Mark to Market | Hero MotoCorp shifts to reverse gear

While both revenue and profit were expected to fall, the results are weaker than expected
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First Published: Tue, Oct 23 2012. 08 16 PM IST
The management is confident that monthly volumes will rebound to the 500,000 mark in the coming months, but investors are likely to remain cautious. Photo: Ramesh Pathania/Mint
The management is confident that monthly volumes will rebound to the 500,000 mark in the coming months, but investors are likely to remain cautious. Photo: Ramesh Pathania/Mint
Updated: Wed, Oct 24 2012. 12 12 AM IST
Hero MotoCorp Ltd put up a weak show for the September quarter as revenue and profit fell on lower volumes. While both revenue and profit were expected to fall, the results were weaker than expected. According to an analyst with a foreign brokerage, there’s nothing encouraging about the results—if not for an unusual increase in spare parts sales and a drop in tax rate, the drop in net profit would have been much worse than the reported 27% fall.
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Hero’s travails during the quarter began with lower sales volumes—it sold 13.7% fewer vehicles, and monthly sales dropped below the 500,000 mark in the past few months. This was mainly on account of an inventory correction exercise the company was forced to do in the second quarter. Average price realizations improved 3.2%, thanks to an increasing proportion of sales of higher priced bikes, besides an increase in spare parts sales. The resultant 11% drop in net sales to Rs.5,187.5 crore, therefore, was slightly better than expected.
But margins fell by 190 basis points as the drop in volumes hit operating leverage, and as advertising expenses rose owing to the company’s rebranding exercise. A basis point is one-hundredth of a percentage point.
According to Abhishek Banerjee, analyst, Asian Markets Securities Pvt. Ltd, “Hero’s higher percentage of fixed cost to sales pulls down margins during a downtrend when sales volumes fall, but acts positively in a buoyant economy.”
Net profit for the quarter fell by 27.4% to Rs.440.6 crore. The fall would have been worse but for a drop in the effective tax rate. In comparison, Bajaj Auto Ltd was able to contain its fall in net profit to around 6% during the quarter. Bajaj was able to sustain profitability despite a 10% drop in volumes as it has a more diversified play.
This divergence in performance has been priced in to a large extent. In the past three months, Hero shares have fallen by 13%, while those of Bajaj have risen by over 13%. While the management said in a post-results conference call that it is confident that monthly volumes will rebound to the 500,000 mark in the coming months, investors are likely to remain cautious.
Analysts are concerned about the increasing competition in the two-wheeler space. According to Emkay Global Financial Services Ltd, “Expectations were toned down even before the results, but there could still be an 8-10% cut in consensus estimates for fiscal 2013.”
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First Published: Tue, Oct 23 2012. 08 16 PM IST
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