The bike maker has cut raw material costs.
It’s been a splendid June 2008 quarter for Hero Honda, which has posted a 130 basis points increase in its operating profit margin at just under 12 per cent. Revenues for the Rs 10,332 crore company were up a reasonably good 16 per cent at Rs 2,843 crore, driven by a volume growth of 11 per cent and also to some extent by a low base in the June 2007 quarter.
In a difficult environment, Hero Honda was able to push through price increases of Rs 500-Rs 1,000 in April. Besides, at a time when raw material costs have been hurting industry, the company’s raw materials to sales came off by 100 basis points to 71.9 per cent.
The company, which has a 50 per cent share of the Indian motorcycle market and commands the lion’s share of the key executive segment, has managed to cash in on the marriage season, selling a larger share of higher margin bikes like Passion, CBZ-Xtreme and Hunk. Besides, it has also cut back on promotions and discounts. Hero Honda has an edge over competitors because it is able to sell more bikes without finance schemes being offered to the customer.
Also, the company sales are not skewed either in favour of urban or rural markets and therefore it has weathered the downturn in the industry better than its peers.
Two wheeler sales—-which have grown by 8 per cent in the first quarter of FY09— are likely to get a boost when the government implements the recommendations of the Sixth Pay Commission. Hero Honda should be able to cash in on this in the festive season.
More From This Section
The firm is expected to end FY09 with revenues of around Rs 11,500 crore, a net profit of around Rs 1,160 crore and a rise in the earnings per share (eps) of around 20 per cent.
At the current price of Rs 736, the stock trades at 12.4 times estimated FY09 and is reasonably valued. At Rs 505, Bajaj Auto trades at a discounted multiple of just under 9 times.