Two-wheeler Hero Honda Motors Ltd has outdone its peers in the two-wheeler industry for some time now, and its performance in the December quarter is no exception.
To start with, the 4% drop in volumes is much lower than the rate at which the industry’s sales have declined. What’s more, average realizations rose by as much as 9% year-on-year. This, coupled with some cost savings, has led to an 11.5% improvement in operating profit per vehicle sold.
The per-vehicle numbers look impressive, but the company-wide numbers suggest a huge decline in growth. While volumes fell by 4% last quarter, they had grown by as much as 20% in the first six months of the fiscal. Operating profit grew by just 7% to Rs417 crore last quarter, a huge drop from the 38% growth reported in the first two quarters.
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But as the company management said in a press briefing, the right way to look at the results is to club the performance of the December quarter with the September quarter to compare it on a year-on-year basis.
In 2007, the Diwali festival fell in November, so the majority of primary sales to dealers happened in the December quarter. But in 2008, the festival came earlier in October, and sales to beef up dealer inventory happened in the September quarter.
Volumes grew by 10.9% in the two quarters put together, pretty much in line with the 11% growth reported in the June quarter. Operating profit growth in these two quarters stood at 23.4%, not much lower than the 29.8% growth recorded in the June quarter.
But while it’s true that the decline in growth is not as drastic as the December quarter numbers suggest, that’s not to say growth hasn’t declined.
Volumes fell by 10% in December, which has nothing to do with the change in Diwali dates. Tight financing norms, coupled with the slowdown in the economy, continue to hurt the auto sector. Hero Honda has so far outperformed its peers, thanks to a better product portfolio.
But since demand continues to be slow, and with banks remaining cautious about lending to two-wheeler buyers, volumes are likely to be under pressure. Given this scenario, Hero Honda’s valuation of 14.2 times trailing earnings looks rich.
Graphics by Ahmed Raza Khan/Mint
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