In spite of the recent split in Hero Honda Motors Ltd’s promoter groups, there was a glimmer of hope for a better December quarter performance, especially after it took a price hike and clocked record sales of 500,000 motorcycles in the month of December. But operating profit margin (OPM) at 11.2% was about 600 basis points (bps) lower from a year ago and 220 bps lower than the previous sequential quarter. The 28.5% year-on-year (y-o-y) growth in sales volumes and a near 5% y-o-y improvement in its realization per vehicle could only partly offset rising material costs.
Also See Bumpy Ride (PDF)
Led by steel and tyres, raw material costs during the quarter jumped by about 590 bps y-o-y and 120 bps quarter-on-quarter (q-o-q) to 74% of sales. Other expenses, too, were higher than anticipated, at about 12% of sales. Both these elements pulled down the operating profit to Rs 577 crore—10% lower from a year ago and 13% lower from the previous sequential quarter. What this implies is that despite its leadership position in the Indian marketplace, with a near two-thirds share, the competitive milieu is posing challenges to price increases.
Adjusted for a one-time exceptional item, the firm’s net profit at about Rs 508 crore was 5% lower y-o-y and around 8% lower q-o-q. This came as a big disappointment against the Bloombergconsensus estimate of Rs 563 crore for net profit. But revenue growth was in line with the consensus—at Rs 5,162 crore, it was 34% higher y-o-y and 20% higher q-o-q. In fact, the January sales numbers (just released) showed a 20% y-o-y surge in sales volumes to 470,000 bikes, though it declined by about 7% compared with the previous month.
Due to the disappointing results, Hero Honda’s shares dropped 5.3% to Rs 1,523 apiece, which discounts estimated fiscal 2012 earnings by around 14 times. Given the pressure on margins, analysts also peg the compounded earnings growth rate over the next two years at around 12-14%, which implies a fair valuation.
We welcome your comments at firstname.lastname@example.org