Hero Honda net profit down 20%, beats forecast

Hero Honda net profit down 20%, beats forecast
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First Published: Tue, Jul 24 2007. 10 14 PM IST
Updated: Tue, Jul 24 2007. 10 14 PM IST
Delhi: Hero Honda Motors Ltd, India’s biggest motorcycle maker, said profit declined for the fourth quarter in a row as rising interest rates hurt sales in a nation where more than 60% of purchases are made on credit.
Net income in the three months ended 30 June declined 20% to Rs190 crore from Rs238 crore a year earlier, the Delhi-based company said in a release. That was more than the Rs184 crore median profit estimate in a Bloomberg survey of 16 analysts.
Hero Honda’s sales last year grew the slowest among India’s top three motorcycle makers and it joins smaller rival Bajaj Auto Ltd in reporting a drop in first-quarter profit. Hero Honda cut output in June and postponed starting production in a new factory as eight-year-high loan rates curbed demand in the world’s second largest motorcycle market.
“It will take some more time for two-wheeler makers to reach some improvement on profitability,” said Mahesh Patil, who helps manage the equivalent of $3.7 billion (Rs14,874 crore) of assets at Birla Sun Life Asset Management Co. in Mumbai. “We are not so positive about the two-wheeler sector.”
The Reserve Bank of India has raised benchmark interest rates to control inflation in the world’s second fastest growing major economy. State Bank of India, the nation’s biggest commercial lender, had said on 7 April it will charge its best customers 12.75%, the highest rate since April 1999.
Shares of Hero Honda, the Indian affiliate of Japan’s Honda Motor Co., have declined 9.1% this year, lagging behind the 14.5% gain in the benchmark Sensex Index. Hero Honda shares closed at Rs695 on Tuesday, down 1.39% from the previous close.
Hero Honda, maker of the Splendor model of motorcycles, cut production starting in June and delayed opening its third factory by six months as demand slowed.
Income from business other than manufacturing, such as returns on investments in stocks, mutual funds and bonds, was Rs38.9 crore, lower than the Rs52.2 crore in the same quarter a year earlier, Hero Honda said.
Profit at Hero Honda, Bajaj and TVS Motor Co., the top three motorcycle manufacturers, have declined on growing competition and as Honda and Yamaha Motor Co. expand in the country with new products.
Bajaj Auto said on 12 July its first-quarter net income fell 15% to Rs226 crore. It was the second straight drop in quarterly earnings for the firm.
Motorcycle makers are forced to offer discounts to win buyers even as they pay more to buy steel, aluminium and other raw material.
Higher metal prices and increased competition, which limits the company’s ability to pass on cost increases, also hurt Hero Honda. Spending on raw material, Hero Honda’s biggest cost, grew 4.3% to Rs1,797 crore, the company said. Aluminium prices were 5% higher on an average in the quarter compared with a year earlier, according to prices on the London Metal Exchange that Indian companies follow. Steel prices in India were 10% higher on average, according to Motilal Oswal Securities Ltd, a Mumbai brokerage.
Debarati Roy in Mumbai contributed to this story.
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First Published: Tue, Jul 24 2007. 10 14 PM IST