The first quarter net profit of Rs500 crore posted by Hero Honda Motors Ltd has been better-than-expected. While this is higher than the Rs463 crore consensus estimate of analysts polled by Bloomberg, it hasn’t come as a surprise. After all, other auto firms such as Bajaj Auto Ltd and Tata Motors Ltd also beat expectations this season, and that too by much wider margins. The auto industry has benefited from lenders loosening their purse strings and commodity prices softening.
Although Hero Honda hasn’t beaten estimates by a wide margin, it is still the preferred stock in the two-wheeler space because of its consistent performance. The company has an edge over its competitors thanks to its decision to focus on rural sales. Since rural consumers don’t depend on financing schemes, the company was able to ride out the lack of consumer financing options and avoid a dip in sales. In the first quarter this fiscal, Hero Honda dispatched more than one million vehicles, a first for the firm, as volumes grew 25%.
Hero Honda has pruned costs thanks to its factory in Haridwar, Uttarakhand. Analysts estimate at least a quarter of Hero Honda’s motorcycles are manufactured at Haridwar. In the last June quarter, this was about 5%. Thanks to various incentives such as an excise tax waiver for 10 years, income-tax exemption and an investment subsidy at this plant, the firm’s sales net realizations and profitability are much higher. On a per unit basis, average realizations grew 7.1% to Rs34,058 per unit.
Raw material savings also were better than expected, especially with a steeper fall in aluminium prices, say analysts. Two-wheelers use more aluminium (as a percentage of total metal used) than four-wheelers. Raw material costs as a ratio of net sales fell to 67.6% last quarter compared with 72.5% in the year-ago period. Consequently, operating profit almost doubled to Rs604 crore and operating margin rose by 5.1 percentage points.
It will be difficult to sustain such high growth rates. Hero Honda sells 60% of its vehicles in rural India, a segment that depends on the monsoon. Despite a late surge in July, rains are 19% below normal and have delayed sowing in several areas. And competition in the urban segment is expected to get tougher with new vehicle launches from peers and easier financing. With the firm now valued at 19 times estimated 2009-10 profit, further upside may be limited.
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