Home / Markets / Mark To Market /  Hero MotoCorp: Welcome surprise over margins, worry lines over volumes

Weak demand and rising commodity prices have cast a pall over automakers in the September quarter. While Hero MotoCorp Ltd was no exception, the company has managed to show some silver linings along with a decent outlook.

Hero was able to raise prices of several products, which offset pressures from high commodity prices to some extent.

Of course, weak demand meant that the company’s volume growth remained modest. The company sold 1.438 million motorcycles and scooters during Q2FY22.

Uptick awaited
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Uptick awaited

While vehicle sales grew 40% sequentially, it was on the back of the low base of the June quarter, which was severely impacted by covid-induced lockdowns. On a year-on-year basis, vehicle sales declined 20.7%. The upshot is that demand remains weak, even in a rather resilient rural market.

That said, the outlook is sanguine and most analysts believe that a gradual pick-up in economic activity should lead to an uptick in demand for vehicles in the coming quarters. The ongoing festival season too has helped shore up sales.

“We expect a gradual recovery in domestic volumes, supported by improving macros, and opening of educational institutions/hospitality sector," analysts at Motilal Oswal Financial Services Ltd said in a note. The brokerage expects 12% volume CAGR (compound annual growth rate) in domestic market over FY22-24.

In addition, the analysts expect exports to post a 15% CAGR, owing to improved penetration in Africa and Latin America.

Hero continues to lag its peers such as Bajaj Auto and TVS Motor Company in terms of exports and has higher domestic exposure. However, its efforts on growing exports continue and analysts expect an annual run-rate of 300,000 units this year versus a 200,000-unit run-rate till last year.

The company has grown its share in seven out of eight key markets. Rising exports will also support margins, according to analysts.

For the September quarter, the company was able to report robust Ebitda margins, exceeding estimates of most analysts. Ebitda margins came in at 12.6%, up 323 basis points (bps) sequentially. Ebitda is earnings before interest, taxes, depreciation and amortization. Margins were 100bps ahead of estimates of Credit Suisse and analysts there point out that the 15% growth in Ebitda for the quarter also surprised on the upside. The key factor behind this has been price hikes and strong revenues from sale of spares.

Hero’s price increases meant that per unit realizations at 58,760 were up about 14% year-on-year, point out analysts. Better product realizations supported and net revenue from operations at 8,453 crore declined by a modest 9.8% year-on-year despite a steep decline in volumes. On a sequential basis, revenues rose 54.1%.

With rising prices of key commodities such as steel and aluminium, among others, Hero’s raw material costs as a percentage of sales rose to 72.3% from 71.1% a year earlier. However, with weak volumes, Ebitda still declined about 17% year-on-year.

Meanwhile, the progress in electric vehicles (EVs) remains another key area of interest for investors. The company said it is accelerating focus on producing EVs as an integral part of its product portfolio. Its project is in the advanced stages and the first product will be manufactured at its plant at Chittoor in Andhra Pradesh. The company is expected to launch its first in-house electric two-wheeler in March.

While progress on the EV front is being monitored, analysts point out that the company’s core 100cc motorcycle business may not get disrupted from it.

Analysts at Emkay Global Financial Services said Hero has a low vulnerability to EVs as it gets just 8% of volumes from scooters.

Hero is also working on premiumizing each segment. Further, it is scaling up the distribution network for its premium Harley Davidson range.

Emkay expects 12% volume CAGR in the domestic market over FY22-24, while revenue is expected to grow 14% and earnings by 18% during the same period on a CAGR basis.

Shares of the company rose more than 3% intraday on Monday before settling 0.56% up on the National Stock Exchange.

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