Hero Honda: Production ramp-up adds value

ANALYSTS' CORNER

Motilal Oswal Securities reiterates a buy on Hero Honda. The report expects a rise in production to be visible from August onwards. The company's volumes were impacted in the June quarter by production constraints and labour problems in Haryana.

It has already ramped up its production to 11,000 units/ day. In August, Hero Honda's production is expected to be approximately 2,50,000 units, and going forward the monthly run rate will be 2,70,000 units per month. Hero Honda is extending the length of its assembly lines, increasing the shift by half an hour and expecting productivity gains.

Hero Honda is focusing on the Splendor and Passion and their variants rather than the entry level CD Dawn. The report believes that the newly-launched products in the 125 cc category, coupled with the old Splendor and Passion combination, will once again demonstrate Hero Honda's ability to offer superior value. The stock trades at a P/E of 13.6x FY06 and 11.7x FY07 estimates.

Maruti Udyog: Value buy despite blips

ICICI Securities maintains its hold recommendation on Maruti Udyog. Although the company's management concedes that there could be short-term blips, it emphasised that the long-term growth drivers are intact.

Given the competitive advantage-highest market share of 54 per cent, largest number of models/ variants and the strongest distribution network-and its aggressive initiatives to gain market share, it is well positioned to capitalise on the emerging opportunities.

However, there are some concerns of a slowdown in revenue growth in FY06 as well as margin pressures. The company witnessed a slowdown in sales in April-July.

This was mainly due to product price hikes by 3-4 per cent on account of introduction of stricter emission norms from April as well as steel price hikes, increase in fuel prices and introduction of VAT.

Kesoram Industries: Unlocking value

Motilal Oswal Securities recommends a buy on Kesoram Industries. The report sees significant value hidden in tyre and cement businesses. Its assets are still quoting at a significant discount to replacement cost and peers.

Besides, there is significant potential to unlock value from investments in associate companies. The report believes that the stock is ripe for re-rating.

The cement business is expected to witness strong volume growth in FY07, driving up operating profit from Rs 86 crore in FY05 to Rs 150 crore in FY07. The Indian tyre industry is also set for better times and as one of the top-5 players in the market.

The report adds that the company's tyre division, Birla Tyres, would be a major beneficiary of improvement in business dynamics. A 220 bp expansion in tyre margins during FY05-07 to 6.3 per cent is anticipated. Given the buoyancy in its key businesses and significant value unlocking potential, the report is bullish.