HERO MOTOCORP LTD : ON ROAD OF SUCCESS !!!

Scrip Code: 500182 / HEROMOTOCO

CMP:  Rs. 1646.95; Buy at current levels.
Medium to Long term Target: Rs. 1842; STOP LOSS – Rs. 1515.20; Market Cap: Rs. 32,887.53 Cr; 52 Week High/Low: Rs. 2249.00 / Rs. 1615.00

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. 148.58; Face Value: Rs. 2.00; EPS: Rs. 107.54; Div: 5250 % ; P/E: 15.31 times; Ind. P/E: 16.50; EV/EBITDA: 10.72.

Total Debt: 1,491.16 Cr; Enterprise Value: Rs. 34,378.70 Cr.

HERO MOTOCORP LIMITED:  HEROMOTOCORP Ltd was incorporated in 1984 and is based in New Delhi, India. The company changed its name to HeroMotoCorp from Hero Honda Motors Ltd in July 2011. HeroMotoCorp engages in the manufacturing and sales of motorcycles in India. It provides a range of two wheeler products, including motorcycles and scooters and spare parts. The company markets its product under various brands, including CD Dawn, CD Deluxe, Splendor Plus, Splendor NXC, Passion and Passion Pro, Passion Plus, Glamour, Super Splendor Pro, Achiever, Glamour FI, Hunk, CBZ X-treme, Karizma, Pleasure and Karizma ZMR. The company offers its product 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 100 cubic centimeter scooter Pleasure. 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 in Gurgoan 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 Motors Co whereby the promoter the Munjal’s bought the stake of Honda in July 2011. The company is compared to Bajaj Auto Ltd, TVS Motor Company Ltd, Atlas Cycles (Haryana) & Ashok Leyland Ltd locally and is compared with Shimano Inc of Japan globally.

Investment Rationale:

HEROMOTOCORP (HEROMOTOCO) management has indicated to launch seven to eight new variants every year. The company is targeting 1 million two wheelers to be annually exported by FY17E. The management also stated that it has neither offered discounts or freebies nor it plans to do so in the future. It has hiked dealer commissions by Rs.100 since October 2012, which is a regular revision followed by the company. HeroMotoCorp’s Q3 FY13 result was lower than street estimates; HeroMotoCorp’s volume in Q3 FY13 was down 1% YoY but up 18% Q-o-Q to 15,73,135 units due to festival season in Q3 in this FY. Contribution from 75-125 cc segments has increased by 97 bps YoY but down 207 bps Q-o-Q. Major contribution in 75-125 cc segments have been 125 cc segments namely Ignitor, Super Splendor and Glamour which has led to growth in realization. Management expects industry and HeroMotoCorp to grow at 5% - 6%. HeroMotoCorp’s Revenue was marginally lower at Rs. 6,151 Cr largely led by higher realization of Rs. 39,102/unit. EBITDA were lower than street estimates at Rs. 779 Cr. and EBIDTA margin were around 12.6%. Other expenditure was higher at Rs. 625 Cr. despite volumes which were down by 1% YoY due to increase in dealer margin by 50% on incremental sales and higher Ad spending in wake of intense competition. PAT for the HeroMotoCorp was at Rs. 488 Cr. Other expenses were high at 10.2% due to brand building and product launches. The management expects these expenses to continue in Q4FY13. It expects ad-spend to remain at 2% of sales. The Tax rate is expected to increase to 23% in FY14 from 16.3% currently as the Haridwar plant will no longer be eligible for tax breaks. The management expects better y-o-y volume growth in Q4FY13 than in Q3FY13. Management is expecting some relief in raw material cost due to depreciating YEN. Hero Moto Corp shipped its first lot of motorcycles to Latin America, it intends to increase its exports to 10% of its total sales. This was one of the key reasons that Hero parted with Honda, to be able to pursue its interests in the International market. The company hopes to sell in around 30 countries around the globe. It is expected that the company will launch 'Hero' as a brand in the south America markets in the next few weeks. It also intends to set up an assembly units in these markets once the relevant volumes are achieved.    

Outlook and Valuation:

Hero MotoCorp’s efforts for brand building post the Honda split and its investment phase and intensifying competition in two-wheelers will exert pressure on its profitability in the short term. However, its fundamentals are intact given its leadership position, robust rural reach and strong brand recall. HeroMotoCorp’s market share in two-wheelers rose by 2.93% quarter on quarter to 38.6%. It also gained market share from Honda in its core domestic motorcycle segment – its market share rose by 1.93% Q-o-Q to 51.9%. 

