HERO MOTOCORP LTD: A HERO OF EVERY PORTFOLIO !!!

Scrip Code: 500182 / HEROMOTOCO

CMP:  Rs. 1945.25; Buy at Rs.1925 - 1935 levels.

Short term Target: Rs. 2,000, 6 month Target – Rs. 2160; STOP LOSS – Rs. 1770.50; Market Cap: Rs. 38,844.21 Cr; 52 Week High/Low: Rs. 2249.70 / Rs. 1375.75

Total Shares: 19,96,87,500 shares; Promoters : 10,42,59,490 shares –52.21 %; Total Public holding : 9,54,28,010 shares – 47.79 %; Book Value: Rs. 148.03; Face Value: Rs. 2.00; EPS: Rs. 113.99; Div: 5250.00 % ; P/E: 17.06 times; Ind. P/E: 16.58; EV/EBITDA: 14.18.

Total Debt: 1491.16 Cr; Enterprise Value: Rs. 40,019.37 Cr.

HERO MOTOCORP LTD:  Hero Motocorp Ltd was incorporated in 1984 and is based in New Delhi, India. The company changed its name to Hero Motocorp from Hero Honda Motors Ltd in July 2011. Hero MotoCorp Limited engages in the manufacture and sale of motorcycles in India. It provides a range of two wheeler products, including motorcycles and scooters; and spare parts. The company markets its products under various brands, including CD Dawn, CD Deluxe, Splendor Plus, Splendor NXG, Passion and Passion Pro, Passion Plus, Glamour, Super Splendor, Splendor PRO, Achiever, Glamour FI, Hunk, CBZ X-treme, Karizma, Pleasure, and Karizma ZMR. It offers its products through a network of dealers, service and spare parts outlets, and dealer-appointed outlets. The Company's bikes are manufactured across three manufacturing facilities. Two of these are based at Gurgaon and Dharuhera, which are located in the state of Haryana in northern India. The third manufacturing plant is based at Haridwar, in the hill state of Uttrakhand. The Company was a joint venture between India's Hero Group and Japan's Honda Motor Co where by the promoter the munjals bought the 26 % stake of Honda for Rs. 3,841.83 Cr in July 2011. The Company offers Achiever in 135 cubic centimeter segment. In the 150 cubic centimeters and above the Company offers brands like Hunk, CBZ X-treme, Karizma and the Karizma ZMR. It also offers a 100 cubic centimeter scooter, Pleasure. The company is compared to Bajaj Auto Limited, TVS Motor Company Limited and Ashok Leyland Limited.

Investment Rationale:

Hero Motocorp Ltd's new promoter structure now is Hero Investment Pvt Ltd (HIPL) which holds 43.33 % in the company. Hero MotoCorp’s management expects volume momentum to moderate by 10 % - 12 % in Q4FY12. Despite of slowdown seen in both rural & urban markets, rural demand is still more resilient. It is expected that in FY13 volume growth could be at 10 % + levels. Inventory levels were around 1 to 1.5 weeks at dealers end. December inventory has moved up slightly to 2 to 2.5 weeks. Initial 3-4 days of sales post 15 Jan have been very encouraging. However, sustainability of sales needs to be monitored during the quarter. Management does not expect any meaningful saving in commodity costs going ahead and also Company has direct imports (largely cast wheel) of 1.5 % - 2 % (USD denominated) and 14 % - 15 % indirect imports (in both USD/Yen). Some pressure is expected from vendors as they are normally compensated with a lag. The R&D ramp up in terms of talent, international tie ups for technology etc are on track and so the Management maintains a time frame of 3 - 3.5 years (from time of separation from HONDA) for full capability to be able to launch its own products. Capacity is expected to reach 7 mn units by FY12 end. There is a scope for 15 % increase in capacity next year by further de-bottle necking. Haridwar capacity ramp up is on track and is expected to touch 9,500 units per day by mid FY13 (from 8,000 currently). Company expects that there would be strong exports momentum which should continue going ahead. The strategy of strengthening market share in existing markets like South Asia, Latin America and penetrating in new markets in the next 2-3 quarter is on track. Management maintained its vision of 1 mn units of exports in the next 5-6 years. The company maintains its target of achieving 5,000 active touch points by FY12 end from 4,500 in FY11.  All touch points have servicing capability while some of them have dealerships. Royalty would not exceed 5 % of sales on new models (beginning with Impulse). The current arrangement of technological tie ups for new products is till 2017 and so the company has the freedom to modify existing models. It is expected that the demand scenario will moderate slightly going ahead after strong volume growth over the past three years, mainly due to macroeconomic concerns. It is expected that HMCL to slightly under perform the industry’s growth during the period, due to increasing competition in the industry. HMCL commenced expansion plans at its Haridwar plant in Uttarakhand, with the first plant commissioned in April 2008, with an initial capacity of 500,000 units. The company has increased its total installed capacity to 6.15 mn units in FY2011 from 5.4mn units in FY2010, with capacity of 2.25 mn at Haridwar and 1.95 mn each at Dharuhera and Gurgaon. HMCL plans to further expand its capacity to 7 mn units by FY2012 through de bottle necking at existing plants. As a result of capacity expansion, HMCL will be able to meet the increasing demand and, as such, is expected to post a volume CAGR of 12.7 % over FY2011-13E. 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.

