Stock Review: Hero Honda

Hero Honda is the largest player in the domestic motorcycle market. However, its operating margins are significantly lower than its nearest rival, Bajaj Auto, as it has not been able to deal as well with rising input costs.

   For instance, during the trailing 12 months ended December 2010 quarter, Hero Honda's net sales grew 19.5% year-on-year to 18,132 crore while operating profit margin declined 390 basis points to 13.3%. This was much lower than Bajaj Auto's net sales which grew 51.9% during this period while operating margins grew 250 basis points to 20.6%.

   Furthermore, the entire process of Honda exiting from the Indian listed joint venture Hero Honda has been perceived to be opaque. Hero Honda trades at a P/E of 17.5 times on a trailing basis. Investors can reduce their position in this stock.