Last month, Honda Motors (NYSE:HMC) announced its first quarter results which were generally short of the market expectations. Investors were anticipating the profits to soar on the back of a weak yen. But the results were impacted by investments lined up by Honda which are hurting its near-term margins. In our view, Honda’s long term fundamentals still look solid, and we estimate that there could easily be upside of 10% to the current market price. We have a $42 price estimate for Honda Motors.
At the moment, more than 40% of Honda’s sales come from North America. Thus, it isn’t surprising to see the automaker paying more attention to emerging markets. Last year, Honda unveiled its ambitious mid-year plan of selling 6 million vehicles annually by 2017. The automaker expects the majority of the incremental sales to come from the developing markets in Asia. In fact, by 2017, Honda hopes to generate half of its unit sales from the developing regions.
In order to meet the increased demand that Honda anticipates, the automaker is building new manufacturing facilities as well as raising the capacity of its existing plants. To take advantage of a weak domestic currency, Honda started building a new production plant in Japan, which recently became functional. A greater proportion of production in Japan will only benefit Honda’s margins now that the yen has depreciated against the dollar. Besides Japan, Honda is also looking to increase production in China, Thailand and Mexico.
Just like any other automaker, gaining volumes in China is a priority for Honda. While it is true that Honda’s Chinese sales haven’t really grabbed the headlines lately, the automaker is still optimistic about China in the long run. The major reason behind Honda’s tepid Chinese sales is the tension between Japan and China. This has caused anti-Japanese sentiment among the general public. But once the situation normalizes, the sales should start to pick up.
Honda is developing cars exclusively for Chinese customers and plans to introduce 12 new models in the next three years. In 2013, it will introduce the Crider, a mid size sedan, and the Jade, a multi-purpose vehicle. In fact, Honda is so confident of the success of its upcoming models that it intends to double the sales to 1.3 million units annually by 2015.  China is one of the biggest markets for Honda with about a sixth of the total sales coming from the country.
In India, Honda’s sales are booming thanks to its new model launch – the Amaze. This is Honda’s first diesel vehicle in the country and is priced at a point which should see the volumes high. Indian customers prefer diesel variants because of government policies that subsidize diesel prices. Reflecting the success of the new launch, Honda’s Indian sales have surged 65% to 40,350 units in the last three months.  The automaker is even planning to raise production levels in order to meet the increased demand.
The Indian automotive market has stagnated in the last year or two because of high interest rates and economic slowdown, but the long-term potential remains significant due to the extremely low vehicle ownership rates in the country. Thus, getting a grip on the Indian market is a big part of any major automaker’s long-term plans.
Furthermore, with the new Fit (or Jazz as it called in some countries) set to hit the global markets next year, the automaker’s portfolio of cheaper cars will get a boost. Honda will roll out a SUV under the Fit range of cars as well. All these vehicles are likely to appeal to the price sensitive and ‘value’ seeking customers of the developing countries.Notes: