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Monday, December 29, 2008

Hero Honda - Best stock to invest in two wheeler auto sector

The country's largest two wheeler maker has not been as badly hit by the slowdown as its peers.

Its year-to-date sales volume growth at 13 per cent is twice the two wheeler sector growth helping the company increase its market share in motorcycles (62 per cent) and scooters (14 per cent). The company has been able to perform better than its peers (Bajaj Auto, TVS Motors) by focussing on the high growth rural markets, which now constitutes 55 per cent of its sales. Secondly, 90 per cent of its overall sales are cash purchases, while both its peers are dependent on vehicle finance.

Going ahead, growth in the second half, is expected to be muted as the slowdown drags down purchase activity. Operating margins, now at around 13 per cent, might move up due to reduction in raw material cost and excise duty cut. Once volumes move up, the doubling of capacity at its Uttaranchal plant to 1.2 million units and increase in sub-contracting to 60 per cent levels in the current fiscal would help.

While its focus continues to be the 100 cc segment and the company aiming for six new launches over the next one year, expect volume growth to trend down to about 10 per cent in FY10. At Rs 813, the stock can deliver 15-18 per cent returns over the next 12 months.

Despite the current trend of falling sales, lower demand and lack of credit financing (up to 70 per cent of sales), another stock in the auto space that can be looked at is Maruti Suzuki; trading at an attractive 8.7 times FY10 EPS estimates.
Source: Business Standard

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