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SYNOPSIS

Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers, based in India. It also offers spare parts for motor cycles.

Total cumulative sales for the quarter stands at record 15,29,577 units, growth of 24 percent. This is the highest unit sales for the company in any quarter.

The Company launches four new products – the New Glamour & Glamour FI; & the refreshed Karizma & ZMR.

The company plans to continue to build on its strategy of innovation and technology focus by introducing new products, combined with new types of sales and marketing programs.

Net Sales and PAT of the company are expected to grow at a CAGR of 21% and 3% over 2010 to 2013E respectively.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 194011.50 28052.90 19279.00 96.54 18.54

FY 12E 238634.15 35537.85 21226.57 106.29 16.84

FY 13E 281588.29 40372.55 24369.40 122.03 14.67

Stock Data:

Sector: Automobiles

Face Value Rs. 2.00

52 wk. High/Low (Rs.) 2060.00/1377.95

Volume (2 wk. Avg.) 54000

BSE Code 500182

Market Cap (Rs in mn) 357463.00

Share Holding Pattern

1 Year Comparative Graph

Hero Honda BSE SENSEX

C.M.P: Rs. 1790.00 Target Price: Rs. 2022.00 Date: July 22nd 2011 BUY

HERO HONDA MOTORS LTD Result Update: Q1 FY 12

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Hero Honda 1790.00 357463.00 99.86 18.20 6.73 5500.00

Bajaj Auto 1447.60 418887.70 119.59 12.10 8.53 400.00

Tvs Motor 51.10 24277.00 4.05 12.62 2.80 120.00

Kinetic Motor 19.85 546.80 0.03 661.67 - 0.00

*As on 22/07/2011

Investment Highlights

Q1 FY12 Results Update

During the quarter, the company disclosed a standalone profit of Rs. 5578.90

million as against of Rs.4916.90 million for the quarter ended June 30, 2010. Net

sales are increased by 32% to Rs. 56833.30 million from Rs. 42966.10 million in

the same quarter previous year. In the same period, standalone operating profit of

the company was at Rs. 9061.70 million, a rise of 38% over the prior year period.

Company EPS is stood at Rs.27.94 for the quarter ended June 2011.

Quarterly Results - standalone (Rs in mn)

As At Jun-11 Jun-10 %change

Net sales 56833.30 42966.10 32

Net profit 5578.90 4916.90 13

Basic EPS 27.94 24.62 13

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Break-up of Expenses

Company Profile

Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers, based

in India.

The company is a joint venture between India's Hero Group and Honda Motor

Company, Japan that began in 1984.

In 2001, the company achieved the coveted position of being the largest two-wheeler

manufacturing company in India and the ‘World No.1’ two-wheeler company in terms

of unit volume sales in a calendar year by a single company. Hero Honda has retained

that coveted position till date.

Today, every second motorcycle sold in the country is a Hero Honda bike. Every 30

seconds, someone in India buys Hero Honda's top-selling motorcycle – Splendor.

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Manufacturing

Hero Honda bikes are manufactured across three globally benchmarked

manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are

located in the state of Haryana in northern India. The third and the latest

manufacturing plant is based at Haridwar, in the hill state of Uttrakhand.

Distribution

The company's growth in the two wheeler market in India is the result of an intrinsic

ability to increase reach in new geographies and growth markets. Hero Honda's

extensive sales and service network now spans close to 4500 customer touch points.

These comprise a mix of authorized dealerships, Service & Spare Parts outlets, and

dealer-appointed outlets across the country.

Product range of the company includes:

• CD Dawn

• CD Deluxe

• Pleasure

• Splendor +

• Splendor NXG

• Passion PRO

• Passion Plus

• Super Splendor

• Splendor PRO

• Glamour

• Glamour PGM FI

• Achiever

• CBZ Extreme

• Hunk

• Karizma

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Financials Results 12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY10 FY11 FY12E FY13E

Description 12m 12m 12m 12m

Net Sales 158605.10 194011.50 238634.15 281588.29

Other Income 2356.30 2681.40 3083.61 3484.48

Total Income 160961.40 196692.90 241717.76 285072.77

Expenditure -130935.60 -168640.00 -206179.90 -244700.22

Operating Profit 30025.80 28052.90 35537.85 40372.55

Interest 206.20 18.50 123.72 114.66

Gross profit 30232.00 28071.40 35661.57 40487.20

Depreciation -1914.70 -4023.80 -9455.93 -10401.52

Profit Before Tax 28317.30 24047.60 26205.64 30085.68

Tax -5999.00 -4768.60 -4979.07 -5716.28

Net Profit 22318.30 19279.00 21226.57 24369.40

Equity capital 399.40 399.40 399.40 399.40

Reserves 34250.80 29161.20 50387.77 74757.17

Face Value 2.00 2.00 2.00 2.00

Total No. of Shares 199.70 199.70 199.70 199.70

EPS 111.76 96.54 106.29 122.03

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 31-Dec-10 31-Mar-11 30-Jun-11 30-Sep-11E

