Hero MotoCorp’s sales on fast track but input costs take a toll on margins
In spite of its high base, the country’s largest motorcycle maker Hero MotoCorp Ltd has been steadily clocking strong sales, aiding profit growth in spite of rising costs and competitive pressures.
The December quarter’s 15% revenue growth at Rs7,305 crore compared to the year-ago period matched the Street’s expectation. Driving this was the 16% growth in domestic two-wheeler sales, but without an expansion in realizations, which indicates competitive pressures in the two-wheeler market.
Moreover, the auto industry has been faced with rising raw material costs. Hero’s raw material costs rose in absolute terms steeply when compared to a year back. They rose by 250 basis points as a percentage to sales in spite of higher volumes clocked and the benefits of operating leverage.
This dragged the operating margin down by 100 basis points year-on-year to 15.9%, although it was what the Street had expected. The quarter’s operating profit grew by 7.3% to Rs1,158 crore. Mark-to-market losses on the investment portfolio, however, translated into lower other income, which in turn impacted net profit growth. The Rs805 crore net profit therefore was a tad lower than forecasts and 4.3% higher year-on-year.
Hero’s shares fell by 2.5% on Tuesday, which was largely due to the fall in the overall market. Otherwise, it is on a better wicket both in terms of growth and valuation among two-wheeler makers. While Bajaj Auto Ltd’s shares trade at about 20 times one- year forward earnings, TVS Motor Co. Ltd’s trade at 32 times. Hero is comparatively cheap at about 18 times. According to Bharat Gianani, research analyst at Sharekhan Ltd, “Rising rural demand and strong budgetary focus on rural spend will boost motorcycle sales. So, FY2019 is likely to witness another year of double-digit growth in two-wheelers. As market leader in the segment with strong rural focus, Hero should continue to clock good sales.”
That optimism seems to be borne out by the strong sales growth of about 31% in January. The only dampener for the stock could be sticky profitability if competitive pressures are high and input costs rise further.
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