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Business News/ Market / Mark-to-market/  Higher operating expenses hobble Hero MotoCorp in Q3
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Higher operating expenses hobble Hero MotoCorp in Q3

Hero MotoCorp lost steam on profitability as the expenses were far higher than a year ago and beyond analysts' expectations

The net profit, though 11% higher than a year ago, was a disappointment as it was 12% below Bloomberg’s forecast, and may be a dampener in the near term. Photo: Ramesh Pathania/MintPremium
The net profit, though 11% higher than a year ago, was a disappointment as it was 12% below Bloomberg’s forecast, and may be a dampener in the near term. Photo: Ramesh Pathania/Mint

After several robust quarters amid challenging times, Hero MotoCorp Ltd put up a disappointing show in the December quarter. The world leader in motorcycles clocked a net revenue almost in line with the forecast on the Street. But it lost steam on profitability as the expenses were far higher than a year ago and beyond analysts’ expectations.

Hero MotoCorp’s profit at the operating level fell by 8.5% year-on-year to 821.8 crore, which was 17% below Bloomberg’s consensus estimate of 30 analysts. The media release indicated higher investments for global expansion, capacity enhancement and brand building. “These added investments have impacted our margins in the quarter," it said. Employee expenses rose by about 30% even as other expenses, which could be attributed to marketing, rose by about 9%.

Higher expenses hurt operating profit margin that narrowed by 105 basis points from a year ago to 12.02%, significantly below consensus forecast of 13.6%. A report released by Emkay Global Financial Services Ltd soon after the results were announced say that one-time expenses could have hurt profit margins for the quarter.

Weak financials are also partly attributable to slippages in sales. Hero MotoCorp sold marginally fewer vehicles than in the year-ago period. Efforts to maintain stable realization offset the drop in sales volume, which helped maintain a flat revenue when compared with a year back.

Since November, when sales were tepid across most domestic motorcycle makers, Hero MotoCorp’s shares have been slipping on bourses. Given this sentiment, the disappointment in net profit, which was about 12% below Bloomberg’s forecast, may be a dampener in the near term. Note, however, that the net profit of 583 crore was 11% higher than a year back.

That said, what is material over the long term is its ability to offset these reportedly one-time brand building expenses by generating higher sales volume. Investors may do well to watch for the company’s forays in world markets that may bring in export revenue.

On the domestic front, competition is likely to be tough. Results of others in the fray like Bajaj Auto Ltd and TVS Motor Co. Ltd have also shown higher expenses on marketing and brand building in the hope that this would help garner higher market share in the long term.

For now, the two-wheeler market is a battlefield of stiff competition. Who would win the battle is the question that would determine long-term return on such expenses. Hero MotoCorp’s stock at 2,812.35 discounts one-year forward earnings estimates by about 16 times, a fair valuation pricing in near term prospects for the company. Any indications on profitability being impacted for a longer term may weigh down on stock performance.

The writer doesn’t own shares in the above-mentioned companies.

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Published: 03 Feb 2015, 09:33 PM IST
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