Hero MotoCorp Ltd’s second-quarter results beat analysts’ estimates, but the loss of market share is disconcerting for investors.
In July-September, Hero MotoCorp’s revenue declined 16.7% to ₹7,571 crore, but was still ahead of consensus estimate of ₹7,390 crore. Revenue was higher than estimates due to spares and other operating income.
Volume growth has been a key concern for Hero MotoCorp as it continues to grapple with the increase in competitive intensity. Volumes declined 21% year-on-year to 1.7 million units. Higher realisations per unit due to a better product mix saved the day as it grew 5% year-on-year.
Hero MotoCorp continued to lose market share in the domestic two-wheeler market, which declined to 35.5% in H1FY20 from 35.8% in H1FY19. New products in the two-wheeler market failed to have the desired effect. “Although HMCL will benefit from a recovery in the domestic 2W sales cycle, we expect market share losses to continue, with a further decline to 34.5% by FY22E," said analysts at Emkay Global Financial Services in a note to clients.
Hero MotoCorp’s operating income fell 20.2% y-o-y to ₹1,101 crore in Q2FY20. However, this was also above the consensus estimates of about ₹1,025 crore. Operating margins contracted 70 basis points to 14.5% in the second quarter compared with 15.2% in the year-ago quarter.
The company has benefited from the cut in corporate tax rates announced by finance minister Nirmala Sitharaman last month. The company’s tax expense fell to ₹162.9 crore from ₹472.17 crore for the same period last year.
This reduction in the effective tax rate for the company boosted net profits. Net profit stood at ₹919 crore against consensus expectation of ₹770 crore.
All this is good, and the stock price-earnings multiple of 17 times FY21 forward earnings seems to be fairly priced. Steady, sustainable growth in demand post the festival season holds the key to future performance.