Home >Companies >Hero Honda net up 83% on sustained rural growth

New Delhi: The country’s largest two-wheeler company, Hero Honda Motors Ltd, reported record profits in the June quarter as lower commodity prices, excise tax savings from its Haridwar factory and gains due to sales of higher priced variants helped it surpass its past performance.

In high demand: A file photo of a Hero Honda sales camp at the Khirni village panchayat office in Rajasthan. Four out of every 10 motorcycles and scooters the firm sells are to customers in rural areas. Harikrishna Katragadda / Mint

Net profit for the quarter stood at Rs500.11 crore, a growth of 83% over the corresponding quarter in 2008-09 while sales rose 34% to Rs3,822.44 crore. A Mint poll of analysts on 15 July had forecast a profit of Rs383.5 crore.

At the core of the company’s strong performance is a continued emphasis on the rural hinterland: Four of every 10 motorcycles and scooters Hero Honda sells are sold in rural areas.

Even as competitors try to emulate Hero Honda’s rural strategy, however, there’s a likelihood of rural demand for bikes being hit by a poor monsoon.

“We need to wait for another 15-20 days to assess what demand (on account of possible poor monsoon) would be like," said Ravi Sud, chief financial officer of the company.

Also Read Hero Honda gains from lower costs, tax sops

That, though, will happen with a lag effect of a couple of quarters, according to Mahantesh Sabarad of Centrum Broking Pvt. Ltd.

Until then, Hero Honda will continue to reap the benefits of a decision it took in 2007 to establish a rural vertical.

Since then it has steadily expanded rural dealerships or “touchpoints" as the company defines them.

This year, the company hopes to take the number of touchpoints to 3,500, up from 2,000 two years ago. “We have a rigorous expansion plan in place," Pawan Munjal, Hero Honda’s chief executive said in a statement.

Last year, as growth in urban markets slowed, Hero Honda continued to post healthy sales numbers as rural buyers were less affected by a slowing economy. Last fiscal its sales stayed flat even as Bajaj Auto Ltd and TVS Motor Co. Ltd reported identical declines of 19% each.

Another reason for the sales growth: the company’s lack of dependence on financing as rural buyers generally prefer to pay cash.

In the last year, as banks and non-banking finance companies pulled back from financing bike purchases, Hero Honda had been largely unaffected. At present, only about 25% of Hero Honda’s bikes have been financed compared to upwards of 30-35% for rivals Bajaj and TVS, according to analyst estimates.

Analysts, however, anticipate that sales could begin to slow in the coming months as the effect of rural schemes such as the farm loan waiver and the National Rural Employment Guarantee Act are beginning to wear off.

Competitors are stepping up their rural marketing activities, according to Sabarad of Centrum Broking. “The company will have to work harder for rural customers in future."

Below normal monsoons also have the potential to dent rural demand.

So far India’s monsoons have been 19% below the 50 year average. This has led to delayed sowing of the kharif (summer) crop across several parts of the country and a contraction in the farm area under foodgrain cultivation, a first in five years.

Jacob P. Koshy contributed to this story.

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