Merrill Lynch maintains 'Buy' rating on Hero Honda

RESEARCH: Merrill Lynch

RATING: BUY

CMP: RS 1147

Merrill Lynch maintains `Buy��� rating on Hero Honda by raising the target price by 14% to Rs 1,250. It views any potential weakness in the stock as a particularly attractive buying opportunity. Despite higher marketing spend, Q4 margin at 16%, exceeded estimates of 15.7%.

Merrill Lynch expects continuing benefit of the ramp-up at Haridwar facility, and operating leverage to aid improved margin outlook. Merrill Lynch expects the company to hold on to its market share over the next 12 months, following: (1) success of self-start Passion Pro (100cc bike), and (2) weak franchise of competitors.

Honda���s entry into the commuter segment in FY11, will impact Bajaj Auto more than Hero Honda, on likely positioning of the product. Merrill Lynch estimates 9.5% growth in FY10 and 7.5% in FY11 and raises EBITDA forecasts by 5% in FY10 and 7.3% in FY11.

Now it estimates 17.7% EBITDA and 24.7% EPS CAGR over the forecast period . It has rolled over multiple to FY11, at 5% discount to the existing multiple of 8.5x EV/EBITDA.