Investing In Value And Multibagger Stocks

HERO HONDA - Safe Ride - Value & Growth Stock

Leadership position, strong financials and sound balance sheet make Hero Honda a good investment candidate for the long term

Double-digit inflation and high interest rates are not new for the 25-year-old two-wheeler manufacturer, Hero Honda Motors. The company has been able to wade through such tough times in the past and become a leading player in the domestic two-wheeler market (current market share: over 55 per cent). When the domestic motorcycle industry declined by 12 per cent in 2007-08, Hero Honda posted positive numbers (4 per cent growth in sales). For the latest quarter of the current fiscal, its topline grew by 35.60 per cent compared to the corresponding period last year—impressive given the credit crunch in the industry.

Its strengths include strong distribution network, new models, and focus on all segments of the market, including the rural vertical. Besides, the company enjoys a debt-free balance sheet.

Business performance. Hero Honda is strong in both urban and rural markets. Its key brands continue to drive volumes across segments. The company is increasing its presence in the premium segment with brands such as Hunk and CBZ X-treme that target urban youth. For the festive season, it has already launched four new models and more launches will be seen over the next few months.

While the overall rural penetration of two-wheelers is still low (10 per cent), the company has made inroads into the growing rural and semi-urban markets to increase sales. It is formulating region-specific modules.

To address financing issues, Hero Honda has tie-ups with regional retail financiers like Shriram Transport Finance and Fullerton India Credit. It also has agreements with Grameen Bank, co-operative banks and microfinance companies that are present in smaller towns and villages and have small loan portfolios.

The company has also expanded its distribution network by over 50 per cent over the last two years to 3,000 outlets (touching 3,500 this year).

Financial performance.

Valuation.
Hero Honda has a strong brand name, sound fundamentals and impressive figures over the last few quarters. The recent cut in cash-reserve ratio and repo rate, which could lead to lowering of lending rates, may support volume growth. Softening in commodity prices will help maintain operating margin growth. Its net profit margin is likely to improve as the benefits from lower excise liabilities and tax savings from its capacity in Uttarakhand (started production in April 2008) have started trickling in. Excise duty as percentage of gross sales is lower at 10.24 per cent for the last quarter as against 14.43 per cent in September 07 quarter.

Hero Honda’s increasing dividend and high dividend yield (2.3 per cent) is good news. The stock has also outperformed the BSE Sensex since January this year. At the current market price, it is trading 13.03 times its trailing 12 months’ earnings. Park here with a long term-ticket.
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Rakesh Jhunjhunwala's Latest Portfolio-September 2008