Hero Honda Motors Ltd has already started benefiting from the drop in commodity prices. All of its gain in margins in the March quarter came from a drop in raw material costs, unlike the preceding three quarters where savings on raw material costs were modest.
Last quarter, operating revenues rose by 22% and operating profit increased by 30%. In the first three quarters of the year, operating profit had risen by 25%. Apart from the savings on raw material costs, Hero Honda also gained from higher realizations. Average realizations (net of excise) rose by 8.4%, thanks in part to the excise waiver the company enjoys at its new plant at Haridwar in Uttarakhand. According to an analyst, unlike Bajaj Auto Ltd, Hero Honda hasn’t passed on the excise benefit to customers. The gains from the excise waiver, therefore, are reflected in the firm’s net sales and profit.
It started operations at Haridwar in the first quarter of the previous fiscal year and has been steadily increasing production. Apart from the excise waiver for 10 years, there are various other incentives such as exemption on income tax for a specified period and subsidy on capital investment. As a result, an increase in output at Haridwar results in higher profitability for the firm. A recent report by Motilal Oswal Research states that Hero Honda’s earnings in this fiscal year largely depend on the extent to which it’s able to raise output at Haridwar, rather than growth in volumes.
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Production at the new unit picked up in the March quarter and this is reflected in the high operating margin of 16% (15.1% in the year-ago period). On a per vehicle basis, operating profit rose by 15% to Rs5,503.
Volumes, too, grew at a healthy pace of about 13% last quarter, despite the fact that the industry grew in single digits. While the slowdown in two-wheeler financing had impacted most manufacturers, Hero Honda has managed the crisis better thanks to its focus on the rural segment. Rural consumers seldom borrow from organized players, and hence demand from that segment hasn’t slowed down for the lack of financing options. Besides, the firm has been able to increase the proportion of cash sales consistently.
These factors have given it an edge over competition in the past year and should continue to work in its favour. Nevertheless, two-wheeler sales are expected to slow down this year because of the economic slowdown and Hero Honda may register only a single-digit growth. But the outlook is bright as far as profits are concerned, thanks to the drop in commodity prices and the expected increase in output at Haridwar. Still, with valuations already above 17 times trailing earnings, the markets seem to have priced in most of these positives.
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Graphics by Ahmed Raza Khan / Mint