Hero Honda Motors Ltd Q4 results update
Hero Honda Motors Ltd has planned a capex of Rs.350 cr in FY10 for product development,
investment in engine technology (due to new emission norms), setting up a
paint shop in Haridwar and plant modernisation at the facilities. In 2009,
HHML launched 9 models alongwith its variants and plans to launch similar
number of models in 2010.The management is looking at a volume of 4 mn
units in FY10, which is ~8% growth from FY09 volume of 3.7 mn units. The
raw material prices are expected to soften/remain stable in Q1 and Q2 of
FY10, which could help improve the margins.
In a period where the business threw up much larger cash than required for
working capital and capex, the decision to cut payout ratio to 30.6% in
FY09 is perplexing.
In FY09, HHML has earned an EPS of Rs.65.4 (vs our revised estimate of
Rs.57). We are introducing quick estimates for FY10. At the CMP of
Rs.1110.9, HHML quotes at 14.5 times FY10(E) EPS. Given the recent run up
in prices, lower dividend payout ratio and slower growth expected in FY11,
we feel the stock is fairly valued at the CMP. However, due to its strong
marketing position, healthy balance sheet, strong earnings outlook and free
cash flow generation, HHML remains one of the best picks on dips (ideally
in the price band of Rs.988 to Rs.1,017).
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