Hero MotoCorp Ltd’s shares have risen more than 16% in the past six months and have beaten the benchmark sectoral index even as the auto industry has been facing several regulatory challenges. The BSE Auto index rose 9.8% during this period, while rival Bajaj Auto Ltd paled in comparison with negative returns.
Hero MotoCorp’s June quarter results back investors’ faith in the company. First, volumes rose by 6.2% over the year-ago period. Price hikes effected during the quarter elevated the revenues by 7.7% to Rs7,971.6 crore. This compares favourably with Bajaj Auto, whose revenue contracted by around 5%.
Further, the operating leverage from sales growth helped Hero MotoCorp’s operating profit margins. For perspective, almost all auto firms are challenged with the surge in steel and aluminium prices, the key commodity inputs in making automobiles. Thanks to the benefit of higher sales, Hero MotoCorp was able to contain other expenses and also offset the costs incurred in compensating dealers for the losses incurred in clearing stocks before moving to the new goods and services tax.
In fact, the 16.2% operating margin—60 basis points higher year-on-year—surprised investors positively. Rival Bajaj Auto’s operating margin contracted by about 320 basis points during the quarter, as it faced the double whammy of weak sales and high input costs. A basis point is 0.01%.
In the final analysis, Hero MotoCorp’s Rs914 crore net profit was a marginal 3.5% higher from a year ago. Again, this compares favourably with Bajaj Auto, whose net profit fell around 20%.
Of course, one could argue that Bajaj Auto’s performance is presently impacted by the steep decline in exports. However, even on the domestic turf, it has been losing out due to a paucity of new launches.
On the other hand, Hero MotoCorp has come a long way on its own mettle, especially since its separation from its former Japanese partner Honda Motor Co.
What’s strange is that both stocks—Hero MotoCorp and Bajaj Auto—trade at similar valuations of around 18 times estimated FY19 earnings. With the monsoon on track and rural consumption set to improve, Hero MotoCorp may have an edge over peers due to its strong rural penetration. That said, competition from Honda Motorcycle and Scooter India Pvt. Ltd and even TVS Motor Co. Ltd in some pockets has been stiff and could force the company to increase marketing spends. Hero MotoCorp’s market share could be challenged due to its relatively small presence in the growing scooter market and in premium motorcycles, say some analysts.