Hero does well despite rural demand slowdown
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Sluggish consumer demand is a dampener for two-wheeler firms and is expected to remain so till the middle of FY17. If the southwest monsoon returns to form in June, then there is hope that the second half will be better. That is the sobering message that comes from Hero MotoCorp Ltd’s management, as the company reported a 2.5% increase in two-wheeler sales volume and a 6.7% increase by value, against a year ago. Average per vehicle revenue rose by 4%, which is a good sign as it signals a better product mix. These numbers were on expected lines, but the increase in per vehicle revenue was lower than the 6% rise seen in the September quarter.
Hero MotoCorp benefited from benign raw material costs and a cost-reduction programme. Input costs declined by 0.4%, while employee costs rose by 9% and other expenses rose by 16%. Part of the increase in other expenses was expected, attributed to higher festival season spending on publicity.
Since materials are the main portion of expenses, a decline here and a better product mix caused the company’s operating profit to rise by 38.6%, again meeting the Street’s expectations. Net profit for the quarter rose by a smart 36.4%.
Hero MotoCorp expects the industry to close the year with growth similar to the 1% growth in the year so far. Next year, it expects growth to be in lower single digits in the first half, with the second half seeing a better growth rate, provided the monsoon is good. It may have to tone down its overseas ambitions, as emerging markets have turned risky because of wild fluctuations in foreign exchange rates.
The company seems confident of holding its own against competition in its home market, stating that it has not resorted to discounting to sell products even in this weak market. That’s a good sign but the question is if it can sustain this, especially if the cracks in demand widen. The one factor firmly in its favour is input costs. Since input costs reflect with a lag of a quarter, the continuing decline in prices should be visible in the March quarter. Risks posed by the minimum import price on steel may come to the fore next fiscal year.
Hero MotoCorp’s stock is down 7.1% in the year so far. It fell by 1.9% on Thursday, which is better than the 3.5% fall in the BSE Auto index. The company’s results show it is still at the top of its game and can tackle competition head on. Investors will like that but will also be aware of the risk posed by weak market conditions for motorcycles. A sustained revival in urban consumption and forecasts of a good monsoon are triggers to watch for.