The company should do well although competition is increasing
Despite a tough environment, Hero Honda did exceptionally well in 2008-09 ending the year with a market share in motorcycles of 57 per cent. The March quarter saw an increase in revenues of 22 per cent y-o-y and easing commodity prices helped the firm post an operating profit margin of 14.16 per cent.
The company commands a strong presence in rural areas and despite the downturn in the economy, a strong product portfolio across the entry, executive and premium segments, should help it grow two wheeler volumes by about 8 per cent in the current year. On a slightly smaller base last year, volumes were up 12 per cent. Hero Honda depends less on financing schemes to sell its bikes.
Moreover, the company has demonstrated that it has pricing power — it hasn’t always passed on the benefits of lower excise duties or lower raw material prices to customers. So it’s possible revenues this year could grow by about 7-8 per cent over the Rs 12,319 crore earned in 2008-09. With prices of steel easing, operating margins should sustain at current levels of 14 per cent.
And with the company planning to scale up production at its Hardwar plant, the effective tax rate should be lower. That means the earnings per share (EPS) could grow at around 20 per cent this year over the Rs 64.19 posted last year. The Hero Honda stock was one of the top performers of 2008 and since January, this year, has rallied smartly. At 1,100, the stock trades at around 14 times estimated 2009-10 earnings and is attractively valued.