Hero MotoCorp: Surprise welcome on margins, worry streaks over volumes

Hero was able to raise prices of several products, which somewhat offset pressure from higher commodity prices.

Of course, weak demand meant that the company’s volume growth remained modest. The company sold 1.438 million motorcycles and scooters during Q2FY22.

While vehicle sales grew 40% sequentially, this was on the back of a low base for the June quarter, which was severely impacted by the Covid-induced lockdown. Vehicle sales declined 20.7% on a year-on-year basis. As a result, demand remains weak even in a resilient rural market.

That said, the outlook is optimistic and most analysts are of the view that a gradual pick-up in economic activity should pick up the demand for vehicles in the coming quarters. The current festive season has also helped in increasing the sales.

“We expect a gradual recovery in domestic volumes supported by improving macros and opening up of educational institutions/hospitality sector,” analysts at Motilal Oswal Financial Services Ltd said in a note. The brokerage expects 12% volume CAGR (Compounded Annual Growth Rate). In domestic market over FY22-24.

Besides, analysts expect exports to post 15% CAGR on account of better penetration in Africa and Latin America.

Hero continues to lag behind its peers such as Bajaj Auto and TVS Motor Company in terms of exports and has a high domestic exposure. However, efforts on rising exports are ongoing and analysts expect an annual run-rate of 300,000 units this year, up from a 200,000-unit run-rate last year.

The company has increased its stake in seven of the eight key markets. According to analysts, increased exports will also support margins.

For the September quarter, the company managed to post strong EBITDA margins, which are higher than most analysts’ estimates. Ebitda margins rose 323 basis points (bps) sequentially to 12.6%. Ebitda is earnings before interest, taxes, depreciation and amortization. Margins were 100 bps ahead of Credit Suisse’s estimates and analysts there said the 15% growth in Ebitda for the quarter also surprised the upside. The main reason behind this has been the increase in prices and strong revenue from the sale of parts.

Hike in Hero Prices Means Per Unit Receipts Analysts say 58,760 were up about 14% year-on-year. Supported improved product receipts and net revenue from operations 8,453 crores declined marginally by 9.8% on a year-on-year basis, despite a sharp drop in volumes. On a sequential basis, revenue grew by 54.1%.

Hero’s raw material cost as a percentage of sales rose to 72.3% from 71.1% a year ago, with rising prices of key items such as steel and aluminium. However, even with weaker volumes, Ebitda still declined by about 17% year-on-year.

Meanwhile, advancements in electric vehicles (EVs) remain another major area of ​​interest for investors. The company said it is focusing on the production of EVs as an integral part of its product portfolio. Its project is in advanced stages and the first product will be manufactured at its plant in Chittoor, Andhra Pradesh. The company may launch its first in-house electric two-wheeler in March.

While the progress on the EV front is being monitored, analysts say that the company’s core 100cc motorcycle business cannot be hampered by this.

Analysts at Emkay Global Financial Services said Hero has less vulnerability to EVs as it gets just 8% volume from scooters.

Hero is also working on making each segment premium. In addition, it is expanding the distribution network for its premium Harley Davidson range.

Emkay expects 12% volume CAGR in the domestic market in FY22-24, while revenues are expected to grow at 14% and earnings by 18% on a CAGR basis during the same period.

Shares of the company rose more than 3% intraday on Monday before settling up 0.56% on the National Stock Exchange.