Markets

Hero Honda's profit growth slows for 3 times in a row

Parvatha Vardhini C BL Research Bureau | Updated on February 03, 2011

Workers at the Hero Honda Assembly Unit, at the Hero Honda Plant in Gurgaon, Haryana. (file photo) - Photo: Shiv Kumar Pushpakar.   -  The Hindu

Markets greeted the 20 per cent year-on-year fall in net profits of Hero Honda in the third quarter with a five per cent fall in the stock price. However, the drop in net profits would have been lower at five per cent had the company not provided the Rs 80 crore that it did for probable claims from litigations.

Nevertheless, the December quarter is the third consecutive quarter of dip in profit growth for the company . Overall, for the nine-month period, profits have dropped by about 13 per cent year on year. Sales growth though has been at 34 per cent for this quarter and 19 per cent for nine months.

Hero Honda, an exception

While it has been a good year for the auto industry in general, Hero Honda has continued to underperform during this time. In April-December 2010, total domestic two-wheeler volumes for the company have grown by only 15 per cent. This is because growth in its core entry and entry-premium segment, which makes up 87 of the total volumes has been lower at 11 per cent. In comparison, although absolute numbers may be lower, Bajaj Auto's volume growth has been more robust at 45 per cent during the same period.

Severe competition from Bajaj Auto and subsequent loss of market share has been a major factor to reckon with for Hero Honda. With its strategy of launching products for the middle of the market segment (based on differentiation of the Discover and Pulsar brands), Bajaj has improved its realisations and margins during this period.

Hero Honda's EBITDA margins at about 14 per cent for the nine month period (vis-à-vis 19 per cent in April-December 2009) can be partly explained by its disadvantaged position on all these counts. First, it majors in commuter segment bikes where realisations are lower. Two, the company does not sell three-wheelers, and three, it does not have free hand in exports due to its partnering with Honda until recently.

Outlook

For the industry as a whole, as for Hero Honda, volumes in the next few months will hold the key to figuring out if vehicle sales is past its peak. More so, with interest rates beginning to inch up and fuel becoming costlier. For Hero Honda in particular, with risk of higher royalty dying down and product pipeline being taken care of through the fresh licensing agreements, the immediate goal needs to be a thrust on cost efficiencies, exports and R&D.

Published on February 02, 2011

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