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SYNOPSIS

Hero MotoCorp Ltd. (formerly Hero

Honda Motors Ltd.) is the world's

largest manufacturer of two- wheelers,

based in India.

Hero MotoCorp Ltd, the new name of

Hero Honda Motors Ltd after the Hero

group & Honda Motor Company called

off their 26-year-long association.

Hero MotoCorp Ltd. plans to set up

two new plants- one in the South and

the other in the West and a parts

distribution in Rajasthan.

During the quarter ended, the robust

growth of Net Sales is increased by

28.06% Rs. 58293.20 million.

Net Sales and PAT of the company are

expected to grow at a CAGR of 21%

and 8% over 2010 to 2013E

respectively.

Hero MotoCorp two-wheelers are

manufactured across three globally

benchmarked manufacturing units at

Gurgaon, Dharuhera and Haridwar.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 194011.50 28052.90 19279.00 96.54 21.30

FY 12E 238634.15 38162.83 23521.92 117.79 17.46

FY 13E 281588.29 44785.45 28085.88 140.64 14.62

Stock Data:

Sector: Automobiles

Face Value Rs. 2.00

52 wk. High/Low (Rs.) 2231.70/1906.45

Volume (2 wk. Avg.) 48000.00

BSE Code 500182

Market Cap (Rs in mn) 410583.20

Share Holding Pattern

1 Year Comparative Graph

Hero Honda BSE SENSEX

C.M.P: Rs. 2056.00 Target Price: Rs. 2323.00 Date: Oct. 19th 2011 BUY

HERO MOTOCORP LTD Result Update: Q2 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 2056.00 410583.20 96.54 21.30 13.89 5250.00

Bajaj Auto 1640.05 47550.24 119.59 13.74 9.68 400.00

TVS Motor 64.35 3057.19 4.44 14.49 3.06 120.00

Kinetic Motor 17.90 49.31 0.16 111.87 0.00 0.00

Investment Highlights

Q2 FY12 Results Update

During the quarter, the company disclosed a standalone profit of Rs. 6036.20

million as against of Rs. 5056.00 million for the quarter ended September 30,

2011. Net sales are increased by 28.06% to Rs. 58293.20 million from Rs.45519.50

million in the same quarter previous year. Total income grew by 27.62% to

Rs.59090.70 million from Rs.46303.00 million in the same quarter last year.

Company EPS is stood at Rs. 30.23 for the quarter ended June 2011.

Quarterly Results - standalone (Rs in mn)

As At Sep-11 Sep-10 %change

Net sales 58293.20 45519.50 28.06%

Net profit 6036.20 5056.00 19.39%

Basic EPS 30.23 25.32 19.39%

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Break-up of Expenses

Hero Honda changes name to Hero MotoCorp

The country’s largest two-wheeler maker Hero Honda Motors has changed its name

to Hero MotoCorp following the exit of its erstwhile Japanese promoter, Honda from

the company. The company received the necessary statutory approval from the

Registrar of Companies (RoC) for the changeover to the new name.

Plans to set up two new manufacturing units

Hero MotoCorp Ltd, the new avatar of Hero Honda Motors Ltd after the Hero group

and Honda Motor Company called off their 26-year-long association, plans to set

up new plants- one in the South and the other in the West- and a parts

distribution in Rajasthan. The plant would have an initial capacity of 750,000

units a year.

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Company Profile

Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest

manufacturer of two - wheelers, based in India.

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

manufacturing company in India and also, the 'World No.1' two-wheeler company in

terms of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to

maintain this position till date.

In the 1980's the Company pioneered the introduction of fuel-efficient, environment

friendly four-stroke motorcycles in the country. It became the first company to

launch the Fuel Injection (FI) technology in Indian motorcycles, with the launch of

the Glamour FI in June 2006.

Its plants use world class equipment and processes and have become a benchmark

in leanness and productivity.

Manufacturing

Hero MotoCorp two wheelers 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 are based at Haridwar, in the hill state of Uttrakhand.

