Hero MotoCorp Ltd, India’s largest two-wheeler maker, is likely to end the July-September period with its sharpest year-on-year drop in quarterly sales in at least a decade as rising petrol prices and high interest rates have forced people to put off purchases.
The company will build 448,000 units this month, according to the production plan. This would put sales for the quarter at 1.4 million, down 9.3% from a year earlier.
Mint has reviewed a copy of the production plan.
This is a sharper decline than the one in 2008, when private sector banks had stopped providing finance to two-wheeler buyers, leading to a drop in sales.
There is little difference between production and sales for a two-wheeler company. Inventory with dealers would have already been reported by the company in the previous month as wholesale sales.
Hero’s two-wheeler sales have declined only four times since the June quarter of FY03.
Sales fell 0.7% in the third quarter of FY03, 3.6% in the first three months of FY08, 0.3% in the December quarter of FY08 and 4% in the same quarter of FY09. Sales data before FY03 was unavailable.
said a company spokesman. Hero said the current economic slowdown has hit sales plans, in response to queries. “Retail sales for the industry in July and August have been slow due to the overall economy and the prevailing sentiments. We expect this trend to continue even in the month of September,”
Things are expected to improve subsequently.
“From the month of October, however, we expect to see a retail pick-up during the festive season,” the spokesman said.
While the current economic slowdown has had an impact on sales, some customers may be moving away from the company after the separation from Honda, said Deepesh Rathore, managing director of IHS Automotive, a consultant for automobile companies.
“The reason why Hero sustained its numbers during the 2008 slowdown was because of its association with Honda that made the brand impeccable,” he said. “After separation, there may have been cases where customers would have preferred Honda over Hero. This, coupled with the weak monsoon, high interest rates and petrol prices have affected its performance.”
After its separation from Japanese auto maker Honda Motor Co. in December 2010, Hero has tried to establish its own brand name and is in the process of removing the Honda name from its bikes.
Due to the slowdown, the company has cut production at three plants, the Hero spokesman said. “As we have already stated recently, we have adjusted our production plans owing to a slowdown,” he said. “However, we will ensure there is sufficient stock at dealerships to leverage the high retail opportunity that comes with the festive season. All our brands are in good health, and we have a robust communication plan leading up to the festive season.”
Two-wheeler sales in the country have slowed in the current fiscal after growing at 15% last year. In the first five months to August, the two-wheeler market grew 6.8% to 5.71 million units.
During this period, Hero sold 2.5 million units, registering a growth of 2.1% over last year.
The drop in sales is a concern for investors as it’s likely to affect earnings, said Mahantesh Sabarad, senior vice-president, equity and research, Fortune Equity Brokers Ltd.
“Profit is mostly dependent on sales and margins,” Sabarad said. “However, at the moment, margins are not under pressure as raw material prices have softened but declining sales is likely to affect net profit.”
To be sure, September quarter despatches are not always comparable from the year before as the festive season sometimes falls in October and at other times in November, said an industry expert who didn’t want to be named.
“In some years, both Dussehra and Diwali fall in October, resulting in massive despatches by manufacturers in September to feed the festive season demand in October,” said this expert. “However, the despatches would be less in September if the festive season starts late; for example, like this year when Dussehra is in the third week of October, and Diwali is only in November. So the market demand for Dussehra can be catered to by despatches in early October.”
According to the company’s September plan, Hero has cut production for entry-level motorcycles such as CD Dawn, CD Deluxe, Splendour and Passion (in the range of 75cc to 110cc) by 5% while production for other models has been increased significantly.
The production plan may not give a clear picture as the company started production adjustments in the beginning of this fiscal, said a person familiar with the development.
“The company produced roughly 4,000 units of bikes in the range of 125cc-150cc in August,” said the person, who didn’t want to be identified. “This is because the inventory levels for bikes such as Achiever and Hunk were already higher. There would be around 500,000 bikes stacked in various showrooms across the country.”
Hero has, however, plans to increase production of bikes in the 125cc-150cc range to 18,105 units in September from 4,125 units in the preceding month. According to Society of Indian Automobile Manufacturers data, the firm produced 553,224 units in June; 509,563 units in July, and 443,026 units in August.
It has also started production of its new 125cc bike Passion X Pro, which is expected to be launched next month.
The company had showcased the bike at the Auto Expo in January. In September, the firm will produce 9,100 units of its new bike.
