The country’s biggest motorcycle maker Hero Honda Motors Ltd has had another spectacular quarter, with revenues growing 35.6% and operating profit rising nearly 45% year-on-year (y-o-y).
This is a significant improvement over its market-beating performance in the quarter to June, when revenues and profit had grown by 16% and 30%, respectively. With interest rates rising sharply and some two-wheeler loan providers such as ICICI Bank Ltd exiting the space, one would have imagined sales to slow.
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The company has managed not only to capture share from competitors, but also grow the market.
According to an analyst with a domestic brokerage, two-wheeler sales funded by loans accounted for 65% of the market till last year. It’s now down to about 45%, although some estimates put it as low as 30%. Either way, cash-based sales have risen considerably.
Demand has also been spurred by two years of good monsoon, the farm loan waiver and implementation of the Sixth Pay Commission—all of which benefit prospective two-wheeler buyers.
Hero Honda has made the most of the situation, increasing its average sale price, on the one hand, to cover rising raw material costs, and cutting discounts, on the other, to take advantage of the drop in competitive pressure. The upshot: Operating profit per vehicle has risen 12.6% in the September quarter on a y-o-y basis.
The profit margin was also helped thanks to an increase in vehicle production at Uttarakhand, which offers the company tax incentives.
In the first six months of this fiscal year that began in April, average realization per vehicle rose by 5% to Rs32,327 and operating profit went up by 15% to Rs4,198 per vehicle.
Volumes in the September quarter grew by 28.5%, much higher than the 11.4% growth in the preceding quarter. That has to do with the company pushing sales to dealers ahead of the festival season in October. Last year, some of this inventory pile-up happened in the December quarter because Diwali fell in November.
But even though primary sales to dealers got an unusual boost making comparison difficult, it’s important to note that secondary sales are also at healthy levels. It’s not that sales will fall with a thud after the festive season.
Having underperformed the market last year, Hero Honda has outperformed by a huge margin this year. Its past price-earnings multiple of 14 times is at a premium to the average market valuation.
But given its strong growth and solid balance sheet, investors are likely to stock with it in the current environment.
Graphics by Sandeep Bhatnagar / Mint
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