October 2011

A Research Report
On

By
Islami Tijara Research Team

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October 2011

Hero MotoCorp Ltd.

Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest manufacturer of two -
wheelers, based in India. The company is engaged in the manufacture of two wheelers motorcycles and its
parts. The company has three manufacturing facilities namely Dharuhera, Gurgaon at Haryana and Haridwar
at Uttarakhand.

Hero Honda Motors Ltd was incorporated in the year 1984. The company was established as a joint venture
company between Honda Motor Company of Japan and Hero Group. In the year 1983, they signed a joint
collaboration agreement and formed the company. In December 2010, the Board of Directors of the Hero
Honda Group have decided to terminate the joint venture between Hero Group of India and Honda of Japan
in a phased manner. The Hero Group would buy out the 26% stake of the Honda in JV Hero Honda.
Subsequently, in August 2011 the company was renamed Hero MotoCorp with a new corporate identity.

Segments
Hero
MotoCorp

Motorcycle Scooter

Entry Deluxe Premium

In the motorcycle segment, the Company sold over five million units. In the domestic market, the Company
sold over 4.9 million motorcycles at a growth of 15%, thereby capturing 54.6% domestic motorcycle market
share.

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October 2011
In the scooter segment Pleasure, grew a whopping 65% during the year, with sales of 3.42 lakh units. This
single scooter brand now accounts for over 16% market share.

Across various motorcycle segments, the Company bested industry growth in the entry segment by growing
in excess of 17%, and selling more than 1.5 million units. In the deluxe segment, the Company captured
68.9% share. With sales of 3.8 million units, the Company registered growth in excess of 12%.

Financials
Hero MotoCorp out beat the market expectation with 13% growth in net profit to Rs 557.89 crore in June
2011 quarter on robust volumes. The company's top-line grew by healthy 32% to Rs 5683.33 crore in June
2011 quarter reflecting its highest quarterly sales of 15.29 lakh two wheelers, up by 24% y-o-y (Year-on-
Year). Its total two wheeler sales largely reflects the sales to entry level motorcycles i.e. 75 cc –less than 125
cc motorcycles that constitute 88% of its total sales and domestic sales in June 2011 quarter. Only Hero
MotoCorp managed to record growth in this segment in domestic market while the rest of players witnessed
fall. This could be attributed to robust demand in rural market that constitutes 45% of its domestic sales. The
OPM (Operating Profit Margin) increased by 40 bps(Basis Points) to 14.4% though limited by hike in raw
material costs. The operating profit grew by 36% to Rs 817.76 crore.

Key Rationale:
Continuously Improving Performance: Hero MotoCorp has posted its strongest sales volumes of all time. It
achieved sales of more than 5 lakh vehicles each month its highest for any quarter. Total sales were
recorded at 1529577 units, an increase of 24% Y-o-Y and 5% Q-o-Q(Quarter-on-Quarter). The average net
realization per vehicle notably increased in the current quarter by 6.7% Y-o-Y but marginally improved by
0.2% Q-o-Q.

Demand momentum to remain healthy: In view of expectations of normal monsoons and increasing
penetration in rural markets, Demand outlook remains strong over FY2011–13E. Management has also
Expect positive surprise for two wheeler demand to exceed 6mn units in FY2012.

Capacity expansion to meet increasing demand: Hero MotoCorp commenced expansion plans at its
Haridwar plant in Uttarakhand, with the first plant commissioned in April 2008 with an initial capacity of

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October 2011
500,000 units. The company has increased its total installed capacity to 6.15mn units from 5.4mn units in
March 2010, with capacity of 2.25mn at Haridwar and 1.95mn each at Dharuhera and Gurgaon. The
Haridwar plant also avails tax benefits, including a 100% excise exemption for 10 years and a 100% income
tax exemption for the first five years and 30% for the next five years. Besides the Haridwar plant, two plants
in Gurgaon also enjoy tax benefits. As a result of capacity expansion, Hero MotoCorp will be able to meet the
increasing demand and as such is expected to post a volume CAGR(Compounded Annual Growth Rate) of
~11% over FY2011–13E.

Smooth Demerger: The promoters of the company have announced their split wherein the Hero group will
buyout Honda’s stake in the company. This is a major positive for the company in many aspects like
exposure to export market and gradual decline then nil payment of royalty. The Hero group had been in talks
with Honda from a long time since the earlier agreement had restricted Hero Honda motors from exporting
in markets where Honda had a presence.

Exports to Boost volumes: When the buyout is complete and agreement signed, Hero MotoCorp will have
access to export markets which it didn’t have earlier. Export will start adding only in the long term after
detail analysis of potential markets. but the company’s competition views this as a major threat and have
already started to make plans to aggressively market their products in the export markets.

