News Analysis

Hero MotoCorp Q4 results: Better product mix and cost control helps contain profit drop

Parvatha Vardhini C | Updated on June 10, 2020 Published on June 10, 2020

Sanguine outlook for rural demand augurs well for company

BL Research Bureau

Although volumes for Hero MotoCorp dropped by 26 per cent in the quarter ended March 2020 (over January –March 2019), the company managed to contain the fall in profits to 15 per cent for the quarter. Hero reported profits of ₹621 crore during this period, compared with ₹730 crore a year ago.

Few factors helped arrest the fall in profits. For one, higher realisations from a better product mix helped the top line. Average realisations improved to ₹47,150 per vehicle during the quarter, compared with ₹44,272 a year ago. Though the company is a market leader in the commuter segment bikes (75-110 cc), in the past year it has been able to increase its market share in the executive ( 110-125 cc) and premium segments (150 – 200cc) , which are sold at higher price points than the commuter segment. Hence, even as volumes came down by 26 per cent, revenues fell only by about 21 per cent to ₹6,238 crore during the quarter.

 

Secondly, lower expenses and taxes helped. Raw material costs as a percentage of sales came down to 65 per cent, as against 67.7 per cent a year ago. Employee costs and other expenses also dipped. Adoption of the new corporate tax rate of 25.17 per cent saw the company’s tax expenses ease substantially during the quarter over the March 2019 quarter. Total tax expenses for the quarter came down by 91 per cent.

However, despite some tailwinds on the cost front, operating margins came in at 10.6 per cent, compared with 13.5 per cent in the three months ended March 2019. Apart from lower operating leverage due to fall in volumes, the margin performance was also impacted by one-off items such as support given to dealers by up to ₹15,000 a vehicle for clearing off BS-IV inventory and clearing off of some BS-IV raw material inventory.

Outlook

After closing down operations in April due to Covid-19, Hero has gradually resumed operations across all its plants and was able to sell 1,12,682 units in May. All the company’s vendors have also recommenced operations, and about 90 per cent of the dealership outlets have also opened up. Though it is still early days and capacity utilisation remains on the lower side, the company is currently seeing encouraging enquiry and conversion rates.

With rural India less impacted by Covid-19, Hero will be a big beneficiary. Good rabi harvest, the expectation of normal monsoon along with opportunities under MNREGA bodes well for rural demand this fiscal. Hero has a 72 per cent market share in commuter segment bikes which see good rural demand.

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Published on June 10, 2020
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