Product range

Hero MotoCorp offers wide range of two wheeler products that include motorcycles

and scooters, and has set the industry standards across all the market segments.

• CD Dawn

• CD Deluxe

• Pleasure

• Splendor +

• Splendor NXG

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• Passion PRO

• Passion Plus

• Super Splendor • Splendor PRO

• Glamour

• Glamour PGM FI

• Achiever

• CBZ Xtreme

• Hunk

• Karizma • Karizma ZMR

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Financial 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 3391.97

Total Income 160961.40 196692.90 241717.76 284980.26

Expenditure -130935.60 -168640.00 -203554.93 -240194.81

Operating Profit 30025.80 28052.90 38162.83 44785.45

Interest 206.20 18.50 48.50 56.26

Gross profit 30232.00 28071.40 38211.33 44841.71

Depreciation -1914.70 -4023.80 -9455.93 -10590.64

Profit Before Tax 28317.30 24047.60 28755.40 34251.07

Tax -5999.00 -4768.60 -5233.48 -6165.19

Net Profit 22318.30 19279.00 23521.92 28085.88

Equity capital 399.40 399.40 399.40 399.40

Reserves 34250.80 29161.20 52683.12 80768.99

Face Value 2.00 2.00 2.00 2.00

EPS 111.76 96.54 117.79 140.64

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Quarterly Ended Profit & Loss Account (Standalone)

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

Description 3m 3m 3m 3m

Net sales 53909.30 56833.30 58293.20 64705.45

Other income 743.40 884.10 797.50 861.30

Total Income 54652.70 57717.40 59090.70 65566.75

Expenditure -45610.00 -48655.70 -49106.10 -55646.69

Operating profit 9042.70 9061.70 9984.60 9920.06

Interest -81.00 31.90 44.90 49.39

Gross profit 8961.70 9093.60 10029.50 9969.45

Depreciation -2373.90 -2397.90 -2784.90 -2924.15

Profit Before Tax 6587.80 6695.70 7244.60 7045.31

Tax -1571.70 -1116.80 -1208.40 -1268.16

Net Profit 5016.10 5578.90 6036.20 5777.15

Equity capital 399.40 399.40 399.40 399.40

Face Value 2.00 2.00 2.00 2.00

EPS 25.12 27.94 30.23 28.93

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Key Ratio

Particulars FY10 FY11 FY12E FY13E

No of Shares (in mn) 199.70 199.70 199.70 199.70

EBIDTA % 18.93% 14.46% 15.99% 15.90%

PBT % 17.85% 12.39% 12.05% 12.16%

PAT % 14.07% 9.94% 9.86% 9.97%

P/E ratio (x) 18.40 21.30 17.46 14.62

ROE - % 64.41% 65.22% 44.31% 34.60%

ROCE - % 90.46% 72.13% 69.27% 56.73%

Debt Equity Ratio 0.02 0.50 0.29 0.20

EV/EBIDTA (x) 13.67 14.64 10.76 9.17

Book Value (Rs.) 173.51 148.03 265.81 406.45

Price/Book Value 11.85 13.89 7.73 5.06

Charts:

• Net sales & PAT

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• P/E Ratio (x)

• Debt Equity Ratio

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• EV/EBITDA(X)

• P/BV (X)

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Outlook and Conclusion

At the current market price of Rs.2056.00, the stock is trading at 17.46 x

FY12E and 14.62 x FY13E respectively.

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

is seen at Rs.117.79 and Rs.140.64 respectively.

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

8% over 2010 to 2013E respectively.

On the basis of EV/EBITDA, the stock trades at 10.76 x for FY12E and 9.17 x

for FY13E.

Price to Book Value of the stock is expected to be at 7.73 x and 5.06 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.2323.00 for Medium to Long term investment.

Industry Overview

The Indian automobile industry, the seventh largest in the world, has demonstrated a

phenomenal growth. The industry has grown significantly over the last ten years,

during which industry volumes have increased by 3.2 times, from a level of 4.7 million

numbers to 14.9 million numbers, according to Vishnu Mathur, Director General,

Society of Indian Automobile Manufacturers (SIAM).