Outlook and Valuation:

HMCL commenced expansion plans at its Haridwar plant in Uttarakhand, with the first plant commissioned in April 2008, with an initial capacity of 500,000 units. The company has increased its total installed capacity to 6.15mn units in FY2011 from 5.4mn units in FY2010, with capacity of 2.25mn at Haridwar and 1.95mn each at Dharuhera and Gurgaon. HMCL plans to further expand its capacity to 7mn units by FY2012 through de-bottlenecking at existing plants. As a result of capacity expansion, HMCL will be able to meet the increasing demand and, as such, is expected to post a volume CAGR of 12.7 % over FY2011-13E. 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. It is believed that the benefits of lower raw-material costs will be negated due to higher advertising and R&D expenses that HMCL intends to incur going ahead. Further, due to increased competitive activity in the two-wheeler segment, HMCL’s market share will also remain under pressure. HMCL’s current valuations factors in the strong 31 % earnings CAGR that the company is likely to register over FY2011-13E. At the current market price of Rs. 1,945.25, HMCL is fairly valued at 13.43x FY2013E earnings (historical multiple – 15x). The stock is currently trading at a PE of 16.18 x FY12E and 13.43 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 120.20 in FY12E and Rs. 144.80 in FY13E. One can buy HEROMOTOCORP with a Medium to Long term investment with the price target of Rs. 2160 and for the SHORT TERM PLAYERS it should be Rs. 2000.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	15,770.20	19,258.50	23,468.90	26,608.60
NET PROFIT (Rs. Crs)	2,231.80	2,007.70	2,399.60	2,892.50
EPS (Rs.)	111.80	100.50	120.20	144.80
PE (x)	17.50	19.40	16.30	13.50
P/BV (x)	11.30	13.20	10.80	8.60
EV/EBITDA (x)	12.50	14.80	12.80	9.90
ROE (%)	61.40	62.50	73.00	71.00
ROCE (%)	72.90	59.30	60.20	75.40

I would buy HERO MOTOCORP LTD with a price target of Rs. 2160 for Medium to Long term and Rs. 2,000 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1770.50 on every purchase.


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UNION BUDGET 2012 - 13 : HIGHLIGHTS

GROSS DOMESTIC PRODUCT ESTIMATED TO GROW AT 7.6 %, +/- 0.25 % IN FY12 - 13. AT CURRENT PRICES THE ADVANCE GDP ESTIMATE OF 2011 - 12 IS Rs. 83,91,691 LAKH CR  AND AT 2004-05 PRICES Rs. 52,47,530 LAKH CR.

TOTAL SUBSIDES AT Rs. 1,90,015 CR.

FERTILIZER SUBSIDIES AT  Rs. 60,974 CR,

FOOD SUBSIDIES AT  Rs. 75,000 CR

OIL & PETROL SUBSIDIES AT  Rs. 43,580 CR.

FISCAL DEFICIT AT Rs. 5,13,590 CR.

