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Hero Honda benefits from higher volumes

Hero Honda benefits from higher volumes
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First Published: Tue, Jan 26 2010. 11 50 PM IST

Updated: Tue, Jan 26 2010. 11 50 PM IST
The country’s largest motorcycle maker Hero Honda Motors Ltd impressed markets for the third consecutive quarter in 2009-10, clocking sales of at least a million units. Both revenue and net profit grew, even as the company’s market share fell slightly. Having sold around 1.1 million vehicles in the third quarter, Hero Honda’s net sales grew by around 33% over the year-ago period to Rs3,827 crore. The increase was largely due to volume growth at 29% and a 3% improvement in the average net realization per vehicle.
But Hero Honda’s volume growth was lower than the industry growth of 39%. The firm maintains that its market share is 59%, just a bit lower than the 60% figure in the year-ago period. But analysts estimate it to have lost market share by around three percentage points during the December quarter to 57%.
Quite in line with the preceding two quarters, Hero Honda cut costs during the third quarter too, resulting in higher operating profit margins. Raw material costs were down from 60% to around 58% of net sales. As a result, its operating profit margin rose to around 17%, from around 15% in the corresponding previous period. On a sequential basis, however, margins were a bit lower. The operating profit at Rs661 crore was nearly 52% higher from a year ago.
Graphic: Yogesh Kumar / Mint
The phenomenal surge in net profit by around 78% to Rs536 crore resulted from a combination of factors—improved operating margins and a lower tax rate of around 21% (compared with 26% in the year-ago period). Higher production from its tax-exempt facility at Haridwar has lowered its effective tax rate. But its net profit contracted by around 10% on a sequential basis.
Will Hero Honda be able to sustain profitability at the current levels? Both the company and analysts state that there could be pressure on operating margins in the ensuing quarters. Raw material prices (steel, aluminium and rubber) have all been on the upswing in the past six months. Besides, given the buoyant motorcycle market, most peers in the industry too have lined up a flurry of new products and variants, which will offer stiff competition for Hero Honda. If market growth is high enough to accommodate everyone, the impact may be limited, but if fierce competition results in lower realizations, then margins may not be sustainable at these levels.
Despite these challenges, analysts’ consensus is that net profit expansion for 2009-10 will be around 70-75% over the 2008-09 figure of Rs1,281 crore. Though Hero Honda’s results did impress markets, it was not enough to take its share price up. Given that the results were on predicted lines, the stock closed around 1.5% lower at Rs1,618 on Monday, compared with a 0.6% decline in the Nifty.
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First Published: Tue, Jan 26 2010. 11 50 PM IST