The industry, by virtue of its deep connects with several key segments of the economy,

occupies a prominent place in the country’s growth canvas. It exhibits a strong

multiplier effect and has the ability to be the key driver of economic growth. A robust

transportation system plays a key role in a country's rapid economic and industrial

development, and the well-developed Indian automotive industry justifies this catalytic

role by producing a wide variety of vehicles, which include passenger cars, light,

medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters,

motorcycles, mopeds, three wheelers, tractors etc.

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Auto Industry in India – Growth Drivers

The automobile sector in India has been experiencing significant growth in the last few

years on the back of factors that include:

• Favorable demographic distribution with rising working population and middle

class Urbanisation

• Rising affluence of the average consumer as per capita income rises - According

to McKinsey, the middle class in India will grow from 50 million to 550 million

by 2025. With a tremendous growth in wealth as the economy grows, there will

be significant increases in spending on discretionary items and consumer

durables

• Increasing disposable incomes in rural agri-sector

• Overall GDP growth, with a rise in industrial and agricultural output

• Introduction of ultra-low-cost cars

• Increasing maturity of Indian original equipment manufacturers (OEMs)

• Availability of a variety of vehicle models meeting diverse needs and preferences

– robust production

• Greater affordability of vehicles

• Easy finance schemes

• Favourable government policies

Indian Automobile market – Key statistics

India's automobile industry, currently estimated to have a turnover of US$ 73 billion,

accounts for 6 per cent of its GDP, and is expected to hit a turnover of US$ 145 billion

by 2016.

The automobile industry currently contributes 22 per cent to the manufacturing GDP

and 21 per cent of the total excise collection in the country, according to Mr Praful

Patel, Minister, Heavy Industries and Public Enterprises. In 2010-11, the total

turnover and export of the automotive Industry in India reached a new high of US$ 73

billion and US$ 11 billion respectively. The cumulative announced investments

reached US$ 30 billion during this period. He also said that the forecasted size of the

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Indian Passenger Vehicle Segment is nearly 9 million units and that of 2 wheelers,

close to 30 million units – by 2020.

India achieved the position of the top growing passenger car market in the world

during the January-June period in 2011, overtaking the US, which grew at 14.40 per

cent, according to SIAM. In passenger vehicles, India was the fastest growing market

at 18.20 per cent during the six month period.

India's automobile industry is expected to grow by 11 to 13 per cent in the fiscal year

ending March 2012, according to Pawan Goenka, President, SIAM. The industry body

said that Indian automakers sold 143,370 cars in June 2011.

The four-wheel passenger vehicle market has grown impressively at the hands of the

new middle class, and there is huge opportunity, as market penetration remains low.

Domestic market share for 2010-11

India’s automobile industry is growing fast, but two wheelers remain a dominant

category. More than 78 percent of motor vehicles on the road are two-wheelers, their

popularity driven by low price, high fuel mileage, and an ability to drive efficiently

through dense traffic. The share of different types of vehicles during 2010-11 was

passenger vehicles (16.25), commercial vehicles (4.36), three wheelers (3.39), and two

wheelers (76.00).

Recent Investments/ Trends

The auto industry has made huge investments in the country. As per 2008-09, the

total investment of auto industry in India was Rs 60,952 crore (US$ 13.89 billion).

Another Rs 78,000 crore (US$ 17.78 billion) of new investments have been announced

by the auto industry out of which some have already been made and the rest will come

up over the next 2-3 years. The industry, therefore, is keeping pace with the growing

demand for vehicles in all segments.

The Karnataka government has cleared investment proposals amounting to more than

Rs 8,662 crore (US$ 19.74 billion), which include the plans of Honda Motorcycle India

plans for a manufacturing unit in the State. Mr Murugesh Nirani, Karnataka

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Industries Minister, has said that Honda Motorcycles and Scooter India would be

investing Rs 1,350 crore (US$ 307.7 million) in Narsapur Industrial area of Kolar

district of the State.

