Hero MotoCorp’s pile of BS-III vehicles, high input costs set to eat into profits
Weak demand and costs involved in shift to BS-IV engines are set to make matters worse for Hero MotoCorp, India’s largest two-wheeler maker
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Mumbai: Hero MotoCorp Ltd is set for a bumpy ride as unsold older models, rising raw material prices, and weak demand take their toll on profit in the coming quarters at India’s No.1 maker of motorcycles and scooters.
India switches to stricter Bharat Stage IV (BS-1V) emission norms from 1 April, when sale and registration of the more polluting BS-III vehicles will stop. Hero has a pile of them (as do other two-wheeler makers).
On average, the prices of BS-IV compliant scooters and motorcycles are expected to be Rs1,500 higher than the BS-III versions of the same models. With demand flagging, companies may not be able to pass on all of the additional cost to consumers.
“We expect margins for all two-wheeler companies to be under pressure at least for the next two quarters as a weak market prevents them from passing on the entire cost hike in one shot,” said Nitesh Sharma, an analyst at Phillip Capital India Ltd.
Hero MotoCorp, which sells one in every two two-wheelers sold in the country, will be hit hard, he added.
“Our channel checks reveal Hero has an inventory of BS-III models for two months,” said Sharma.
A Hero dealer confirmed this. “Inventories are on a higher side definitely and with the financial year coming to an end, I don’t see it correcting any time soon.”
The government’s move to invalidate higher-value currency notes on 8 November hit sales of two-wheelers, especially in rural areas where most of the sales are in cash. In the three months ended December, Hero MotoCorp sold 12% fewer vehicles than in the year-ago period. Its net sales in the quarter fell 11% Rs6,898.64 crore.
The dealer cited above claimed inventories in the channel have risen almost 200% over the past few months.
Sales of two-wheelers in India have been in negative terrain since the note ban. Sales skidded 22% in December—the steepest in eight years, according to the Society of Indian automobile Manufacturers (Siam). Sales fell 7.39% to 1,262,141 units in January compared to a year ago.
A Hero spokesperson side-stepped answering a query on inventories. “Majority of Hero models have already transitioned to BS-IV and we would have fully transitioned to producing only BS-IV vehicles from the first week of March 2017,” he said.
BS-IV apart, higher raw material prices are also likely to hurt Hero and its peers. “Two-wheeler firms have received significant benefits from lower commodity prices over the past couple of years. With recent spike in commodity prices, these benefits may reverse,” said Joseph George, an analyst at IIFL Ltd, in a 23 February research note based on an IIFL investor conference. The Hero MotoCorp spokesperson admitted this but said the company would take a decision on increasing prices “based on our review of the overall market situation.”
Hero’s margins will also be impacted by an adverse mix due to a higher share of scooters in its sales mix (motorcycles are more profitable than scooters), an increase in research and development costs and ad spending and expiry of excise duty benefits for the company’s Haridwar plant from fiscal 2018. The impact of the last two alone would be 1.5%, IIFL’s George wrote. He added that this would be offset to some extent by tax benefits from the company’s newer plants, gains from a cost saving programme, the launch of premium products, and a price hike.
“Overall, management expects margins to settle in the range of 15-17% over next three years,” he added. In 2015-16, Hero’s profit margins were 17%. The Hero spokesperson said the company would maintain its margins at the same level, powered by gains of Rs600-crore-odd from the cost savings programme.
On Thursday, Hero MotoCorp shares rose 1.37% to close at Rs3,227.55 each, the Sensex closed at 28,839.79 points, down 0.50%.