Hero MotoCorp's manufacturing plant at Haridwar

HeroMotoCorp has started the construction of its fourth manufacturing plant which will have an capacity of 7.50 lakh units per annum and started a new global parts center in Neemrana, Rajasthan at a capex of around Rs. 550 Cr. This plant  is spread over an area of 47 acres and will provide employment to over 1,000 people These are expected to be operational by the end of FY14. Company is also in the process of acquiring land for the Gujarat plant, this plant is expected to be operational by FY15. The Rajasthan and Gujarat projects will take up the total installed capacity to 85 lakh units. Despite festive season, inventory pile-up continues at the dealer’s level on poor demands. Since the rural region accounts for nearly 46% of sales, weak monsoons at the outset have impacted sales volume. Honda’s new launches in the sub-125 cc segment and commissioning of capacities well ahead of HeroMotoCorp’s new capacities is the biggest concern for HeroMotoCorp from its market share erosion point of view. The benefit on account of reduction in royalty Q1 FY15 onward would compensate the incremental cost pressure for HeroMotoCorp. At current price of Rs. 1646.95, the stock is trading at P/E of 15.23 x on FY13 estimates & 13.77 x on FY14 estimates. In my view HeroMotocorp could post EPS of Rs.108.10 for FY13E & Rs.119.60 for FY14E and one can ACCUMULATE the stock and would advise investors to use declines in the stock to buy with a long term view with a target price of Rs. 1842.00 for Medium to Long term investment.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	23,878.90	24,076.80	26,451.70	29,663.70
NET PROFIT(Rs. Crs)	2,378.80	2,157.90	2,357.90	2,999.70
EPS (Rs.)	119.10	108.10	119.60	150.20
PE (x)	15.00	16.50	14.90	11.90
P/BV (x)	8.30	6.50	5.20	4.20
EV/EBITDA (x)	8.90	9.30	8.20	6.90
ROE (%)	65.70	44.10	38.70	39.10
ROCE (%)	69.50	46.00	43.60	46.60

I would buy HERO MOTOCORP LTD with a price target of Rs. 1842 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. 1515.20 on every purchase.

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UNION BUDGET 2013 - 14 : HIGHLIGHTS !!!

GROSS DOMESTIC PRODUCT ESTIMATED TO GROW AT 5.5 %, +/- 0.5 % IN FY13 - 14. 

AT CURRENT PRICES THE ADVANCE GDP ESTIMATE OF 2012 - 13 IS Rs. 93,88,876 LAKHS CR AND AT 2004-05 PRICES ITS AT Rs. 54,82,111 LAKHS CR.

FY14 TOTAL SUBSIDES AT Rs. 2,31,000 CR.

FY14 FERTILIZER SUBSIDIES AT  Rs. 66,000 CR.

FY14 FOOD SUBSIDIES AT  Rs. 90,000 CR.

FY14 OIL & PETROL SUBSIDIES AT  Rs. 65,000 CR.

FY14 FISCAL DEFICIT AT Rs. 5,42,000 CR.

FY14 GROSS MARKET LOANS ARE Rs. 6,29,000 CR.

STATE PF ARE Rs. 10,000 CR.

EXTERNAL AID ARE Rs.10,560 CR.

OTHERS ARE Rs. 12,297 CR.

THE CENTER'S EXPENDITURE 2013 - 14 IS PROJECTED AT Rs. 14,90,925 Cr.

IN FLOW (Rs. in Cr)
CORPORATE TAX	4,19,520
INCOME TAX	2,47,639
CUSTOMS DUTY	1,87,308
EXCISE DUTY	1,97,554
SERVICE TAX	1,80,141
TAX OF UNION TERRITORY	2,758
TAX RECEIPTS FOR CENTRAL	8,84,078
STATE's SHARE IN TAX RECEIPTS	3,50,842
TOTAL TAX RECEIPTS	12,34,920

NON TAX RECEIPTS	AMOUNT
INTEREST RECEIPTS	17,764
DIVIDENDS & PROFITS	73,866
EXTERNAL GRANTS	1,456
OTHER NON TAX RECEIPTS	78,000
RECEIPTS OF UNION TERRITORY	1,166
TOTAL	1,72,252

NON DEBT CAPITAL RECEIPTS	66,468
RECOVERY OF LOANS & ADVANCES	10,654
MISC. CAPITAL RECEIPTS	55,814

* Out of the Tax Receipts the Center has to keep aside for Calamity & Contingency Fund of Rs. 4,800 Crs.

