Hero MotoCorp: In top gear

Margins improve on higher realisations, drop in raw material costs.

The September quarter results of Hero MotoCorp (HMC), the country’s largest motorcycle maker, were ahead of consensus estimates. The better-than-expected performance came on the back of a robust volume growth, price increases and a drop in raw material costs. The company’s strong volume growth continued in the quarter; it posted an year-on-year growth of 20 per cent, outperforming the sector, which grew at 14 per cent.

Further, price increases (Rs 400-500 a bike) in June helped it improve realisations, which grew 6.6 per cent over the corresponding quarter in the previous financial year. A drop in raw material costs helped the company post an improvement in its Ebidta (earnings before interest, taxes, depreciation and amortisation) margins (adjusting for royalty to Honda), which, at 12.7 per cent, were ahead of consensus estimates. Though margins are still shy of last year’s figures by 70 basis points, analysts say the current quarter’s figure came in despite a sharp rise in other expenses, primarily branding costs. The drop in commodity costs helped it improve margins over the June quarter by about 130 bps.

Going ahead, the key challenges for the company will be its ability to scale up research and development efforts. While this is the first full quarter after the rebranding exercise, analysts say it will be a while before consumers will be able to perceive it as a separate entity, independent of Honda.

With Bajaj Auto piling on the pressure, both in the executive segment as well as rural markets, HMC got more aggressive in the 150-cc space with the launch of Impulse, priced at the upper end of bikes in that category. If HMC, through its portfolio (CBZ, Hunk), is able to expand its presence in this segment, it will not only improve its 13 per cent segment market share, but also its margins, as customers are not as price-sensitive as the lower powered bikes.

However, analysts are sceptical about its ability to make a dent in Bajaj Auto’s market share in the short-to-medium term. At Rs 1,984, the stock is trading at 17.5 times its FY12 earnings estimates, which is at a premium to Bajaj Auto’s valuations of 15.4 times. Given the latter’s superior margins (19 per cent), analysts believe the gap is not justified.