Outlook on margins: Despite reporting 15.29 lakh units volumes in Q1, (up 24% yoy) and robust net sales
(32% yoy), Hero MotoCorp reported a disappointing margin performance, wherein EBITDA margins came in
at 11.2% after adjusting for the `1,785 mn royalty expenses. RM to sales percentage was the highest ever
since last 11 years for Hero MotoCorp at 74.7%, due to stiffened commodity costs There are significant cost
pressures on the raw material front. There has been surge of ~18% in the spot prices of key metal inputs in
last few months. Despite of strong volume performance, the margin of company have been on down trend.

Outlook
Hero MotoCorp is expected to achieve a volume of 6mn units during FY12, with July-August remaining
seasonally weak, festive season is expected to provide a boost. The company expects the margins to
improve in Q2 & Q3 due to marginal softening of the commodity prices and benefit of price hike taken in
June 2011 despite incurring the re-branding cost in Q2 and Q3 FY 12. The company had hiked the vehicle

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October 2011
prices by Rs 500-750 per vehicle in June 24th 2011. It would incur re-branding cost of roughly Rs 100 crore
over and above advertising cost for the same. As per the company, the rural demand continues to be strong.
The growth in rural market is faster than in urban market. Rural sales constitute 45% of its sales volume now
compared to 38% in 2008-09. With Honda parting ways with the Hero Group, the company would also begin
to face competitive pressures from Honda's aggressive plans for the India market beginning 2011-12. Hero
MotoCorp has identified potential geographies and partners to explore export opportunities. However
expansion will take some time as it will need to ramp up capacities. increasing reach and new product
launches will helpe the company to create a better brand recall.

Co. Name Market Share

2010-11
Bajaj Auto 20.50%
Hero MotoCorp 44.60%
Honda. 13.00%
TVS 15.00%
Source: Business Line

Factsheet

Net Y-o-Y Y-o-Y Y-o-Y

Net Sales Sales Growth PBIDT PBIDT Growth PAT PAT Growth
Co_Name 201103 201003 % 201103 201003 % 201103 201003 %
Bajaj Auto 15998.12 11508.5 39% 4472.28 2550.04 75% 3339.73 1702.73 96%
Hero Motocorp 19245.03 15758.18 22% 2822.94 3025.3 -7% 1927.9 2231.83 -14%
TVS Motor Co. 6179.48 4363.11 42% 425.64 254.06 68% 194.58 88.01 121%

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October 2011

Particulars 1st Qtr 1st Qtr VAR Full Year Full Year VAR
201106 201006 [%] 201103 201003 [%]
Net Sales 5,637.64 4,264.61 0.32 19,245.03 15,758.18 0.22
Expenditure
Raw Material Consumed 4,241.43 3,084.81 0.37 14,135.17 10,730.41 0.32
% of Net Sale 75% 72% 73% 68%
Employee Expenses 164.52 145.01 0.13 618.95 560.32 0.10
% of Net Sale 3% 3% 3% 4%
TOTAL EXPENDITURE 4,865.57 3,694.07 0.32 16,864.00 13,093.56 0.29
% of Net Sale 86% 87% 88% 83%
PBIDT 906.17 655.96 0.38 2,805.29 3,002.58 (0.07)
PBIDT margin(%) 0.16 0.15 0.15 0.19
Interest (3.19) (2.66) 0.20 (1.85) (20.62) (0.91)
PBDT 909.36 658.62 0.38 2,807.14 3,023.20 (0.07)
Depreciation 239.79 48.28 3.97 402.38 191.47 1.10
Tax 111.68 118.65 (0.06) 476.86 591.58 (0.19)
Reported Profit After Tax 557.89 491.69 0.13 1,927.90 2,231.83 (0.14)

Key Financial Ratio 201103 201003

Price Earning (P/E) 19.95 20.85
Price to Book Value (
P/BV) 10.72 11.2
EV/EBIDTA 11.73 12.21
ROCE (%) 60.68 76.48

Source: Capitaline corporate database

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October 2011

Hero MotoCorp Ltd is the world's largest manufacturer of two - wheelers, based in India and is an Index
Component of the frontline ITE Shariah 35 Index, ITE Shariah 251 and ITE Shariah Automobiles Index. Hero
MotoCorp is a Shariah Compliant stock for last quarter and has the following ratios as on June 2011.
Co. Name Islami Tijara Islami Tijara Debt to Cash & Receivables Interest +
Sector Industry TTM Avg. Interest to Impure
Market bearing sec TTM Avg. Income to
Capitalisation to Market Total
TTM Avg. Capitalisation Revenue
Market
Capitalisation
Hero Automobiles Automobiles- 0.19 6.93 0.31 0.36
MotoCorp Vehicles
Limited

Stocks in order to be Shariah Compliant needs to fulfill certain Financial Ratio Criteria certified by Shariah Board.*
*1) Debt to Average Market capitalization should not exceed 33 percent.
2) Cash + interest based investments of the company to Average Market capitalization should not exceed 33 percent.
3) Receivables to Average Market capitalization should not exceed 33 percent.
4) Interest and impure income to total Revenue should not exceed 5 percent.

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