The country’s largest two-wheeler maker, Hero MotoCorp, had a disappointing quarter with operating profit and margins below analysts’ expectations. Though higher volumes and price hike undertaken earlier in the December quarter helped improve revenues, higher raw material costs and promotional expenses dented margins. Weaker operating performance pegged back net profit, which fell a steep 20 per cent.
Though industry volumes are expected to be lower in single digits for FY13 and volumes in Q1FY14 are likely to be muted, Hero MotoCorp’s management believes that recent launches and rural demand should help it sustain steady volumes, going ahead. The December quarter notwithstanding, analysts believe that the risk reward is getting favourable for the company and suggest an entry, especially if the stock corrects in response to the poor quarter numbers. “A 15 per cent FY14 P/E discount to Bajaj Auto could narrow as margins are expected to improve on stabilising raw material costs, gains from yen depreciation and volume growth, going ahead,” says an analyst.
Margins muted
Earnings before interest, tax, depreciation and amortisation (Ebitda) margins came in at 12.6 per cent, 305 basis points (bps) lower year-on-year (y-o-y) due to higher raw material costs as well as higher other expenses. The management said higher raw material cost was both due to new launches ( Ignitor/ Maestro) as well as reintroduction of Hunk. New launches increase metal costs, according to the company. And the product mix thus was adverse, according to the management. While raw materials to sales for the quarter stood at 74 per cent, management expects it to stabilise at 72-73 per cent levels, going ahead. Other expenses were up due to brand building activities as the company spent money on publicity and advertising campaign around the launches / refreshes of Maestro, Ignitor, Extreme and Glamour. Hero expects sales and promotion costs as a percentage of sales to be around the two per cent mark. With raw material costs and volumes stabilising and most of the promotions already done in December quarter, analysts expect Ebitda margins for the company at the end of the year to perk up to 14 per cent for FY13. While Bajaj Auto continues to be ahead of its larger peer by consistently posting 20 per cent Ebitda margins, profitability of Hero would improve once the royalty payments cease post-FY14.
