Hero Honda reported recurring PAT at Rs5.97bn was ~8% ahead of expectations, driven by EBITDA margins that surprised at 18.3% (130bps ahead of expectations) as SG&A costs were slightly lower than expected.
We think margins in the two-wheeler sector are close to peak levels. We expect margins to deteriorate from 4QFY10 on account of input cost pressures. EBITDA growth in FY11E will be driven by volumes (we forecast at ~10% CAGR over FY11/12E).
Channel checks in the drought-affected areas of Uttar Pradesh and Bihar confirm this. Thus, we believe the concern of the drought has been overplayed by investors. Management is guiding for 4.3m sales units in FY10.Further increasing competition can result in significant market-share losses in the second half of the fiscal year. Operating margins are also likely to come down due to increasing raw material prices
Citi expects Hero Honda to report an EPs of Rs 93 and 112 for FY10 and FY11 respectively.
HSBC is extremely bullish and expects Hero Honda to report an EPS of Rs 103 and 124 for FY10 and FY11 respectively. While Macquarie is the most bearish with EPS expectations of Rs 91 and 96 for FY10 and FY11 respectively.
ENAM expects Hero Honda to report an EPS of Rs 100 and 108 for FY10 and FY11 respectively.
Edelweiss expects Hero Honda to report an EPS of Rs 98 and 111 for FY10 and FY11 respectively.