New Delhi: Hero Honda Motors Ltd, which parted ways with its partner of 26 years, Japan’s Honda Motor Co. Ltd in December, saw its profit for the quarter ended 31 March decline 16.23% year-on-year to Rs 501.61 crore on account of higher raw material costs and increased advertising spends due to this year’s cricket World Cup.
And its profitability in coming quarters could be affected by the maximum of Rs 900 crore it will spend this year on research and development, a new factory and expanding capacity.
Hero Honda’s net profit for the quarter fell despite record-breaking sales of 1.4 million two-wheelers.
The company said in a statement that it had posted a net profit of Rs 598.81 crore in the corresponding quarter of 2009-10. The result was in line with a Mint poll of five brokerages that had estimated the profits of Hero Honda to shrink.
On the Bombay Stock Exchange, shares of Hero Honda dropped 3.63% to Rs 1,600.10 each. The benchmark Sensex index fell 0.35% to close at 18,469.36 points.
“We will be spending around Rs 600-900 crore this fiscal. Out of this, Rs 500 crore will be invested for a new plant and Rs 250-300 crore for capacity expansion,” said Ravi Sud, chief financial officer at the firm. “Margins will also be impacted by expenditure on research and development, branding and exploring new markets.”
Sud said that Hero Honda’s current capacity is 6.15 million units a year.
The coming year could see a change in the nature of Hero Honda’s financials with all the extra expenditure, said an analyst. And “if the sales momentum seen so far slows, company’s balance sheet will soon be burdened with debt”, said Mahantesh Sabarad, an analyst at Fortune Equity Brokers (India) Ltd.
In an earnings call with analysts, Sud said Hero Honda’s profitability has fallen in recent quarters on account of rising commodity prices. The trend of higher raw material prices would continue, he added. “Demand will remain robust, but margin will continue to be in the region it is in now,” Sud said, adding that he expects the two-wheeler industry to grow 12-13% in the current year.
The motorcycle maker spent 41% more on steel, rubber and other materials as prices of hot rolled coil steel increased to a more than two-year high of $837.80 (Rs 37,365 today) a tonne on 8 March. Steel prices soared 6% quarter-on-quarter (q-o-q) whereas aluminium prices jumped 7% q-o-q, putting further pressure on profitability of companies. Lead, a key ingredient in making batteries, has risen 9% q-o-q, but the highest rise has been recorded by natural rubber, up 33%, Sachin Gupta and Chetan Vohra of Edelweiss Securities Ltd wrote in a recent research report.
In a statement released on Wednesday, Hero Honda’s chief executive and managing director Pawan Munjal said that new products would play a crucial role in expanding the company’s customer base. “New product development will be one focus area as we move ahead in order to expand our customer base. We are also exploring market opportunities in several parts of the world through a dedicated cross-functional team that has been set up for this purpose,” he said.
Munjal added that the company would take a “considered” call on the location of its new plant.
Answering a query on the company’s royalty expenditure after 2014, when it will stop paying royalty on all existing models to its erstwhile partner, Sud said royalty as a percentage of net sales would be minimal at 0.2-0.3%.
The company will pay royalty for new models it receives from the Honda stable, but its total royalty payments will shrink because the proportion of those models in the overall sales mix will only be 15-20%.
Amit Kasat, analyst at brokerage Standard Chartered Equity Research, said Hero Honda’s earnings are “in line with his estimates” and that the “next two quarters will be painful for the company in terms of profitability”.
Hero Honda plans to create a new brand for its motorcycles in the coming months and introduce at least two models this year, Sud said. The company has hired Wolff Olins and communications firm Law and Kenneth Communications (I) Pvt. Ltd to work on the new brand.
Hero Group, the New Delhi-based founder of Hero Honda, bought out Honda Motor’s 26% stake in the venture in March.
The Japanese company plans to expand its fully owned two-wheeler unit in India.
For the year ended 31 March, Hero Honda recorded revenue of Rs 19,401.15 crore, up 22.32% from 2009-10, and a net profit of Rs 1,927.90 crore, down 13.2%.
Shally Seth Mohile in Mumbai contributed to this story.