BackHero shareholders hold out hope over volume revival, cost controls
Hero MotoCorp’s profit in the June quarter came about largely owing to cost-cutting measuresSales in July rose 14% sequentially and recovery continued well into the first half of August as well
PremiumHero MotoCorp Ltd is the best performing two-wheeler stock post-covid by far, rising by nearly 12% compared to its pre-covid highs in end-January. In comparison, shares of all other listed two-wheeler companies have fallen from their highs earlier in the year. Given its strong rural exposure, Hero is expected to do relatively better, investors believe.
While Hero’s sales fell sharply in the June quarter owing to the lockdown, the company managed to keep its head above water reporting an operating profit of ₹108 crore. Profit after tax stood at ₹61 crore.
This was notwithstanding a meagre 25% capacity utilization. Q1 profit came about largely owing to cost-cutting measures. Operating profit margin stood at 3.6%, down from 14.4% in the year-ago quarter, as the steep fall in sales volumes impacted operating leverage. Due to the closure of manufacturing plants, the company was unable to fully recover the fixed costs of around ₹250 crore. Adjusted for cost under-recovery, the operating profit margin for the quarter would have been 12%, says the company.
Revenue for the quarter was down 63%, tracking the 69% fall in sales volume. Realization per vehicle improved from the earlier quarters, reflecting the benefits of BS-VI transition-led price hikes. But due to the drop in margins, operating profit slumped 91%.
The company expects profit margins to recover from June quarter levels, helped by better operating leverage.
More importantly, sales in July rose 14% sequentially and are down just 4% from the year-earlier month. The recovery continued in the first half of August with the need for personal mobility driving sales, the management told analysts in a post results call. “We are already seeing green shoots, and expect them to sustain and get stronger as we move towards the festive season. Our July month sales were more than 95% of pre-covid sales and we do see positive trend moving forward," Niranjan Gupta, chief financial officer, Hero MotoCorp, said in a statement.
Further, the management sounded confident about retaining the recent gains in volume market share. Quick ramp-up of production and greater exposure to rural and semi-urban markets where demand recovery is better are helping Hero MotoCorp.
Even then, concerns persist. One is local lockdowns and supply chain disruptions. The second is the sustainability of sales recovery. Many fear that the recent recovery in sales is aided by pent-up demand, though Hero MotoCorp’s management believes the rural sector is past this phase. Also, the recent analysis of automobile registration trends by analysts at Jefferies India Pvt. Ltd indicate moderation in two-wheeler registrations. The pick-up in sales would need to sustain for a few months for investors’ firm belief in the stock to be justified.
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