MARKET LOANS = Rs. 4,79,000 CR

STATE PF = Rs. 12,000 CR.

EXTERNAL AID = Rs.10,148 CR.

LESS OTHERS = Rs. 12,442 CR.

THE CENTER'S EXPENDITURE 2012 - 13 IS PROJECTED AT Rs. 14,90,925 Cr.

IN FLOW (Rs. in Cr)
TAX RECEIPTS	7,71,071
CORPORATE TAX	3,73,227
INCOME TAX	1,95,786
CUSTOMS DUTY	1,86,694
EXCISE DUTY	1,94,350
SERVICE TAX	1,24,000
TAX OF UNION TERRITORY	2,310

NON TAX RECEIPTS	AMOUNT
INTEREST RECEIPTS	19,231
DIVIDENDS & PROFITS	50,153
EXTERNAL GRANTS	2,887
OTHER NON TAX RECEIPTS	1,207
RECEIPTS OF UNION TERRITORY	1,136
TOTAL	74,614

NON DEBT CAPITAL RECEIPTS	41,650
RECOVERY OF LOANS & ADVANCES	11,650
MISC. CAPITAL RECEIPTS	30,000

* Out of the Tax Receipts the Center has to keep aside States share of Rs. 3,01,921 cr & for Calamity & Contingency Fund of Rs. 4,620 crs.

OUT FLOW (Rs. in Cr)
PLAN EXPENDITURE	5,21,025
NON PLAN EXPENDITURE	9,69,900
OR
REVENUE EXPENDITURE	12,86,109
CAPITAL EXPENDITURE	2,04,816
DEFENCE	1,93,408
SUBSIDIES	1,90,015
GRANTS TO STATES & UTs	64,211
PENSIONS	63,183
INTEREST PAYMENTS	3,19,759
LOANS TO PSUs	465
OTHER GENERAL SERVICES	21,382
LESS OTHERS	346
CENTRAL PLAN	3,03,582
POSTAL DEFICIT	5,727
EXPENSES of UTs with out Legislature	3,875
NON PLAN CAPITAL OUTLAY	23,971
ECONOMIC SERVICES	24,105
GRANTS TO FOREIGN GOVT.	3,114
CENTRAL PLAN AID TO STATES	1,16,985
SOCIAL SERVICES	20,784
POLICE SERVICE	35,611

SOME MORE POINTS FROM BUDGET

à    PSU Banks to get Rs. 15,888 cr in FY13.

à    Income Tax exemption limit raised from Rs.180,000 to Rs. 200,000.

à    There will be TDS on Buying/Selling of immovable property. TDS of 1 % of the transaction value if transaction value is more than Rs. 50 lakhs in Tire 1 cities or more than Rs. 20 lakh in other cities. 

à  Proposal to launch Rajiv Gandhi Equity Scheme which allows a deduction of 50 % to new retailers with the lock in of 3 years, who invest uto Rs. 50,000 directly in equities and whose annual income is below Rs. 10 lakhs.

à    Priority Home Loans upto Rs. 25 lakhs with 1 % Interest subvention on Home Loans of Rs. 15 lakhs.

à    A deduction of upto Rs.5,000 has been allowed on prevention health check up. 

à    FY12 disinvestment target Rs. 30,000 Crs.

à    UID Project allocated Rs. 14,232 Cr..

à    To allow Foreign Direct Investments in Corporate Bonds.

à    Education sector allocated Rs. 25,555 Cr.

à    Security Transaction Tax reduced 20 % from 0.125 % to 0.10 % on all Delivery Cash Transaction. 

à    Service Tax raised from 10 % to 12 %. 

à  Custom duty on standard gold bars, coins of purity 99.5 % and Platinum have been hiked from 2 % to 4 % & on non -standard gold from 5 % to 10 %.

à  Cash Purchase of Bullion or jewellery in excess of Rs. 2 lakh will be liable to TDS at 1 % . 

à   FM proposes to reopen assessment upto 16 years for overseas assets to check unaccounted money.

à   Minimum Alternate Tax raised from 18 % to 18.5 % of Book profit.

à Two way fungibility in Indian Depository Receipts would be allowed subject to ceiling for greater foreign participation .