FISCAL DEFICIT (In Rs.)	AMOUNT
MARKET LOAN	4,84,000
EXTERNAL AID	10,560
STATE PF	10,000
OTHERS	12,297
TOTAL	5,42,499

OUT FLOW (Rs. in Cr)
PLAN EXPENDITURE	5,55,322
NON PLAN EXPENDITURE	11,09,975
OR
REVENUE EXPENDITURE	14,36,169
CAPITAL EXPENDITURE	2,29,129
DEFENSE	2,03,672
CENTRAL PLAN OUT LAY	99,030
GRANTS TO STATES & UTs	76,981
PENSIONS	70,726
INTEREST PAYMENTS	3,70,684
LOANS TO PSUs	417
OTHER GENERAL SERVICES	22,903
LESS OTHERS	302
CENTRAL PLAN	3,20,038
POSTAL DEFICIT	6,717
EXPENSES of UTs with out Legislature	4,395
NON PLAN CAPITAL OUTLAY	30,131
ECONOMIC SERVICES	24,334
GRANTS TO FOREIGN GOVT.	4,114
CENTRAL PLAN AID TO STATES	1,23,222
SOCIAL SERVICES	23,114
POLICE SERVICE	40,895

SOME MORE POINTS FROM BUDGET:-

• No change in Income tax rates and slabs.
• Imposed Surcharge of 10% on person whose taxable income exceeds Rs.1 Cr/yr. This will apply to Individuals, HUF's, Firms & entities with similar tax status.
• The additional surcharge will be force for only one year i.e. FY 2013-14.
• Increased surcharge from 5% to 10% on domestic companies whose taxable income exceeds Rs.10 Cr/yr, in case of foreign companies who pay the higher rate of Corp tax the surcharge will increase from 2% to 5%.
• Effective Tax rate @33.99% for domestic co. having income more than Rs.10 Cr.
• Effective MAT rate for Domestic co @21%.
• DDT surcharge increased from 5% to 10%.
• Tax credit of Rs. 2000 for income upto Rs.5 lakhs.
• To impose TDS @1% on the value of the transfer of Immovable property wherein consideration exceeds Rs. 50 lakhs, Agriculture land will be exempted.
• STT on Equity futures reduced from 0.017 to 0.01 %.
• STT on MF/ETF redemptions at fund counter reduced from 0.25 to 0.001%.
• STT on MF/ETF purchase/sale on exchange reduced from 0.1 to 0.001% only on seller.
• To levy CTT on non-agriculture commodities futures contracts at 0.01% of the price of the trade. CTT will be allowed as deduction if the income from such transaction forms part of business income.
• Import duty on Set Top Boxes raised from 5% to 10%.
• Import duty on Luxury Cars & vehicles & Yachts raised from 75% to 100%.
• Duty free Gold limit increased to Rs.50,000 in case of Male passenger & Rs.1,00,000 in case of female passenger subject to conditions.
• Excise duty on SUV's increased from 27% to 30%, not applicable to SUV registered as Taxis.
• Effective custom duty on SUV's increased from 138% to 178%.
• Vehicle Parking now comes under Service Tax.
• PSU Banks to get Rs. 14,000 Cr for Recap & Capital infusion of Rs. 12517 Cr by FY13.
• Home Loans upto Rs. 25 lakhs to be allowed additional deduction of interest of Rs.1 lakh.
• To set up India's first Women's Bank as a PSB with Rs. 1000 Cr as initial capital. It will obtain the necessary approval & banking licence by October 2013.
• FY14 disinvestment target Rs. 40,000 Crs.
• Farm GDP was 3.6 % in 11th Plan in GDP growth of 5.6 %.
• GOV. will need $75 billion to finance Current Account Deficit over next 2 years.
• Investor holding stake of 10% or less in a company will be treated as FII.
• Investor holding stake of more than 10% in a company will be treated as FDI.
• FII will be permitted to use their investment in corporate bonds & Gov. securities as collateral to meet their margin requirements.
• Small & medium enterprise incl. Start Ups will be permitted to list on SME Exchange without being required to make an Initial Public Offer,but the issue will be restricted to informed investor.
• FII will be permitted to trade in Exchange Traded Currency Derivative to the extent of their Indian Rupee Exposure in India.
• Stock Exchanges to be allowed to introduce Dedicated Debt Exchange.
• JNNURM will be given Rs. 14873 Cr,this will help in purchase of 10,000 buses by hilly stations.
• More institutions be allowed to raise Tax Free Bonds upto a total sum of Rs.50,000 Cr.
• Rajiv Gandhi Equity Saving Scheme to be liberalised -1st time investors can invest   into Mutual Funds &Listed shares for 3 successive years. The income limit will be raised from Rs. 10,00,000 to Rs. 12,00,000.
• Investment allowance @15% to manufacturing company that invests more than Rs. 100 Cr in plant & machinery during 1.4.2013 to 31.3.2015.
• To introduce Inflation Indexed Bonds or Inflation Index National Security Certificates.
• To provide Low Cost finance to viable renewable energy projects and Generation based incentives for Wind Energy projects.
• Govt. proposes to expand FM Radio services to 294 more cities &about 839 new FM radio channels will be auctioned in 2013-14, All cities having a population of more than 1 lkh will be covered by private FM radio   services.
• Defence sector allocated Rs. 2.03 lakh Cr.
• Corporate surcharge reduced from 7.5 % to 5 %.
• Dividend from foreign subsidiary to Indian companies down from 30 % to 15 %

