Honda Siel Power Products: Add more on declines for decent returns of 40%-50% over the next 8-12 months

Sanjay Chhabria | May 28, 2019, 10:55 a.m.

A 67.67% subsidiary of Honda Motor Co. Japan, Honda Siel Power Products (HSPP) manufactures portable generators, water pumping sets and general purpose engines at its state-of-the-art manufacturing facilities at Greater Noida, Rudrapur (in Uttranchal), and Pondicherry. It is part of one of the world’s largest power product companies manufacturing a complete range of four-stroke range of portable generators, water pumps, engines and lawnmowers. With a strength of over 800 dealers and 15 area offices spread across the country, HSPP has a customer base of more than 1.5 million users, making it the undisputed leader in portable generators. India’s first LPG-based generator along with the super-silent key start generator and portable kerosene generator are some of the products exemplifying Honda’s pursuit of technological excellence. HSPP is the undisputed leader in the power products industry in the country.

During 24 years of its operations HSPP has emerged leader in the Indian market in the Portable Gensets category enjoying more than 67% market share.  In other product categories too i.e. Portable Engines & Portable Water Pumping set, HSPP has brought in new technology providing comfort and convenience to the Indian farmers. Incremental consumer demand for gensets due to the worsening scenario, as a result of inadequate capacity generation and escalating fuel prices, will be the major contributors to the company's growth. In general purpose engines and water pumping sets, HSPP has a 20% market share. Honda is becoming the generic brand for all portable waterpumps in rural India. Farmers are increasingly putting faith in this product as the most reliable solution to their requirement.

The primary business of HSPP is manufacture and sale of portable generators, water pumping sets, general purpose engines & lawnmowers. HSPP benefits from the rich experience of Honda Motors, Japan which is the second largest engine manufacturer in the world, because of their strong emphasis on R&D and in-house technical innovation. India's first LPG based Generator along with the Super Silent Key Start Generator portable kerosene generators are some of the products which exemplify Honda's pursuit of technological excellence. HSPP is into manufacturing and marketing a range of portable generator, water pump and general purpose engine at its state of-art manufacturing facilities at Rudrapur, Puducherry and Greater Noida. HSPP also markets lawnmowers, brush cutter, long tailed outboard motors and power tillers. HSPP operates through a strong network of distributors and dealers across the country, which acts like economic moats for the company. It also uses India as a base for its exports to over 25 countries in Africa, Europe, South America and Asia, with key overseas markets being Japan, Malaysia, Australia & Korea. HSPP is also looking to tap new markets such as power-deficient Latin America and Africa.
For the nine months ended December 2018, the company has posted net profit of Rs 43.4 cr. on sales of Rs. 585.4 cr..  For the year ended March 2018, HSPP had posted net sales of Rs 777.41 cr.(up 11%) and net profit of Rs 61.41 cr..(up 8%).  On a equity of 10.14 cr. the EPS stood at Rs 60.56 and the dividend declared was 90%.  

Honda’s global standing (second largest player in power products after Briggs & Strutton) and track record lend confidence to the company’s plans. As a part of Honda's worldwide strategy, HSPP will also be acting as a production base to manufacture a select range of Gensets and Engines for supplying to various countries across the globe, thus giving a strong impetus to its exports revenue. This move will enable the company to ramp up exports of its three products–gensets, water-pumping sets and general-purpose engines–and counter flagging domestic demand for gensets.  While maintaining its leadership position in the domestic generator market, HSPP, is making active efforts in developing new applications for its General-Purpose Engines (GPE). The business of GPE and Water Pump sets is expected to contribute significantly to the company's future growth plans. Besides, it also offers the customers in India a wide range of niche end-use appliances such as Electric and Engine Lawnmowers.
Going forward, the demand for HSPP's products is expected to be very strong due to the power deficit situation prevailing in the country With the power gap continuing in various parts of the country, the company expects continued growth in the genset business and is working on alternate fuel products to give a viable alternate power solution to its current and potential clients. The future for HSPP’s general purpose engines and water pumping sets is encouraging as the market continues to expand due to the need for mechanisation in the agriculture / floriculture / horticulture sectors of the economy. HSPP is undertaking huge distribution network upgradation and expansion to meet the market demand in potential areas

At Rs 1047, the share trades at 18 times its likely FY19E earnings(Rs 57- Rs 58) and at 15.5 times FY20E earnings(Rs 67–Rs 68) respectively.  Moreover, HSPP holds land area of 2,30,796 square metre and its plants uses only 8% of this land area. It holds good unutilised land reserves at Greater Noida, Pondicherry and Rudrapur in Uttranchal. With no major capex plan, sooner or later, these lands will be sold and the existing and future cash flows will be distributed to shareholders or used for buybacks. Considering the good growth prospects and the excellent parent pedigree, the stock looks cheap and holds good potential for appreciation

Investors can start accumulating the Honda Power stock at current levels and add more on declines for decent returns of 40%-50% over the next 8-12 months.

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