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Hero net profit slumps 20%, misses estimates

Second consecutive decline due to rising material costs and marketing expenditure, company officials say
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First Published: Thu, Jan 17 2013. 06 11 PM IST
Material costs and other expenditure crimped profitability at Hero MotoCorp, India’s largest two-wheeler maker. Photo: Ramesh Pathania/Mint
Material costs and other expenditure crimped profitability at Hero MotoCorp, India’s largest two-wheeler maker. Photo: Ramesh Pathania/Mint
Updated: Thu, Jan 17 2013. 11 59 PM IST
New Delhi: Third quarter profit at India’s largest two-wheeler maker Hero MotoCorp Ltd slumped 20.4% to Rs.487.89 crore from the year earlier, missing analyst estimates by a substantial margin.
This is the second such drop in a row after the firm reported a decline of 27% in net profit to Rs.440 crore for the September quarter.
The firm said material costs and other expenditure crimped profitability in the December quarter.
Total income was flat at Rs.6,187 crore. Sales were flat at 1.57 million units in the quarter. Ebitda (earnings before interest, taxes, depreciation, and amortization) margins for the quarter stood at 12.59%, lower than 13.86% in September quarter and 15.6% a year ago.
According to an auto sector analyst, the firm’s profits missed his estimates despite healthy sequential growth in sales volume.
“There is just one word for it—bad,” said Mahantesh Sabarad, senior vice-president, equity research, Fortune Equity Brokers (India) Ltd, a Mumbai-based brokerage firm “They have missed our estimates by 25%. The only positive is 18% growth in sales over last quarter. But all that has come at a cost.”
Profit lagged behind the Rs.586 crore median profit estimate of 37 analysts compiled by Bloomberg.
Sabarad had estimated a profit of Rs.646 crore.
Hero’s performance has come a day after archrival Bajaj Auto Ltd registered its highest profit. The firm reported a growth of 3% standalone net profit to Rs.819 crore.
Interestingly, at the end of the December quarter of FY09, both the firms were neck and neck in terms of net profit. While Hero’s net profit stood at Rs.536 crore after selling 1.1 million units, Bajaj’s profit was Rs.526 crore after selling 900,000 units.
Hero is in transition and the numbers don’t give a complete picture, said Anil Dua, senior vice-president, marketing and sales.
“We are in an investment phase,” he said. “We are working on new launches and plants. These things have longer gestation period and will take time to fructify.”
Angel Broking Ltd said that the firm reported a “disappointing set of results” and raised concerns that it may see its first decline in sales in 10 years.
At the beginning of this fiscal, Hero aimed to sell 7 million units during the year as against 6.4 million sold in FY12. However, in the nine months to December this fiscal, it has sold only 4.24 million units, posting a decline of 2%.
“Bottom line came in 18.9% below our estimates on account of 305 bp (basis point) y-o-y (year-on-year) contraction in operating margins. We lower our earnings expectations for FY2013/14 by 11.4%/9.3% mainly due to lowering of our volume (we now expect the company to register a 1% decline in volumes in FY2013 as against a growth of 1.9% earlier) and Ebitda margin (due to higher ad spends and raw-material cost pressures) estimates,” said Yaresh Kothari, sector analyst, Angel Broking.
Angel has a neutral rating on Hero’s stock, which ended the day at Rs.1,818.50, down 0.92%. The benchmark Sensex rose 0.74% to 19,964 points.
“Material costs were higher by 120 basis points across products in the third quarter. This has impacted bottomline,” said Ravi Sud, chief financial officer. One basis point is one-hundredth of a percentage point.
Other expenditure, which also affected profitability, increased 25% to Rs.625 crore due to higher marketing expenditure.
“We had to spend on the promotion of our new products such as Maestro, Ignitor, Xtreme and Glamour. This increased our marketing spend,” said Dua.
“Our marketing spend is normally 2% of net sales, but in the second half it will be higher than that as we will be continuing marketing campaigns even in the last quarter,” he said.
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First Published: Thu, Jan 17 2013. 06 11 PM IST
More Topics: Hero MotoCorp | earnings | results | profit | income |