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FINANCIAL TECHNOLOGY:UNLOCKING VALUES !!!

Scrip Code: 526881 / FINANTECH

CMP:  Rs. 929.95; Buy at every dips.
Medium to Long term Target: Rs. 1130.40; STOP LOSS – Rs. 855.55; Market Cap: Rs. 4,285.07 Cr; 52 Week High/Low: Rs. 1221.90 / Rs. 551.55

Total Shares: 4,60,78,537 shares; Promoters : 2,10,42,582 shares –45.67 %; Total Public holding : 2,50,35,955 shares – 54.33 %; Book Value: Rs. 532.75; Face Value: Rs. 2.00; EPS: Rs. 112.37; Div: 400 % ; P/E: 8.27 times; Ind. P/E: 21.00; EV/EBITDA: 5.75.

Total Debt: 562.72 Cr; Enterprise Value: Rs. 4,191.79 Cr.

FINANCIAL TECHNOLOGIES (INDIA) LIMITED: Financial Technologies was incorporated in 1988 and is based in Mumbai, India. The company was earlier known as e-Xchange on the Net, in Aug 2001 the company changed its name to Financial Technologies India Ltd. Financial Technologies (India) Limited provides technology solution, intellectual property and domain expertise for digital transaction and financial markets across all asset classes including equities, commodities, currencies and bonds. It has set up 8 exchange ventures and 6 ecosystems venture – MCX, MCX-SX, IEX, DGCX (DUBAI), GBOT Mauritius, IBS FOREX, NSEL and SNX are all exchange ventures, while NBHC, Ticker Plant, Infovending, Atom technologies, Riskrat Consulting, FT Knowledge Management Company (FTME) are ecosystem ventures. It provides exchange, brokerage, messaging, consulting, and connectivity solutions. The company’s exchange and trading technology platform creates electronic, organized, and regulated financial markets for the asset classes and investor classes. The company offers comprehensive end-to-end solutions for the securities industry vertical encompassing the entire trade lifecycle of pre-trade, trade and post trade processing. In Brokerage Solutions its main product is ODIN. During March 2012, the company’s exchange technology (ET) division deployed energy solution Power Automated Risk & Matching System (PowerARMS) to enable trading risk management and clearing & settlement for Day Ahead Market at the Indian Energy Exchange. Financial Technology India Ltd is compared with Bursa Malaysia Berhad of Malaysia & Daiichi Commodities Company Limited of Japan.  

Investment Rationale:

Financial Technologies (India) Limited (FINANTECH) is the flagship company of the Financial Technologies Group co-promoted by Jignesh Shah an electronic & telecommunications engineer from Kandivali a small suburb of Mumbai who was the man behind the creation of Dubai Gold and Commodities Exchange and Singapore Mercantile Exchange, he started his career with BSE in its Rs. 100 Cr ambitious project to built BOLT. FINANTECH set out by introducing India's first derivatives trading platform, with the launch of ODIN in 1995, which enjoys 80% market share. It powers the Group's exchanges with its technology, and has demonstrated ample expertise in creating robust solutions for exchanges across asset classes and geographies. FINANTECH is one of the leading software and technology providers to institutional investors and their related counterparts. Its technology vertical is sub-divided into four solution suites: (1) Exchange Solutions, (2) Brokerage Solutions, (3) Messaging Solutions, and (4) Consulting Solutions. FINANTECH has graduated from technology to Exchanges to Ecosystem, it ventured into a Regulated business and obtained license by multiple regulators and has become a Market leader across ventures. FINANTECH further integrated by setting up its own exchange - Multi Commodity Exchange (MCX) a state-of-the-art electronic commodity futures exchange, offering futures trading in 47 commodities. FINANTECH further promoted MCX-SX India's third full-fledged Equity stock exchange which was recently launched by the present finance minister Mr.P. Chidambaram on 9^th Feb 2013. Like BSE and NSE, it has now from 11^th February 2013 started offering trading in equities, equity derivatives and other asset classes. Currently, MCX-SX index is named SX-40 comprising 40 diversified stocks & offers trading in equity cash & futures contracts & in bonds etc. MCX -SX has 1,116 companies listed on it as compared to 1,662 on the NSE & 5,195 on BSE, with around 700 member out of which 405 members have received approvals from SEBI rest to follow soon. Its international exchange ventures - Singapore Mercantile Exchange (SMX), Global Board of Trade (GBOT) and Bahrain Financial Exchange (BFX) - are relatively new and still in investment mode, growing on a low base in their respective regions. Its newest exchange venture, Bourse Africa, is all set to commence operations. It will be Africa's first commodities spot and multi-asset derivatives exchange, equipped with a central counter party (CCP) clearing house and depository platform. FINANTECH four ecosystem ventures, which together addresses upstream and downstream opportunities in the financial market which are - National Bulk Handling Corporation (NBHC); Atom; TickerPlant; Financial Technologies Knowledge Management Company (FTKMC) a leading provider of solutions and services in the realm of financial sector knowledge. It offers numerous products and services in the areas of executive education, financial literacy, financial certification, research, consultancy and advisory.

