Hero Honda profit slows down by 1.6%

HIGHER raw material costs and fierce competition led to 1.6% dip in net profit of Hero Honda Motors Ltd for the three months to end June, its first decline in eleven quarters, but the country’s largest two wheeler maker said softening commodity prices could allow it to grow earnings in the coming quarters.

Net profit slipped to Rs 492 crore for the quarter ended June, after raw material costs rose 20%, much faster higher than sales growth. Net sales increased 12% to Rs 4,265 crore over the same quarter last year. The company also incurred additional expenditure on account of conversion to new emission norms.

Operating margins fell to 15.27% for the quarter ended June compared to 18.12% in the corresponding period last year.

Hero Honda sales volume rose 10% to 12.34 lakh units during the quarter, with one in three vehicles being churned out from the tax-free Haridwar plant. “We expect to produce an additional 4 lakh units from Haridwar to take the total production to 18 lakh two wheelers this fiscal. There was some benefit of around Rs 34 crore, but higher raw material costs shrunk our profits,” Hero Honda CFO Ravi Sud said.

Higher commodity costs did not allow the company to benefit from lower taxes but the firm is expecting prices of raw materials like steel, aluminium and nickel to soften in the current quarter leading to better yield in the future.

But analysts remain sceptical over Hero Honda’s performance in coming quarters, terming the result much below expectations. “It is facing capacity constraint which could lead to lower sales growth than the two wheeler industry,” auto analyst with Angel Broking Vaishali Jajoo said.

Lack of fresh products may fail to excite the urban customers even as its key competitor Bajaj Auto has gained market share with the re-launch of 100 cc bikes, she said.

Hero Honda’s overall market share within the motorcycles industry dropped from 62% in the quarter ended June 2009 to 54%. Backed by much higher volume growth, Hero Honda’s key competitors in the market, Bajaj Auto and TVS Motors reported over 40% revenue growth each during the quarter with both firms seeing profits double over the over the year ago period.

The company said as the fundamentals of the economy remain robust, it is hopeful that in the October-December quarter sales will return to high-growth trajectory.