Description 3m 3m 3m 3m

Net sales 51616.60 53909.30 56833.30 60243.30

Other income 620.30 743.40 884.10 972.51

Total Income 52236.90 54652.70 57717.40 61215.81

Expenditure -46649.20 -45610.00 -48655.70 -51508.02

Operating profit 5587.70 9042.70 9061.70 9707.79

Interest 52.20 -81.00 31.90 30.94

Gross profit 5639.90 8961.70 9093.60 9738.73

Depreciation -559.60 -2373.90 -2397.90 -2469.84

Profit Before Tax 5080.30 6587.80 6695.70 7268.89

Tax -790.30 -1571.70 -1116.80 -1381.09

Net Profit 4290.00 5016.10 5578.90 5887.80

Equity capital 399.40 399.40 399.40 399.40

Face Value 2.00 2.00 2.00 2.00

Total No. of Shares 199.70 199.70 199.70 199.70

EPS 21.48 25.12 27.94 29.48

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Key Ratio

Particulars FY10 FY11 FY12E FY13E

EBIDTA % 19% 14% 15% 14%

PAT % 14% 10% 9% 9%

P/E ratio (x) 16.02 18.54 16.84 14.67

ROE - % 64% 65% 42% 32%

ROCE - % 80% 79% 51% 39%

EV/EBIDTA (x) 10.76 13.87 11.27 11.07

Debt Equity Ratio 0.02 0.02 0.01 0.01

Book Value (Rs.) 173.51 148.03 254.32 376.35

Price/Book Value 9.32 12.09 7.04 4.76

Charts:

• Net sales & PAT

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• P/E Ratio (x)

• P/BV (X)

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• EV/EBITDA(X)

Outlook and Conclusion

At the current market price of Rs.1790.00, the stock is trading at 16.84 x

FY12E and 14.67 x FY13E respectively.

Earning per share (EPS) of the company for the earnings for FY12E and FY13E

is seen at Rs.106.29 and Rs.122.03 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 21% and

3% over 2010 to 2013E respectively.

On the basis of EV/EBITDA, the stock trades at 11.27 x for FY12E and 11.07 x

for FY13E.

Price to Book Value of the stock is expected to be at 7.04 x and 4.76 x

respectively for FY12E and FY13E.

We expect that the company will keep its growth story in the coming quarters

also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.2022.00 for Medium to Long term investment.

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Industry Overview

Despite the fiscal slowdown worldwide, India had maintained its growth rate at a

steady 8-8.5 per cent and the automobile industry has also grown in excess of 13 per

cent over the last few years. With easy financing options and with the wide range of

cars being launched frequently, the Indian automobile enthusiasts have never seen it

better.

Recently, the President of the industry body Society of Indian Automobile Industry

(SIAM), Pawan Goenka commented that the Indian Automobile Industry is expected to

grow at the rate of 15 to 16 per cent in 2011. And this growth will be across the

categories – from two wheelers and four wheelers to commercial vehicles.

According to a study by Booz & Company, a Global Management Consulting Company,

the Indian Automobile industry will overtake the European market and is slated to

become the world’s fourth largest by 2015 and will be selling almost 6 million units

annually by 2020.

In the Automotive Mission Plan – 2006-2016 it is stated, ‘By 2016, India would emerge

as the world’s seventh largest car producer (as compared to the eleventh largest

currently) and retain 4th largest position in world truck manufacturing sector.

Further, by 2016, the automotive sector would double its contribution to the country’s

GDP from current levels of 5 per cent to 10 per cent. Its contribution to the

manufacturing sector would rise to 30-35 per cent from the current level of 17 per

cent. This is because the share of manufacturing in GDP is expected to go up to

around 35 per cent from current level of 17 per cent by 2016’.

The Union Budget of 2011-12 was termed as a ‘Reform Oriented Budget’ by Dr Pawan

Goenka, President, SIAM. Several reform initiatives including roadmap for Direct

Taxes Code, Constitutional Amendment Bill for Goods & Services Tax (GST) which

would be tabled in the current session of the Parliament and also pilot project across

11 states for implementation of IT towards GST introduction is positive for the

automobile industry.

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Investments:

Most car brands have either come up with India specific models and/or have launched

international models to satisfy the consumer’s enthusiasm for newer vehicles.

• General Motors (GM) India plans to launch six new vehicles over the next two

years in India at an investment to the tune of US$ 300 million. GM has invested

over US$ 1 billion in India till date.

• To meet the rising demand from the local market, Toyota Kirloskar Motors Ltd

(TKML), the local subsidiary of the Japanese company, will invest US$ 66.45

million to enhance its capacity by 60,000 units in the next one year.

• Mahindra & Mahindra Ltd (M&M) has begun work on its seventh tractor plant

at Zaheerabad in Andhra Pradesh (AP). The plant with a proposed capacity of

100,000 units a year would entail an investment of US$ 66.97 million.

• UK-based luxury and sports car maker Aston Martin has marked its entry into

India with the launch of its entire range, which includes the V8 Vantage Coupe,

V8 Vantage Roadster, V12 Vantage, DB9 Coupe, DB9 Volante, V8 Vantage S,

Virage and the four door sports car Rapide.