Outlook and Valuation:

FINANTECH is a unique play on end-to-end presence in the ecosystem of stock exchanges and provides technology solutions for the financial markets. With the start of MCX –SX the 132 years of legacy of BSE - Asia's oldest stock exchange with 1,405 brokers & the out performance of NSE which was started in 1992 is being challenged. NSE being a relatively new entity by then was more receptive to innovation. NSE quickly realized the importance of IT and innovative products to meet the growing sophistication of the financial markets. NSE raced ahead to rule market share charts. Due to technology expertise of FINANTECH which gives the company a strong economic moat. An Economic Moat protects a company's profits from being attacked by a combination of multiple business forces. Exchanges globally have been enjoying the status of winner takes all businesses, with minimal competition. Financial Technologies forward integration ranges from trading platform to exchanges to complementary ecosystem ventures facilitate a distinctive value proposition to its customers, these cannot be easily replicated in the market and hence FINANTECH enjoys a healthy competitive advantage and sustainable profitability and which provides it Economic Moat to the company. Technology is the key requirement for an exchange hence FINANTECH is the technology supplier for all its exchanges, except Dubai Gold Commodity Exchange. Exchanges are largely a network business. The network effect lends sustainability to the business model and acts as an entry barrier. The first mover clearly holds the edge in such a scenario. The SOTP valuation of FINANTECH's comes at Rs. 1,413.12 per share and applying a holding company discount of 20% to the entities wherein FINANTECH is holding a majority stake and /or will go ahead and unlock value through sale of stake in the future comes the target price for FINANTECH at Rs.1,130.40, which implies 21.55% upside to the valuation. There are some potential triggers in the near term that could drive the valuations of the stock higher which are the Passage of FCRA bill - which allows trading of new products like options, indices on MCX, driving volumes and valuation for MCX, and consequently, FINANTECH, the Stake sale in IEX (from 33% to 26%) - which would help value unlocking in the same and the Volumes performance at MCX-SX post launch on February 9th, the valuation of which will get embedded in FINANTECH's price. At the Cmp of Rs. 929.95 the stock trades at 20.26 x P/E on estimated EPS of Rs. 45.90 for FY13E and 19.74 x the P/E on estimated EPS of Rs. 47.10 for FY14E. One can buy FINANTECH with at target price of Rs. 1130 for medium to long term .

SOTP Valuation :-

Business Subsidiary FY13E	Value Per Share (in Rs.)
FINANTECH Standalone	543.00
MCX	341.12
MCX-SX	245.00
IEX	91.00
NSEL	106.00
SMX	61.00
OTHER INVESTMENTS	26.00
TOTAL	1413.12
Disc. to Holding co.(ex. FTECH stand.%)	20.00 %
TOTAL	1130.40

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	425.50	390.90	482.50	533.40
NET PROFIT (Rs. Crs)	490.90	211.50	216.80	250.30
EPS (Rs.)	106.50	45.90	47.10	54.30
PE (x)	10.10	23.50	22.90	19.80
P/BV (x)	2.00	1.90	1.80	1.70
EV/EBITDA (x)	20.20	22.30	15.50	13.40
ROE (%)	21.70	8.30	8.00	8.60
ROCE (%)	6.00	5.30	5.40	7.30

I would buy FINANCIAL TECHNOLOGIES LTD with a price target of Rs. 1130.40 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. 855.55 on every purchase. 

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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RETURN ON CAPITAL