Sales could taper off after the festive season, especially if the winter monsoon is weak.
Given its strong brands and distribution network, it's not surprising that Hero Honda continues to turn in good performances. However, analysts believe that at least 60,000-70,000 vehicles of the total of of 4.15 lakh two-wheelers despatched in August, would be stocks in the pipeline for the festive season beginning at the end of September. Nevertheless, sales at the retail end should have been higher than the 3.4 lakh posted in July.
While the less-than-normal monsoon hasn't impacted Hero Honda's business as yet, it's possible sales could slow down if the winter rain doesn't arrive on time or isn't sufficient. The company has benefited from high rural incomes -- a fairly high proportion of Hero Honda's sales of close to 60 per cent is derived from rural markets. But a weak winter monsoon could result in sales tapering off somewhat, though the wedding season should partly compensate for that.
Also, while Hero Honda currently commands a market share of 59 per cent for motorcycles and has a firm grip on the 100cc entry segment, Bajaj Auto, which recently re-entered the space, has done well to sell 48,000 vehicles in the very first month.
Nevertheless, Hero Honda plans to go ahead with launches of upgrades of some of its models in the next six months and with the economy on the mend, volumes in the current year should go up by about 10-12 per cent; they were up 12 per cent on a smaller base last year.
Given its pricing power, revenues, analysts estimate, could increase by at least 17-18 per cent over the Rs 12,319 crore posted last year. In the June 2009 quarter, revenues increased 34 per cent year-on-year to Rs 3,811 crore. Lower raw material costs should help operating profit margins sustain at levels of 16.5 per cent. At the current price of Rs 1,668, the stock trades at 18 times estimated 2009-10 earnings which is not cheap.
