India's largest two-wheeler maker Hero MotoCorp Ltd (HMC)'s June quarter results were below analyst expectations, both on counts of revenue growth and margin performance. A single-digit (7.37 per cent) year-on-year (y-o-) volume growth in the quarter saw revenues grow 10 per cent. While this is below Street estimates of 13-15 per cent growth, it is also the slowest growth for the company in four quarters.
The topline growth was disappointing as the slowdown meant consumer were down-trading to cheaper models, which affected the product mix. Thus, while analysts expected realisations to improve by six per cent (on the back of a price hike in May), as well as sales of pricier models, price growth in the revenue contribution was much lower. The Street's disappointment with the results led to the stock shedding 1.37 per cent today.
The management has cautioned about slowing growth, going ahead. Pawan Munjal, managing director and chief executive officer, HMC, says a patchy monsoon might reflect on retail sales in the rural and upcountry markets. Nevertheless, and despite the single-digit growth over the past few months for the sector, (HMC recorded a 6.7 per cent growth in June), and the difficult environment ahead, the management is confident of achieving double-digit growth. Says Munjal: "We remain optimistic of coming back to double-digit growth by leveraging our strong brand and wide network."
Auto analysts, however, are not buying this and say a double-digit growth in this environment looks difficult and at best the company will be able to achieve eight per cent growth. "Given the inventory with the dealers, the down-trading to lower segments (reflecting lower disposable income) and slowing growth, it's difficult to see how the company can achieve double-digit growth," says an analyst with a domestic research house. He adds his growth assumptions take into account the launch of refreshed variants in the premium segment and introduction of new models.
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Meanwhile, slowing growth and inferior product mix, coupled with adverse forex impact on raw materials, led to earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins of 11.5 per cent in the June quarter. While this is 20 basis points higher than that achieved in the year-ago quarter, analysts had estimated Ebitda margins (net of royalty payments) to improve 60-100 basis points y-o-y. Analysts say while HMC cannot be compared to Bajaj Auto because of the latter's large export base, as well as presence in three wheelers, the Pune-based company's margins were resilient. This was despite the issues it faced in some important markets such as Sri Lanka and Egypt. Bajaj's stock, which has lagged Sensex and Hero since the start of 2012, thus jumped over five per cent on Wednesday post results and another 1.85 per cent today. On the other hand, Hero's stock, which has managed to track broader markets in 2012, is expected to under-perform markets as well as its peers like Bajaj, given the concerns on growth.
