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India's largest two-wheeler maker Hero MotoCorp followed its smaller peer Bajaj Auto to report better-than-expected results for the September quarter. The company beat estimates on all counts reporting healthy growth in revenues and profits. Revenues were up 10 per cent year-on-year to Rs 5,726 crore on the back of volume growth, price rises and better product mix. Strong growth in scooter sales (12 per cent of volumes; up 31 per cent year-on-year) and higher sales of more than 125-cc bikes helped boost revenue growth.
The company outperformed the sector in the quarter, with a volume growth of 6.3 per cent to 1.42 million units. While it has not taken any price rises in the quarter, it benefited from the June quarter rise of Rs 1,000 a unit on an average. To tackle the higher raw material costs, it had taken a further rise on October 3 of a similar amount.
What aided the revenues further, according to the management, was the higher proportion of spares in the sales mix. Higher operating leverage and lower cost of raw materials as a proportion of sales helped the company improve the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin.
However, even as interest expenses and depreciation were flat, boosting pre-tax profit 25 per cent, net profit growth came in at just 9.1 per cent year-on-year as tax outgo more than doubled (up 107 per cent) to Rs 177 crore as some of the tax incentives expired (similar to the trend seen in June quarter).
As a result, the stock gained a per cent and closed at Rs 2,088 versus a marginal fall in Sensex. However, while the company is hoping for a pick-up in demand, margins could come under pressure due to higher input costs and import content.
At the current price the stock is trading at 14.5 times its FY15 estimates, marginally lower than Bajaj's 15 times. Given the low single-digit growth expected for the domestic two-wheeler sector in FY14 as well as Hero, analysts prefer to put their bets on Bajaj Auto.
Festivals sales volume to improve?
While Hero has managed to do well in the quarter, the Street will keep an eye on the volumes during festive October and November. The company, which says it is on course to better its last year's volume number of 1.1 million in the two months, is eyeing Dhanteras and Diwali. The senior vice-president of sales, marketing and customer care, Anil Dua, told analysts in an investor concall though the last year base was high, volumes in October were buoyant and the company hoped to do better than the sector on the back of 15 variants and advertising campaigns. A five-year warranty, marriage season and higher scooter volumes (up 40 per cent year-on-year) had helped its performance in the first half of FY14.
What will aid the sales for Hero is it has the highest number of bikes in the entry-level and executive segments and a wider rural reach. About 47 per cent of its sales come from the rural areas versus 40 per cent for the sector. The company is hoping monsoons will translate into higher rural spending. While it expects the second half to be better than the first (0.6 per cent growth in the April to September period), with FY14 growth estimates in lower single-digits (two-three per cent), Yaresh Kothari of Angel Broking is more circumspect and pegs the number closer to a per cent.
Margin pressures ahead
Though the company is banking on higher sales in the coming months, it is likely to face margin pressure due to higher raw material costs, specially for the three key commodities of steel, copper and rubber. The senior vice-president and chief financial officer, Ravi Sud, indicated despite the price rise in October, the company will not be able to absorb the full increase in raw material costs. While more rises are not ruled out, given the company is keen to improve volumes and the weaker overall market part of the raw material rise will likely be absorbed.
For the September quarter, the company posted an Ebitda margin of 14.5 per cent, up 30 basis points year-on-year. The same is the story for Bajaj Auto. While Bajaj managed high margins in the September quarter, it was unlikely to maintain that as currency benefits have peaked, product mix is likely to be unfavourable (larger share of Discover bikes) and higher raw material costs. Analysts, however, say Hero will be impacted more than Bajaj Auto, given higher import content for the Delhi-based company and lack of natural hedge as is the case with Bajaj Auto. The company, though, has indicated its cost reduction program (over 12-18 months), which started in April, should help save Rs 60-80 crore in the second half of FY14.
