Hero MotoCorp: margins beat the Street in Q1
Hero MotoCorp Ltd’s margin beat for the June quarter is impressive, especially given the trend of rising input costs. Operating margin at 16.6% is not only 153 basis points higher than the year-ago period, but it also whizzed past Bloomberg estimates of 15.7%. A basis point is one-hundredth of a percentage point.
What did the trick was a 6% increase in the company’s sales volumes, although net realization was unexpectedly only a tad better compared with a year ago. Including other operating income, net revenue rose by 7.2% to Rs.7,398.9 crore, which however, was lower than Bloomberg estimates.
Higher volumes and a good product mix with higher growth in scooter sales compared with motorcycles helped profitability. Raw material cost per unit of vehicles sold was lower than a year back. Add to this a drop in other expenses, perhaps on the back of contained advertising expenses.
On the whole, improved profitability translated into Rs.1,230.1 crore of operating profit, higher by 18% from the year-ago period and also better than what the Street expected.
The markets gave a thumbs up to the robust operating performance. Hero MotoCorp’s stock closed a tad higher at Rs.3,456.80. But analysts will have their eyes set on sales volumes in the forthcoming months. In the analysts’ conference call, the management reiterated that given the good monsoon, a rural revival should aid motorcycle sales.
Meanwhile, urbanization and the hike in salaries should lift scooter sales too in urban areas, although the growth rate may slow as the base gets higher. Hero MotoCorp’s net profit of Rs.883 crore for the quarter too was above expectations and 18% higher than a year back.
Strong sales would obviously trickle down into better profits for the company. But the big challenge would be rising input costs. In spite of this, if Hero MotoCorp lives up to its guidance of sustained profitability, there could be a re-look at earnings growth estimates.
For now, the stock trades at around 20 times one-year forward estimated earnings per share, which is reasonable given the strong profit growth. If sales numbers continue to support the firm, it could continue its outperformance compared with the benchmark indices.