à  Individual tax payers are allowed a deduction of up to Rs. 10,000 for interest from savings bank account.

EDUCOMP SOLUTIONS LTD : A BEST BUDGET BUY !!!

Scrip Code: 532696 / EDUCOMP

CMP:  Rs. 200.70; Buy at Rs. 198 levels.
Medium to Long Term Target – Rs. 250; STOP LOSS – Rs. 182.16; Market Cap: Rs. 1,927.27 cr; 52 Week High/Low: Rs. 492.50 / Rs. 162.00; Total Shares: 9,60,27,630 shares; Promoters : 4,75,53,645 shares –49.52 %; Total Public holding : 4,84,73,985 shares – 50.47 %; Book Value: Rs. 167.26; Face Value: Rs. 2.00; EPS: Rs. 27.90; Div: 30 % ; P/E: 7.19 times; Ind. P/E: 11.18; EV/EBITDA: 4.86.

Total Debt: 671.37; Enterprise Value: Rs. 2,618.09 cr.

EDUCOMP SOLUTIONS LTD: The Company was founded in 1994 and is based in Gurgaon, India. Educomp Solutions Limited provides education solutions to schools, learners, and educators in India. The company’s products comprise SmartClass - an education content and technology solution; QuEST - Quality Education for Students and Teachers, which provides various services, including professional development programs for educators and students, whole school development programs, parents empowerment programs, mathematical lab kits, and parents empowerment programs; Mathguru - a math-help program; WiZiQ - a Web learning platform, which connects students and teachers worldwide; LearnHub - a social learning network; ETEN - a tele-education network; and MagiKeys - a software application that allows government school students to surf the Web, email, chat, and write documents in their mother tongue. Its products also include Educomp O3 - an one on one learning system; Pave - an alpha phonics and reading program; EduLearn - a learning management system; Wizlearn - an advanced learning platform; Singaporelearning.com - a learning portal for parents and students mainly from Singapore; Aha!Math - a Web-delivered supplemental math curriculum for grades K-5; EasyTech - a Web-delivered K-8 technology literacy curriculum; Aha!Science - a supplemental science curriculum for grades 3-5; and Millennium Learning System - a learning delivery system. In addition, the company operates Leap learning centers; Learning Hour tutoring centers; IndiaCan vocational training centers; EduSchools and higher education institutions under Raffles Millennium International, JRE Group of Institutions, and Millennium Academy of Professional Studies brand names. Further, it provides various services, such as professional development; education infrastructure implementation, teacher training, and content development projects; EduIgnite career guidance program; and TechLiteracy Assessment to measure and report technology literacy. As of 2011, the Educomp Solutions Ltd held portfolio of over 15 direct subsidiaries and approximately 25 indirect subsidiaries in India, Singapore, the United States and Canada. In February 2011, the company acquired majority stake in Gateforum Educational Services Pvt Ltd. EDUCOMP SOLUTION is locally compared with Everonn Education Ltd and with Ichishin Holdings Company Ltd and Riso Kyoiku Co. Ltd globally.

Investment Rationale:

Educomp Solutions has steadily moved up the value chain‐from an Instructional Communication Technologies (ICT) provider to one of the largest school chains in the country. The company has proved its execution skills and is well placed to take advantage of the new opportunities in the education sector. The ICT business gives it access to PPP (Public Private Partnership) projects envisaged for government schools. Smartclass has helped Educomp to develop a differentiated pedagogy (a study of being teacher or process of teaching) for its K‐12 (Kindergarten to Class 12) schools and have proved its execution skills in the K‐12  section. The base for the company’s future expansion into the vocational/ higher education space is this Smart Class. However, the past two quarters have seen a massive detoriation in the profitability of its core segment i.e. Smartclass. This is a key concern from the near to medium term perspective as the other businesses that can drive growth growing forward are still at nascent stages. Educomp’s business is capital intensive due to upfront investments required in the K‐12 segment or BOOT model for smartclass. The capex requirements are set to increase by threefold, particularly for its plans in K‐12 schools (Educomp provides facilities and technology to schools). The school business, as per regulations, cannot be a profit making enterprise So most companies have avoided this regulatory hassles by creating subsidiaries that charge schools for infrastructure and services provided, while the schools themselves operate at breakeven. Many state governments have set up regulatory bodies to regulate fees charged by schools; any increase in fees will require such a body’s prior approval. So, Educomp has a first mover advantage in smartclass and has been able to move quickly to establish itself in schools. Though margins are attractive in smartclass, with no strong barriers to entry in this sector - a competition is expected. However FITCH Rating a rating agency has affirmed its rating on Educomp to stable as they see the affirmative factors like Educomp's first mover advantage, its innovative business offering, market leadership in multimedia education and a diversified presence across all segments of the education sector covering pre schools, K-12 education, multimedia and online learning to higher education/vocational skills. Also Educomp is expected to benefit from the strong renewal rates in smart class business.The contracts in smart class are typically for 5 years and come up for renewal thereafter.  

