The ride has been such an adrenaline teaser. And smart investors have enjoyed the trip. The scrip, having raced 65 per cent from its yearly low of Rs 116 (in April 2001) to Rs 191 (in August), has touched Rs 300 levels.
Hero Honda has been recently promoted as one of the sensex stocks, in turn displacing M&M. Moreover, the company has taken the lead in flagging off the third quarter results season. And what a wonderful ride it has been, the last three months!
After registering a 44 per cent and 38 per cent volume growth for October and November 2001 respectively, the company's sales for December surged 44 per cent as compared to the previous year.Between April to December 2001, Hero Honda posted a 36 per cent sales growth.
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In comparison, the motorcycle segment rose 33 per cent. Little wonder then that the company upgraded its FY02 volume target from 1.25 to 1.4 million motorcycles.
The financial performance for the third quarter almost reflects this superlative volume growth. Topline has risen 44 per cent (Rs 1219.47 crore). Meanwhile, earnings have zoomed 90 per cent (Rs 133.22 crore).
Moreover, the company's focus on cost rationalisation through indigenisation, has rendered operating margins to expand 179 basis points. With pricing pressures being built up by competitors and indigenisation close to complete, analysts fear that the margins have peaked out at the current levels.
Atul Sobti, senior vice president, marketing and sales at Hero Honda, says, "Given the scale of operations, there is always scope for margin expansion led by cost reduction. Although these cost savings will be partly utilised for key sales and marketing initiatives, the current margins will be maintained."
Can Hero Honda sustain this performance for long? Obviously, on an expanding base (an anticipated 1.4 million units for FY02), the prevailing growth rates can't be adhered to. Analysts expect the company to clock around 20 per cent volume growth for FY03.
The company's estimates also seem to be in line with the lower growth rates. "On a higher base, revenue growth should be around 20 per cent for the next fiscal," confirms Sobti.
On the operational front, the company is introducing a 100cc plus bike around the second quarter of FY03, to grab volumes. Besides, it is augmenting capacity by two million units over the next two years to meet demand.
Hero Honda's valuations have zipped in the recent past. At the current level, analysts' consensus earnings estimate for FY02 and FY03 are discounted 16 and 14 times respectively. The earnings for these fiscals were discounted only nine and seven times four months back.
Although the valuations have risen remarkably, sentiments continue to be favourable. There seems to be enough fuel in the scrip and future volumes will chart out the road ahead.