The season has seen a good beginning with a revival in urban demand.
After a strong run in the first half of the year, the Hero Honda stock’s performance over the last three months has been similar to that of the market, both gaining around 17 per cent. Over the last month or so, however, the stock has done slightly better than the market. One reason for this is that while there were apprehensions earlier, that a less-than-normal monsoon could hurt sales, these have receded with better rainfall in September.
Also, with the share of farm income in total rural income now less than 50 per cent, the impact this time around, of a sub-normal monsoon is expected to be less severe than in the past. Hero Honda earns around 50 per cent of its revenues from rural markets. The despatches for September, at just over 4.01 lakh vehicles, are a shade lower than the 4.15 lakh in August. Despatches for both months would have catered for pipeline stocks — in August these were estimated around 60,000-70,000 and could be higher for September.
Nevertheless, retail sales both in August and September should have overtaken the 3.4 lakh figure achieved in July. The management believes that the current festive season will see the company’s sales surpassing the six lakh units sold during the festive season last year. That should not be difficult given that the economic environment is now far more benign than it was at this time last year; salaries are being restored across several sectors, two-wheeler loans are easier to access in a softer interest rate regime and the release of the balance arrears to government employees, following the Sixth Pay Commission’s recommendation, will put more money into the hands of consumers.
So a pick-up in urban consumption should more than offset any fall in rural demand. As such, with a number of new launches and upgrades lined up over the next six months, Hero Honda’s volumes in the current year should increase by about 10 per cent. On a smaller base, they were up 12 per cent in 2008-09. The only concern now is the winter monsoon; it’s possible that sales could slow somewhat down if the winter rains aren’t sufficient though the wedding season would partly compensate for that.
Also, Bajaj Auto has made a comeback in the 100cc segment selling one lakh bikes in less than two months. This space has been dominated by Hero Honda, but Bajaj could take away some market share. Nevertheless, Hero Honda’s revenues are estimated to rise about 17-18 per cent this year over the Rs 12,319 crore in 2008-09. With operating margins expected at 16.5 per cent, earnings should grow by about 42 per cent. At the current price of Rs 1,634, the stock trades at 18 times estimated 2009-10 earnings.
