Hero Honda announced on Tuesday a 20 per cent drop in profits for the third quarter ending December 31, 2010 even as net sales rose 34 per cent to Rs 5161.66 crore. The company attributed the lower profits to rising raw material prices, component shortages and exceptional expenses.

The lower-than-expected results caused the Hero Honda scrip to nosedive 5.27 per cent on the BSE to Rs 1,523.05.

The company's EBITDA margin in the quarter also fell to 11.7 per cent from 17 per cent last year even while vehicle sales were up 28 per cent at 1.4 million units.

Mr Ravi Sud, Chief Financial Officer, said the lower profits were due to a slew of factors. “One, we have not been able to recover costs from rising commodity prices and inflation. In addition, Rs 38 crore was incurred on the Commonwealth Games while Rs 126 crore was the outgo for the National Calamity Contingency Duty which we were asked to pay for the Haridwar plant,” he said.

Of this total payment, Rs 80 crore was for FY09 and FY10 and Rs 46 crore for the first three quarters of this fiscal. The Haridwar plant is exempt from excise duty but Hero Honda has had to pay for NCCD and education cess on sales of two-wheelers (from the plant). A further Rs 79.84 crore has been estimated for “probable claims arising out of litigation/disputes pending with statutory authorities”.

Mr Pawan Munjal, MD and CEO, said in a statement, “For the past few quarters, the industry has faced a multitude of issues with constraints in supply of components and rising input costs. Our margins have been under pressure on account of that. We foresee margins to remain under pressure in the short term.”

The Hero Group had recently announced that it would buy out Honda's 26 per cent stake in the joint venture. “We are in the middle of a transition. Last week, we signed the new licensing agreements with Honda and are also close to finalising the location for our fourth plant,” he added.

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