Honda Siel Power Products Limited

CMP Sector Face Value 52 Wk Low/High Market Cap (` Cr.)

` 1153.60 Electric Equipment ` 10.00 425.65/1197.00 1,166.96

Hold / Buy on decline with an investment horizon of 2 – 3 years

Company Profile & Product Portfolio

One of the India’s leading power products companies, the Honda Siel Power Products Limited

(HSPP), is a subsidiary of Honda Motor Co. Japan and was incorporated on 19th Sept, 1985.

Manufacturing and marketing a range of Portable Generators, Water Pumps, Lawn movers,

Brush Cutters, Rotary Tiller and General Purpose Engine at its manufacturing unit in Greater

Noida.

The Company, as on March 31, 2014, had 1019 associates.

Market Overview

Demand for generator sets come from various sectors such as IT and ITes, telecom and

construction while demand for small gen sets come from households, shops and

commercial establishments.

Manufacturing hub of the Indian power backup industry is concentrated in North India.

Power deficit in the southern region of the country has triggered the demand for power

backup in these regions.

Major manufactures are Honda Siel Power Products, Birla Power Solutions, Himalayan

Power Machine Co, Greaves Cotton and Yamaha.

Financial Analysis:

Intrinsic Value analysis: According to Benjamin Graham, the father of the security analysis,

the “Margin of safety” should be adhered to when buying a security and analysis should be

based on minimum of five years financial data. Average of last five years PE is 17. Currently

the company is trading at a PE of 36, much above the long term average, which makes it

expensive at this juncture to buy. These shows the investors are most optimistic about its

earnings.

RONW: According to Warren Buffet, the legendary capital market investor, the RONW is the

parameter that explicitly states what the shareholder of the business earns on their money.

Analysis of last five years data shows RONW at 11%. The company is earning more or less

equal to bank interest. So for 11% RONW on earnings, the current price represents investors

are more optimistic about its future earnings.

PEG Ratio: According to Peter Lynch, the reputed Fidelity Magellan fund manager

recommends, PEG ratio of less than one while buying. PEG ratio for the company is around 2.

The current price represents that investors are betting on its earnings prospects.

Strengths:

Honda Brand Name

Support of Honda R&D, Japan

Emission compliant gensets with advanced technology

Light weight and portable models

Weakness:

The competitive market scenario limits the pricing

power.

Absence of diesel models.

Dependence on parent, Honda Motor Co Japan for guidance.

NIL R&D expense

Imported Technology not fully indigenized.

Opportunities:

Low petrol prices will improve sales (Majority of the models

are petrol based).

Stringent norms stipulated by the Central Pollution Control

Board (CPCB).

Threat

Normal monsoon may impact water pumping sets.

Geo-political tensions in Middle East will affect the

exports, as this area generates maximum business for the

company.

Fluctuation of Indian Rupee against the US dollar may impact the margins of the

Export business.

SWOT

Analysis of last five quarters P&L (in lacs):

Quarter Ended 31-Dec-13 31-Mar-14 30-Jun-14 30-Sep-14 31-Dec-14

Net Sales/Income

from Operations 14912 17932 16045 12655 15188

Total Expenditure 14125 16643 15207 12444 13746

EBITDA 787 1289 838 997 1442

Net Profit after Tax 705 566 742 459 1216

Quarterly EPS 6.95 5.58 7.32 4.53 11.99

Revenue grew by 25% at Rs. 438.88 Cr in the current 9 months of FY15 compared to Rs.

351.45 Cr in the corresponding 9 month period of the previous year.

Net profit grew by 84% at Rs. 24.17 Cr in the current 9 months of FY15 compared to Rs.

13.12 Cr in the corresponding 9 month period of the previous year.

Exports grew by 147% at Rs. 191.45 Cr in the current 9 months of FY15 compared to Rs.

77 Cr in the corresponding 9 month period of the previous year.

Profitability Analysis:

Historical profit margins are not impressive considering the current valuations.

Profit Margins FY2010 FY2011 FY2012 FY2013 FY2014

EBITDA (%) 12.44% 10.28% 10.51% 7.38% 9.44%

EBIT without other income (%) 10.03% 8.28% 8.47% 4.71% 6.20%

PAT (%) 4.11% 7.23% 10.24% 4.00% 3.47%

Per share Statistics

EPS (Rs) 12.51 29.24 50.95 20.31 18.52

Export growth:

Recommendation:

The current price seems to be fully valued, so risk taking investor may invest on price

declines.

33%

41% 44% 43% 42%

0%

10%

20%

30%

40%

50%

Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15

Exports % of Total Sales

Financial Valuation:

Financials & Valuation ( Bull Case ) INR (in Lacs)

Y/E March FY2015E FY2016E FY2017E

Net sales 61,077.45 70,125.57 80,437.59

EBITDA 6,578.72 9,809.88 13,711.78

PAT 3,446.50 6,337.40 9,325.87

EPS 33.98 62.48 91.94

Growth (%) 83% 84% 47%

ROE 11.68% 21.40% 31.39%

Forward P/E (x) 32.1 17.5 11.9

Porter’s Five Forces:

Threats of substitutes: there is not a huge threat of substitute in the automobile industry

that offers utility, independence and no wasting time, even if there is a large number of

transportation. There are bicycles, subways, buses, trains and airplanes that could make our

life easier, but that can be less convenience than automobiles. The price of fuel have a large

effect on the consumer’s decision to buy vehicles, also the maintenance and the insurance of

the car, but the automobile still has an important use in our personal and daily life.

Buyers bargaining power: consumers have many choices and brands, but the factors that

affect more the consumer to buy a certain brand from another are: the appearance, quality,

price, design. Consumers want always something new and nice looking with the latest

technologies. The car had to be efficient, by saving fuel, protecting the environment, and

running fast.

Suppliers bargaining power: there are many suppliers in the automobile industry, and

“many suppliers rely on one or two automakers to buy a majority of their products. If an

automaker decides to switch the supplier, it could be devastating to the previous supplier

business. As a result, suppliers are extremely susceptible to the demands and requirements

of the automobile manufacturer and hold very little power.”

Barriers to entry: it is not easy for an entrant to enter into the automobile industry easily,

because of the brand loyalty of the consumers. It is substantial for established companies to

have barriers to entry to protect themselves, because some companies are entering into

foreign markets by buying an existing company or either merging with it and then realizing a

huge profit. With local knowledge and expertise, companies have the potential to compete in

the market in which they operate against the domestic firms.