News Analysis

Hero MotoCorp on a rough ride

Parvatha Vardhini C BL Research Bureau | Updated on January 31, 2019 Published on January 31, 2019

Stiff competition, soaring input costs drag net profits down by 4.4% to ₹769 cr

 

Following the drop in profits in the first two quarters of this fiscal, Hero MotoCorp has continued to put up a lacklustre show in the three months ended December 2018. While sales grew by 7.5 per cent to ₹7,865 crore over the December 2017 quarter, net profits fell by 4.4 per cent to ₹769 crore pre-dominantly due to cost pressures.

Margins shrink

Volumes for the company grew by 5.2 per cent during the quarter. But revenue from operations grew at a higher 7.5 per cent, pointing to higher realisations. Average realisations grew by about 2 per cent to ₹43,721 per vehicle. A better product mix from the launch of the Xtreme 200R premium bike in September as well as the XPulse 200T in November could have partly helped the improvement in realisations.

However, this performance could not carry through to the bottom-line. Raw material cost, as a percentage of sales, inched up from 68.7 per cent in the September quarter of last year to 69.6 per cent now.

Even as the company hiked prices by ₹900 per vehicle in October to pass on increase in input prices, operating margin contracted by 180 basis points to 14 per cent in the December quarter.

While taxes too inched up by 14 per cent, it was a 70 per cent increase in other income that prevented the net profits from slipping sharply.

Market share slips

With Bajaj Auto shifting strategy to focus on volumes rather than margins, the company has been posing stiff competition to Hero in its core entry bikes (75-110 cc) segment in the last three quarters. For the nine months ended December, Hero’s volumes in this segment grew only by about 15 per cent, compared with the 60 per cent growth clocked by Bajaj Auto.

As a result, Hero’s market share in entry bikes for the first nine months of this fiscal has slipped to 71.7 per cent against 73.7 per cent registered in the same period last year.

Outlook

Besides, though scooter sales have slowed so far this fiscal, the industry still shows a 4 per cent volume growth. Hero has fared a lot worse, with volumes dropping by 13 per cent this fiscal.

In the last few months, demand for discretionary items such as new vehicles and durables have waned, thanks to high interest rates, rise in fuel costs as well as tight liquidity among NBFCs which affected lending.

Rural consumers have also been reluctant due to patchy monsoons coupled with crash in farm prices.

Given that the company‘s ride has been bumpy, the Hero Moto Corp stock has lost about 29 in the last one year. To make up for the loss in market share in the entry segment, Hero is improving its product mix in the executive and premium segments.

To regain lost share in scooters, it has recently launched the Destini, in the more popular 125 cc segment.

Prospects for the company could improve if the budget announces measures to boost rural consumption as the company has a strong rural footprint.

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