The Street breathed a sigh of relief as Hero MotoCorp did not spring any negative surprise. It was largely known that the company’s revenues and profit would decline in the September quarter, as sales of its two-wheelers plummeted 13.7 per cent year-on-year and 18.7 per cent sequentially. So, a decline of 11 per cent in revenues (17 per cent sequentially) and 27 per cent in net profit (28.4 per cent sequentially) did not come as a negative surprise.
However, what is surprising is the less-than-anticipated fall in the company’s operating margins. Given the lower operating leverage benefits due to lower volumes, Hero’s margins were expected to decline from the 15 per cent seen in the first quarter. However, the company has reported operating margins of 13.9 per cent, down 188 basis points year-on-year and 110 basis points sequentially.
The reason for this is higher other expenses. The two-wheeler industry has seen a sharp deceleration in sales this year, which forced the industry body to cut volume growth expectations to five per cent. The company has increased its marketing spends substantially to combat this slowdown. The new advertisement featuring Ranbir Kapoor has clearly come at a cost. The other expenses to sales ratio at 9.8 per cent is the highest seen over the last few quarters. The fact that volumes are down is also another reason why the ratio is looking higher.
Despite the higher other expenses, margins have not fallen sharply on lower raw material costs. The raw materials to sales ratio has improved from 73.7 per cent in the first quarter to 72.7 per cent in Q2. Also, realisations per vehicle have gone up in Q2. Arun Agarwal of Kotak Securities says: “Realisations improved on the back of better product mix and higher share of spare part revenues.”
Having said this, the outlook does not seem to be any more promising than what the first half of the year has been. Analysts don’t expect volumes to grow at five per cent levels in FY13, as has been indicated by the company, due to fierce competition and overall slowdown. On an average, the company has sold 495,000 units per month in the first six months of the year. If it has to grow volumes at a modest five per cent, the company needs to sell 595,000 units a month in the remaining six months of the year, explains Deepak Jain of Sharekhan. This seems stretched as competition is planning to not only defend their turf but also launch an offensive with new products. While Honda is pushing Shine, Bajaj Auto is expected to launch a 100cc motorcycle in December.
