By Ravi Krishnan
New Delhi: Hero Honda Motors Ltd, India’s largest two-wheeler maker, said net profit for the fourth quarter ended March declined a worse-than-expected 27% from a year ago as higher costs of raw materials and marketing expenses dented earnings.
The company’s net profit in the quarter declined to Rs195 crore from Rs267 crore a year ago. The decline, for the third straight quarter, was worse than that estimated by five analysts polled before the results. They predicted an average Rs201 crore net profit.
Sales at Hero Honda rose about 17% to Rs2,639.5 crore in the quarter as it sold more of its motorcycles. In the same period of the previous year, the revenue was Rs2,255.8 crore. The full-year net profit of the firm declined 11.7% to Rs857.8 crore from Rs971 crore a year ago. Sales were up 13.6% to Rs9,900 crore as the company launched eight new models and variants during the year.
Analysts expect sales growth next year to slow to about 10% as lending rates rise.
A 9% economic growth, which is creating more jobs and increasing disposable incomes, is driving demand in the world’s second-largest two-wheeler market.
Slowing down: Hero Honda managing director Pawan Kant Munjal.
Sales of two-wheelers increased 11.4% to 7.8 million units in fiscal 2007. However, with inflation at a near two-year high and lending rates rising, the demand for bikes, often financed by bank loans, is expected to slow. Lending rates have risen by up to 600 basis points in the past four months, forcing prospective buyers to postpone purchases.
“I don’t think it (growth) is going to be anything exciting,” said Ashutosh Goel, an analyst with Edelweiss Securities. “The rise in interest rates will impact entry-level and mid-level bikes most and growth should be at 10% or thereabouts.”
Eight out of every 10 motorcycles sold in the country are entry-level bikes and Hero Honda has a 60% share of this segment. We are pushing “out new models and variants to continue growth,” said Pawan Munjal, managing director of Hero Honda.
But rising expenses are likely to put further pressure on margins. Hero Honda’s operating margins fell about 4.9 percentage points to 11.84% in Q4 from a year ago, as prices of raw materials such as steel and rubber also rose. Prices of cold-rolled steel rose by Rs1,500 to Rs40,000 per tonne during the quarter. Operating margins measure how much profit is left after deducting the basic expenses of running a business.
“The trend (of increasing commodity prices) is not relenting,” said Munjal. “There’s a lot of pressure on competitive pricing, too, and this will squeeze margins.”
Competition in India’s motorcycle market is forcing players to offer steep discounts, hampering their ability to absorb the prices of increasing raw material prices.
Shares of Hero Honda closed down 0.03% at Rs704.8 on the Bombay Stock Exchange on Friday. The results were declared after markets closed.