Home >Markets >Mark To Market >Weak margins, demand woes aren’t reflected in the Hero MotoCorp stock
Analysts' industry interactions indicate improving enquiries, particularly from rural and semi-urban areas. (Photo: Hemant Mishra/Mint)
Analysts' industry interactions indicate improving enquiries, particularly from rural and semi-urban areas. (Photo: Hemant Mishra/Mint)

Weak margins, demand woes aren’t reflected in the Hero MotoCorp stock

While the requirement for personal vehicles may perk up demand in the near term, the economic slowdown and overall fall in consumer incomes can be a headwind

Shares of Hero MotoCorp Ltd lost about 3% on Wednesday after the company reported weak numbers for the March quarter. Still, the stock has been fairly resilient, falling just 8% from its highs in end-January. This suggests that investors expect a minimal impact from covid-19, although as the Q4 results show, this certainly can’t be taken for granted.

Revenues dropped 21%, tracking the 25% fall in sales volumes. What’s more, operating profit slumped 38% from the year-ago quarter. Operating profit margins dropped three percentage points from the year-ago to 10.6%, the lowest in recent times. Compared to the December quarter, margins are down as much as 4.2 percentage points. Last month, TVS Motor Co. Ltd, too, reported a notable fall in operating profit margins sequentially. The company attributed the decline to one-time discounts offered to dealers to clear Bharat Stage-IV vehicles (which met older emission norms) and contributions to covid-19 relief measures.

Graphic: Paras Jain/Mint
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Graphic: Paras Jain/Mint

Similarly, Hero MotoCorp saw one-time expenses and provisions. It gave discounts for BS-IV vehicles, the management told analysts. “Revenue and Ebitda for the quarter was impacted due to lockdown and one-off items. Excluding the same, revenue would have been 7,403 crore, at underlying Ebitda margin of 13.5%," Hero MotoCorp said in a statement. The drop in margins was simply because some large expenses were more or less the same despite the fall in revenues.

“Other expenses were higher than estimates and flat q-o-q in rupee terms despite a 13.4% q-o-q decline in volumes," Motilal Oswal Financial Services Ltd said in a note. Also, some analysts said management commentary was a tad cautious and, hence, a bit worrying. The company refrained from giving specific forecasts on demand, despite re-opening a large number of retail outlets.

While the requirement for personal vehicles may perk up demand in the near term, the economic slowdown and overall fall in consumer incomes can be a headwind. “Demand can take some more time to recover. We see a significant fall in automobile sales in the current and next quarters. 3QFY21 will see improvement, while we expect growth to return from Q4FY21 onwards," said Mitul Shah, vice president-research, Reliance Securities Ltd.

This is in variance to the sharp recovery investors are factoring in. On the positive side, Hero MotoCorp is now trimming costs. It has rationalized capital expenditure and launched initiatives to improve productivity. Also, all its manufacturing plants and vendors have resumed operations. The company started dispatching vehicles to retailers in May, and with enquiries from customers on the rise, volumes are likely to improve gradually.

Hero MotoCorp’s rural exposure, large presence in the economy and entry-level motorcycle segments are also seen as an advantage. “Relatively they (Hero) are better positioned compared to others," said Bharat Gianani, auto analyst, Sharekhan Ltd.

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