Mumbai: Hero Honda Motors Ltd, India’s largest motorcycle maker, said on Monday rising raw material costs were worrying after it reported forecast-beating quarterly profit.
The company also said it was looking at the possibility of setting up a new plant and expanding existing capacity.
“Pressure on margins is definitely a concern,” said Jatin Chawla, auto analyst with the institutional segment of India Infoline.
“At the current levels of raw material prices we would expect an (adverse) impact of 100 basis points on its profitability,” he said.
Hero Honda, in which Japan’s Honda Motor Corp holds a 26% stake, reported a net profit of Rs536 crore ($116 million) for the December quarter, up from Rs300 crore a year earlier on better sales.
A Reuters poll of 13 brokerages had forecast net profit at Rs507 crore on net sales of Rs3,794 crore.
Vehicles makers Maruti Suzuki and Mahindra & Mahindra, who had reported results earlier said margins in the current quarter would be under pressure from rising commodity prices.
Hero Honda sold 1.1 million motorcycles and scooters in the quarter, up 35.5% from a year earlier.
The company said it expected market demand to remain bullish especially in rural areas, where incomes are rising on the back of government-run employment schemes.
“Therefore going forward, we would also have to look at further augmenting our installed capacity in our existing manufacturing plants and also at the possibility of a new plant sometime in the near future,” it said in a statement.
Infoline’s Chawla said the company was running at close to peak capacity and it was inevitable it would have to look at additional capacities.
“It would take 10-12 months for new capacities to start commercial production and the company had just started thinking about the new investments,” chief financial officer Ravi Sud said on television channel ET Now.
The company currently has an installed capacity for 5 million vehicles a year.
Ahead of the results Hero Honda shares fell 1.5% to Rs1,618 while the main index ended down 0.5%.
Shares in the company, valued at $7.1 billion, had risen 35.5% in the December quarter, while the main index rose 2%.