor in lower treasury yield. As a result, we have upgraded our FY10E and FY11E earnings estimates by 1.7% and 1.8% to Rs 85.5 and Rs 96 respectively. More importantly, the current volume estimates are based on expectation of subdued monsoon. We expect an additional volumes of around 4to 5% in case there is normal monsoon and good crop output. We maintain ourACCUMULATE rating with a target price of Rs 1445.

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My View : Price of the stock has moved up significantly in the last few days. Moreover volatility of the stock market may continue till the budget is announced. This is a good stock to accumulate. But a prudent investor should start accumulating this stock after election.