Price cuts, rising costs seen crimping Hero’s margins
Mumbai: Hero MotoCorp Ltd is expected to clock 2017-18 Ebitda margin just above its long-term forecast of 14-16%, as costlier inputs, scooter price cuts and lower tax sops at its Haridwar factory take a toll on India’s largest two-wheeler maker.
During the December quarter, Hero’s Ebitda (earnings before interest, tax, depreciation and amortization) margin—a measure of operating profitability—stood at 15.9%, down 100 basis points (bps) from a year ago.
During the quarters ended September and June, the corresponding figures were 17.4% and 16.3% respectively.
For the nine months ended 31 December, Ebitda margin stood at 16.5%, the company said in an email response to Mint queries.
In 2016-17, margins stood at 15.03%. To be sure, the figure would have been higher had it not been for heavy discounting in March 2017 quarter to liquidate inventory compliant with Bharat Stage (BS) III emission norms, as the BS-IV norms kicked in from 1 April 2017. During an analyst call after the December quarter earnings, the company reiterated that it expects to maintain its margin within the 14-16% band over the long term, a good 50 to 250 bps lower than the 16.5% figure for the fiscal so far. Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd expect Hero’s margin for the 2018 fiscal at 16.5% and narrow to 16.1% in fiscal 2019 as the Haridwar incentives expire.
The narrowing of margin is estimated to the extent of 100bps but would be offset by incentives at Hero’s Halol plant, wrote Kapil Singh and Siddhartha Bera in a 28 February note. One basis point is a hundredth of a percentage point. Another factor affecting margins is the rise in raw material costs.
“Aluminum and steel prices have risen this year, reversing a downward trend prevalent in the past three to four years. The complete impact of this rise on margins will be felt even further in the March quarter,” said Ashutosh Tiwari, head of research at Equirus Securities. The maker of the Pleasure scooter cut prices of its Maestro and Duet scooters in January to expand market share.
“These price cuts, in addition to discounts given during the festive season (September-December) to regain scooter market share Hero has been losing over the past four to five years, will drag margins as well,” Tiwari added.
To be sure, even Hero’s strong pricing power in its entry-level motorcycle portfolio, which allowed for price hikes to offset commodity pressures, may not aid the average selling price much.
“We continue to drive savings and take judicious pricing decisions in order to drive both the topline and the bottomline,” a Hero spokesperson said in an email response to a query. The Delhi-based company is also seeking to sell higher-value models with the launch of a 200cc motorcycle and a 125cc scooter in the near term, according to a 6 February note by Mahesh Bendre, an analyst at Karvy Stock Broking Ltd.
However, improvement of market share in the premium segment is a “distant possibility because Hero is not considered a premium motorcycle maker,” according to Tiwari of Equirius.
“Margins over 17% are not expected to come back for at least the next two to three years. Earnings growth will not happen despite volume growth, which may drive the stock price down,” he added.
Losing out on high-growth segments may well be Hero’s Achilles heel.
“We remain concerned about medium-term growth prospects given continued underperformance in scooters, premium motorcycles and exports, the three high growth opportunities for Indian two-wheeler companies,” Arya Sen and Ranjeet Jaiswal, analysts at Jefferies India Pvt. Ltd, wrote in a 7 February note.