Outlook and Valuation:

Union Budget is very close and I think Educomp Solutions will see a run up as government trends to increase spending on education sector as this sector is important for the core and sustainable development of the country. A growing economy, growing income, increasing urbanization, improving lifestyle and the determination of the young and educated couple to provide better and best quality higher education to their kids will result in higher penetration of ICT market in India. India enjoys good growth in Per capita income where more and more parents tries to provide best of the education to their kids. Further Government's Sarva Shiksha Abhiyan is the area to watch for as government tends to increase emphasis on PPP in education and ICT implementation in schools which would benefit firms like Educomp. Also due to FITCH Rating Educomp may see any private equity infusion or other initiatives such as disinvestment, if used for debt reduction or reduced off balance sheet corporate guarantees debt which leads to reduction in financial leverage to 2x or below its consistent basis. Educomp continued its good show in the SmartClass business with 6,818 classroom additions (up 28% YoY) in Q2FY12. Management has maintained its FY12 guidance of 40,000 ‐ 45,000 classroom additions (12,000 in H1FY12), which is aggressive. They have built in 34,000 additions in FY12, implying 45 % YoY growth in H2FY12. After incurring heavy capex in the past many quarters (and significantly higher than Street expectations), the capex have dipped during Q2FY12, as guided by management and no capex was incurred in higher learning versus the capex of Rs. 105 Cr which incurred in Q1FY12. Further, the K‐12 capex was Rs. 48 Cr versus Rs. 115 Cr in Q1FY12. Management has guided for even lower capex in H2FY12, which is a positive.  Educomp’s Q2FY12 PAT of Rs. 12.80 Cr (including MTM forex loss of Rs. 37.40 Cr) was significantly below expectation, on back of higher losses in online and higher learning segments. Though SmartClass performed well during the quarter, management’s FY12 guidance is aggressive, in the broader view. It is expected that it can report 8 % ‐ 13 % below consensus on FY12‐13 EPS estimates and expect the earnings downgrade cycle to continue. While a dip in capex in Q2FY12 is a key positive, sustaining it for a few more quarters is important for any re‐rating of the stock. Educomp stock prices fell substantially after the IT raids on its premises but the company clarified that it was the survey conducted by IT department and was not a raid, however due to this sort of negative news gives a good opportunity to enter & accumulate the stock at lower prices. At the current market price of Rs. 200.70, the stock is trading at a PE of 6.78 x FY12E and 4.98 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 29.60 in FY12E and Rs. 40.30 in FY13E. One can buy EDUCOMP SOLUTION with a target price of Rs. 250/share for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 210.00 from the day of budget.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
REVENUES (Rs. Crs)	1,039.50	1,350.90	1,514.00	1,917.60
NET PROFIT (Rs. Crs)	275.90	336.60	244.40	383.70
EPS (Rs.)	29.30	35.10	29.60	40.30
PE (x)	6.00	5.00	5.90	4.30
P/BV (x)	1.00	0.80	0.70	0.06
EV/EBITDA (x)	4.30	4.90	4.80	3.50
ROE (%)	27.40	17.80	12.60	15.10
ROCE (%)	17.60	13.90	13.10	16.70

I would buy EDUCOMP SOLUTIONS LTD with a price target of Rs. 250 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 182.16 on every purchase.