• British carmaker Bentley has launched a 4-seater coupe of its Continental GT

luxury sedan with a price tag of US$ 4,31,290 (ex-showroom, Delhi). The

company aims to cross the 100-units mark in the Indian market by 2012.

• Daimler, the parent company of Mercedes Benz, is planning to launch a

compact car in India based on the Smart range. France’s Renault and Japan’s

Nissan will provide technical assistance to alter and modify the basic design of

Daimler’s Smart two-seater car.

• BMW India is planning to increase its dealership network in 2011. Under its

Phase-1 expansion plan, the automobile manufacturer has set up 12 outlets in

the country. In Phase-2, it has planned to increase it to 22 outlets from the

present 18. The company inaugurated its new outlet OSL Prestige in

Bhubaneswar recently.

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• Hyundai Motor India Ltd (HMIL) will soon be setting up a greenfield plant in

India. The company will be spending US$ 89.1 million for this purpose. This

plant will be utilised to build 1.5 lakh diesel engines.

• Honda SIEL India Ltd is planning to launch their small car in India in 2011.

• Renault recently launched its five-year plan which will focus on India and other

emerging markets. The company will be launching the Koleos and Fluence in

India in 2011 as well as an SUV in 2012.

• Toyota has unveiled the 2011 Etios, which was specially developed for India.

The five- door variant of the Etios will be launched in April by the company in

2012. Toyota will construct a second plant at its Bidali complex in Karnataka in

an investment worth US$ 713.8 million for the manufacture of the Etios, with

its two varieties, the sedan and the hatchback.

• Mitsubishi is planning to introduce new models in India and tweak the existing

ones. As part of the plan, the company will launch the new Lancer in India and

Lancer Evo X and two SUV’s Pajero Sport and the 2010 Outlander.

• Daimler India Commercial Vehicles plans an investment of US$ 981 million

over a five year period in the manufacture of light, medium and heavy duty

trucks at its plant in Oragadam.

• Hero Honda and Ashok Leyland-Nissan are also planning new factories.

Domestic Market/Sales:

According to SIAM, the cumulative production data for April-January 2011 shows

production growth of 27.45 per cent over same period in 2010. In March 2011 as

compared to March 2010, production grew at 20.62 per cent. The industry produced

17,916,035 million vehicles of which share of two wheelers, passenger vehicles, three

wheelers and commercial vehicles were 75 per cent, 17 per cent, 4 per cent and 4 per

cent respectively.

• The growth rate recorded for Domestic Sales for 2010-11 was 26.17 per cent

amounting to 15,513,156 vehicles.

• Passenger Vehicles segment grew at 29.16 per cent during April-March 2011

over same period last year. Passenger Cars grew by 29.73 per cent, Utility

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Vehicles grew by 18.87 per cent and Multi-Purpose Vehicles grew by 42.10 per

cent in this period.

• The overall Commercial Vehicles segment registered growth of 26.97 per cent

during April-March 2011 as compared to the same period last year. While

Medium & Heavy Commercial Vehicles (M&HCVs) registered growth of 31.78

per cent, Light Commercial Vehicles grew at 22.88 per cent.

• Three Wheelers sales recorded a growth rate of 19.44 per cent in April-March

2011. While Passenger Carriers grew by 22.03 per cent during April-March

2011, Goods Carriers registered growth of 9.45 per cent.

• Two Wheelers registered a growth of 25.82 per cent during April-March 2011.

Mopeds, Motorcycles and Scooters grew by 23.53 per cent, 22.86 per cent and

41.79 per cent respectively.

• Maruti Suzuki posted a 14.7 per cent rise in January car sales while Mahindra

& Mahindra reported a sales growth of 22 per cent in comparison to last year.

• Tata Motors posted a 15 per cent rise in January sales. Tata Motors has

reported a consolidated net profit of US$ 540.3 million for the quarter ended

December 2010, up 273 per cent as compared to US$ 144.89 in same quarter

the previous year.

• Skoda Auto India has reported impressive sales growth for January 2011, with

total sales for January 2011 at 2825 units, as against 1881 units in January

2010.

• Volkswagen too has registered impressive growth in 2011 with more than 5000

units of the Polo hatchback and its sedan version, the Vento, in January.

Exports

During April-March 2011, overall automobile exports registered a growth rate of 29.64

per cent. Passenger Vehicles registered marginal growth at 1.64 per cent in this

period. Commercial Vehicles, Three Wheelers and Two Wheelers segments recorded

growth of 69.51 per cent, 55.86 per cent and 35.04 per cent respectively during April-

March 2011.

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Road Ahead:

After robust sales last year, the Indian automobile industry seems set to sustain the

growth trajectory in 2011 with a slew of new launches, while trying to keep prices

competitive. According to a report by KPMG, ‘Demographically and economically,

India’s automotive industry is well-positioned for growth, servicing both domestic

demand, and, increasingly export opportunities...Manufacturers are already planning

for the future: early advocates of technological and distribution alliances have yielded

generally positive results, enabling domestic OEMs to access global technology and

experience, and permitting them to grow their ranges with fewer financial risks’.

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This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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