Demand for two-wheelers from six of the eight domestic mobike manufacturers rose

16 per cent in June to more than 880,000 units, compared to 761,000 units in June

2010.

Australia is looking at possibilities of building better relations between its world-class

firms and rapidly growing Indian automotive industries with an objective to create new

export opportunities.

Pune-based Force Motors has signed an agreement with Daimler AG, under which

Daimler will supply technology for the development of a multi-purpose vehicle (MPV)

by Force Motors

Swedish automobile manufacturer Volvo Cars Corp is looking at introducing corporate

editions of its luxury sedans S60 and S80 to shore up volumes in the Indian

automobile market.

French car maker PSA Peugeot Citroen has selected a site near Sriperumbudur, to the

west of Chennai, in Tamil Nadu for setting up its car plant. The company is planning

to invest Rs 4,000 crore (US$ 911.72 million) in an integrated automobile project.

Toyota has launched its first made-for-India small car, the EtiosLiva, in the intensely

competitive hatchback segment. The car, priced between Rs 399,000 and 599,000

(US$9,094 and 13,653), will compete with Maruti Suzuki Swift, Hyundai i20,

Volkswagen Polo and Ford Figo.

Auto industry in India – Government Initiatives

With the gradual liberalisation of the automobile sector since 1991, the number of

manufacturing units in India has grown progressively.

Currently, 100 per cent Foreign Direct Investment (FDI) is permissible under

automatic route in this sector including passenger car segment. The import of

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technology/technological upgradation on the royalty payment of 5 per cent without

any duration limit and lump sum payment of US$ 2 million is also allowed under

automatic route in this sector.

The automobile industry is relicensed, and import of components is freely allowed.

With an objective of accelerating and sustaining growth in the automotive sector and

to steer, co-ordinate and synergize the efforts of all stakeholders, the Automotive

Mission Plan (AMP) 2006-2016 was prepared. The plan aims at making India global

automotive hub. The AMP 2006-2016 aims at doubling the contribution of automotive

sector in GDP by taking the turnover to US$ 145 billion and providing additional

employment to 25 million people by 2016.

In the long term, the government has expressed plans to follow a two pronged strategy

for spurring automotive Research &Development (R&D). The first is aimed at

addressing the existing infrastructure gap in the field domain of automotive testing

and homologation through the Department’s flagship National Automotive Testing and

R&D Infrastructure Project(NATRiP), which is being implemented at a cost of Rs 2,288

crores (US$ 521.5 million), and is expected to be completed by the end of 2012. The

second part of the strategy is aimed at leveraging the investments being made in

NATRiP facilities for collaborative R&D with the industry, especially for the small and

medium enterprises (SMEs) in the auto component space.

Further, with the recent announcement of the launch of the National Mission for

Electric Mobility and the setting up of the National Council and Board for Electric

Mobility, Mr. Patel emphasised on the commitment of the government for early

adoption of electric vehicles, including hybrid vehicles, and the manufacturing of these

vehicles and their components.

The government is considering setting up two automotive manufacturing hubs spread

over 10,000 acres each in central and eastern India. The new hubs, aimed at

consolidating India's position as an important destination for low-cost automotive

production, will be in addition to the three existing zones — Haryana, Maharashtra

and Tamil Nadu.

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Auto Industry in India – Road Ahead

The automotive industry is at the core of India’s manufacturing economy - India is all

set to become one of the world’s most attractive automotive markets for both

manufacturers and consumers. The resulting benefits to society, such as economic

growth, increased jobs, and stability for families employed by the automotive industry,

are significant.

The long-term potential for growth of the auto industry is very favorable, on account of

low vehicle penetration in the country. As income levels rise and easy finance is

available, the industry will continue to see a healthy growth rate. SIAM estimates that

the growth of the auto industry in FY12 will be in the region of 12-15 per cent.

________________ ____ _________________________ Disclaimer:

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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