Hero MotoCorp Ltd’s March quarter performance bears a stark contrast to that registered a year ago, when the firm had just steered away from its long-standing partnership with Japan’s Honda Motor Co.
At the end of one full year of its solo run in the two-wheeler market, net revenue rose 12% year-on-year (y-o-y) to Rs6,034.90 crore. This came as the company sold 8.1% more two-wheelers at 1.57 million units from a year ago. Realizations improved by 3%.
What’s reassuring for the investor is that Hero displayed stability in its operational performance. The firm maintained operating margin at 15.5% this quarter, in line with both the year-ago and preceding quarters. This, in spite of the tough market conditions, pressures arising out of the partnership severance and the resultant costs incurred on rebranding and sustaining its market share. In fact, the management in its conference call said Hero’s share in the motorcycle market has inched up to 56% from 55%.
The scenario contrasts with a year ago when Hero was facing capacity constraints and rising input cost pressures, which dragged the March 2011 quarter’s operating margin down sharply.
The stable profitability was in spite of higher raw material prices, especially steel, and higher staff costs than in the year-ago period. Operating leverage as more two-wheelers were despatched offset these higher costs and, hence, they were stable as a percentage to sales. Umesh Karne, analyst at Brics Securities Ltd, says, “Its product mix with stronghold in fuel-efficient, entry-level vehicles and high penetration in rural markets is playing out favourably.”
Going forward, there could be trouble for profit margin from its entry into markets such as Africa and Latin America. Here, Hero will not have a head start and will have to fight it out among several global firms, which can imply competitive pricing and, therefore, margin pressure. Further, it might entail higher spending on marketing, and research and development.
However, the net profit rose 20% y-o-y to Rs603.5 crore, which was a tad higher than in the December quarter. Here again, Hero’s performance is commendable, as a year ago it languished with a 16% y-o-y drop in net profit, in spite of robust sales growth.
On the whole, Hero sold 15% more vehicles in fiscal 2012 (FY12) than it did in the year ago. Net revenue was up by 21% at Rs23,579 crore.
The Street might have got wind of the firm’s positive trajectory as its shares have steadily risen over the past 52 weeks, closing at Rs2,245 apiece on Wednesday, beating all benchmark indices.
At the current market price, the stock is fairly valued, trading at around 16 times its estimated FY13 earnings. But its resilient comeback, after the severance of its tie-up, could lead to a re-rating and revision of earnings, at least for the medium term.
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Also See | Quarterly Performance : Hero MotoCorp Ltd ( PDF )