India’s one of the biggest two wheeler manufacturer Hero Motocorp reported its full year financial results last week. The number of two wheelers sold in the 2016 financial year was 6,632,322 units compare to 6,631,826 units sold in 2015. The volumes remain unchanged.

Total income from operations was up by 4% to Rs 28,613.73 crore compare to last year. EBIDTA for the year stands at Rs 4,771.33 crore which translates its operating margins of 16.45% compare to 14.23% for the year 2015. The Net profits were up by 30% to Rs 3093.78 crore compare to last year.

The volumes had remain flat and this is the reason we had seen only marginal growth (4%) in its total income from operations for this financial year. However, we had seen volumes increase by 9% on quarterly basis when we compare March 2016 quarter with last year March 2015 quarter.

We do expect its operating margins to stay in range of 16.25% – 16.60% as long as the cost of material do not jump up. We calculated its intrinsic value for the year end 2016 to be Rs 2,554 per share on the basis of dividend payout ratio of 45%.

If the dividend payout ratio remains same for the next financial year, today its share price is trading at premium price to our expected 2018 intrinsic value (remember, future intrinsic  values change with available new information). The reason behind this is, because most of the analyst are expecting its earnings to grow by only 9% for the 2017-18 financial year, on a basis that it will be hard to maintain the recent margins once the commodity prices starts its up trend.

We will be watching very closely its volumes as well as its income from operations numbers as we think if they can sustain consistent growth of 11% – 13% in its revenue then they have good chances to maintain their margins. Today market is pricing same growth to its pricing, hence there is no margin of safety available to investors if they do not achieve those numbers.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.