Hero posts 4th straight fall in profit on poor sales, higher taxes

Net profit declines 11%, net sales fall 1.3%; firm indicates two-wheeler sales growth may miss Siam’s forecast
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First Published: Wed, Jul 24 2013. 04 29 PM IST
Net sales fell to Rs6,127 crore from Rs6,247crore. Photo: Ramesh Pathania/Mint
Net sales fell to Rs6,127 crore from Rs6,247crore. Photo: Ramesh Pathania/Mint
Updated: Wed, Jul 24 2013. 10 02 PM IST
New Delhi: Hero MotoCorp Ltd, India’s largest two-wheeler maker, reported its fourth consecutive drop in quarterly profit on Wednesday because of declining sales and higher taxes resulting from the expiry of a five-year tax exemption for its Haridwar facility as well as a new surcharge.
Net profit for the quarter ended 30 June fell 10.9% to Rs.548.58 crore from Rs.615.46 crore a year ago. Net sales fell 1.3% to Rs.6,126.84 crore from Rs.6,207.78, the company said on Wednesday.
The profit was largely within expectations, based on a Bloomberg poll of 43 analysts that had estimated profit at Rs.550 crore.
Automobile manufacturers are struggling as slower economic growth, high interest rates and fuel prices prompt buyers to postpone purchases. In the year ended 31 March, India’s economy grew 5%, the slowest pace in a decade.
Hero’s stock closed at Rs.1,757.75 on the BSE, down 1.5%, while the benchmark Sensex fell 1.04% to 20,090.68 points. The earnings were declared after the end of trading on Wednesday.
Hero MotoCorp reported profit declines of 27%, 20% and 5% in the September, December and March quarters, respectively.
The company took a hit on net profit because of the expiry of the tax exemption for its Haridwar plant at the end of fiscal 2013.
It did not provide details of the precise impact this had on its profit, but said in a conference call with analysts that the Haridwar facility accounted for more than one-third of its production.
Hero also has manufacturing facilities in Gurgaon and Dharuhera in Haryana.
“The lower PAT (profit after tax) is also reflective of the newly levied higher surcharge in the Financial Bill 2013,” the company said in a statement, referring to the 10% surcharge on income-tax introduced in the budget, raising the effective tax rate of the company by 3 percentage points.
In the June quarter, Hero’s local sales declined 4.24% from a year ago to 1.52 million units and exports fell 30% to 31,303 units.
However, profit before tax (PBT) rose 2.06% to Rs.750.1 crore.
“The fact that our PBT has surpassed the previous as well as corresponding quarter, despite a marginal de-growth in our volumes during the quarter and the overall economic downturn, is a strong statement of our intent and vision,” said Pawan Munjal, chief executive officer.
Mumbai-based brokerage firm IDBI Capital Pvt. Ltd said the company’s performance was “largely on the expected lines”.
“Hopes are pinned on second half and a good monsoon. We will have to wait and see how good will be the good monsoon,” said Bhaumik Bhatia, equity analyst at IDBI Capital.
A good monsoon, which has pushed tractor sales this fiscal, is expected to increase the purchasing power in the rural India that accounts for 40% of the total two-wheeler sales in the country.
Hero indicated that the two-wheeler industry will not be able to achieve double-digit sales growth this fiscal and may well miss the 7-8% target set by Society of Indian Automobile Manufacturers in April.
Anil Dua, senior-vice-president (marketing and sales), Hero MotoCorp, said tractors are normally an “income-generating instrument and it normally takes time to influence sales in the two-wheeler segment”.
“There is not going to be a double digit growth. It is also clear that it is not going to be 7-8%. How much will it be depends on the monsoon and government decisions to revive the economy,” Dua said in the analyst call.
However, banking on two-wheeler industry’s compounded annual growth rate (CAGR), Dua hoped for double-digit growth in the next fiscal.
“The underlining factor is, of course, industry’s CAGR of 10-12%, which makes us believe that, if not this year then industry will return to double- digit growth next year,” he said.
In the downturn, the company is focused on reducing inventory and a massive cost-reduction programme. It reduced its inventory by 50,000 units during the June quarter but Dua wants to build inventory ahead of the festive season, which starts with Onam on 16 September.
The company has rolled out a three-year cost reduction plan through which it wants to improve its Ebitda (earnings before interest, taxes, depreciation and amortization)—an indicator of operating profitability—by at least 400-500 basis points. One basis point is one-hundredth of a percentage point.
“The benefits of these programmes will start coming from December quarter this fiscal,” Ravi Sud, chief financial officer, said in the analyst call.
Sud also said there was a possibility of Hero MotoCorp buying a a majority stake in EBR Racing, the Wisconsin-based sports bike maker. Mint reported on 1 July that Hero had bought a 49.2% stake in EBR for $25 million
The company also plans to introduce a slew of products, including new models and variants of existing ones, from this quarter, but Bhatia of IDBI Capital does not see new launches giving any push to sales volumes.
“Track record of Hero’s newly launched products has not been really good. So, I would like to wait and watch. Also, I don’t see variants and refreshes giving any major push to the volumes,” he said.
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First Published: Wed, Jul 24 2013. 04 29 PM IST
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