Hero Honda net skids 20% on high input costs

HERO Honda Motors posted a third consecutive drop in quarterly net profit as mounting raw material costs and a one-time expense eroded gains from record motorcycle sales.
Net profit declined 20% to 429 crore during the third quarter ended December 31, 2010, as against 535 crore a year ago, the world’s largest two-wheeler manufacturer by volumes, said. The latest drop in profit followed a 15% decline in the second quarter and a 1.6% drop in the April-June period. Net sales rose 34% to 5,161 crore, boosted by 28% jump in two-wheeler sales during the third quarter in India. “For the past few quarters, the industry has faced a multitude of issues with constraints in supply of components and rising input costs,” said Hero Honda’s MD, Pawan Munjal.

Hero Honda’s quarterly results were much below analysts’ expectations. “Profits are much lower even if we take into account the high rawmaterial cost and extraordinary expenditure. We do expect revenue growth to be on track and the company could post 13-14% growth in volumes on an annual basis, but its profit margins would continue to be under pressure due to rising commodity prices and marketing expenditure on the upcoming Cricket World Cup,” said Mahantesh Sabarad, analyst at Mumbai-based Fortune Equity. Hero Honda spent 3,749 crore in the quarter to purchase steel, aluminium and other intermediates, a 43.5 % rise from a year earlier.

“While we expect the market demand for two-wheelers to remain bullish and we are confident of carrying on our growth trajectory, we do foresee margins to remain under pressure in the short term,” added Mr Munjal.

Hero Honda incurred a one-time marketing expense of 38 crore for the CommonWealth Games. CFO Ravi Sud said that the company has earmarked 18 crore for National Calamity Contingency Duty on sales of motorcycles from its plants in Gurgaon and Daruhera in Haryana. Hero Honda has a capacity to produce 5.4 million two-wheelers a year. Mr Munjal says it is on the verge of finalising the location for its fourth plant. “Going forward, the company would have to change its product mix and concentrate more on higher profit generating premium bikes in the 150 cc and above segment to keep its profits intact,” said an analyst.

BUMPY ROAD


Net sales rose 34% to 5,161 crore, boosted by 28% jump in two-wheeler sales in Q3 Co spent 3,749 cr in the quarter to purchase steel, aluminium and other intermediates, a 43.5 % rise from a year earlier