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Home / Markets / Mark To Market /  Hero MotoCorp records a dull Q1; recovery hinges on demand uptick

Hero MotoCorp records a dull Q1; recovery hinges on demand uptick

Input cost pressures have also finally caught up with gross margins (down 204 basis points quarter-on-quarter).  Mint 

Hero’s strong point has been the domestic market while its peers have been boosting earnings from exports

Hero MotoCorp Ltd’s June-quarter performance was mixed with pressure on volumes getting accentuated by rising commodity prices.

Hero MotoCorp Ltd’s June-quarter performance was mixed with pressure on volumes getting accentuated by rising commodity prices.

Hero reported a 58% sequential decline in earnings before interest, tax, depreciation and amortization (Ebitda) for Q1FY22 and missed Street estimates for net profit by a wide margin.

Hero reported a 58% sequential decline in earnings before interest, tax, depreciation and amortization (Ebitda) for Q1FY22 and missed Street estimates for net profit by a wide margin.

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Two-wheeler sales volumes, already under pressure since last year, showed little recovery. Hopes of a recovery were dashed after the second covid wave led to fresh curbs. It did not help that rural areas, where Hero has a strong hold, were hit more by the second wave. It sold 10.25 lakh units in Q1, a decline of 34% from Q4FY21. Of course, year-on-year growth of 81% was largely due to a low base.

Hero’s strong point has been the domestic market, unlike peers such as Bajaj Auto Ltd or TVS Motor Co. Ltd, which have a larger exports component. However, this has come to bite the firm as exports have buoyed the earnings of its peers. Analysts have flagged concerns over tepid demand, expected to continue putting pressure on Hero. In the entry and mid-level segments, where Hero has a strong presence, the sales pressure has been much more. This has been hurting the sales volumes of Hero more than that of its peers.

 

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The weak demand for now also means that the firm has not been able to raise prices adequately to offset the impact of rising commodity prices. With demand under pressure, the adverse product mix further pulled down the average realizations. Some analysts have also attributed the decline to higher discounting. Average realizations at 53,559 a unit were lower than 55,434 during the previous quarter, point out analysts at Motilal Oswal Financial Services Ltd. This coupled with declining volumes meant that net revenues declined about 37% sequentially.

Input cost pressures have also finally caught up with gross margins (down 204 basis points quarter-on-quarter). Analysts at ICICI Securities Ltd pointed out that rising prices could further hurt demand for vehicles at the entry level, which are already under duress.

That said, the outlook seems to be brighter and the management also sounded optimistic. The firm’s efforts in launching more premium versions may pay off over time. In this respect, the company’s tie-up with Harley-Davidson should give it further mileage in terms of sales and presence in the high-end market.

“While current business performance remains weak, we remain neutral on the stock ahead of a possible revival of low-income discretionary consumption and as the stock continues to price in benign assumptions and valuations," said analysts at Credit Suisse in their post results note.

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