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Hero Moto: No respite from margin pressure - Views on News from Equitymaster

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Hero Moto: No respite from margin pressure
Jan 23, 2013

Hero Motocorp Ltd announced third quarter results of the financial year 2012-2013 (3QFY13). The company has reported a growth of 3% YoY in revenues and a fall of 20% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by a mere 3% YoY during the quarter on account of the general slowdown in the auto industry including 2 wheelers.
  • Operating margins shrink by 3% to 12.6% in 3QFY13. As a result, operating profits fall by 17% YoY during the quarter.
  • Led by the poor performance at the operating level, net profits decline by 20% YoY.

Standalone financial snapshot
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Net sales 60,315 61,876 2.6% 175,393 176,224 0.5%
Expenditure 50,885 54,090 6.3% 148,511 151,877 2.3%
Operating profit (EBDITA) 9,430 7,787 -17.4% 26,882 24,347 -9.4%
EBDITA margin (%) 15.6% 12.6%   15.3% 13.8%  
Other income 763 901 18.1% 2,588 2,939 13.5%
Depreciation 2,987 2,832 -5.2% 8,169 8,762 7.3%
Interest (32) 30   123 88 -28.0%
Profit before tax 7,238 5,826 -19.5% 21,178 18,435 -13.0%
Tax 1,108 947 -14.5% 3,433 2,996 -12.7%
Profit after tax/(loss) 6,130 4,879 -20.4% 17,745 15,439 -13.0%
Net profit margin (%) 10.2% 7.9%   10.1% 8.8%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         107.5  
Price to earnings ratio (x)*         16.5  
* On a trailing 12 months basis

What has driven the performance in 3QFY13?
  • Hero Motocorp reported a mere 3% YoY growth in sales during the quarter and this was attributed to the general slowdown prevailing in the market. That said, performance was better than in 2QFY13 on account of decent growth in volumes during the festival period. Further, the company expects volume growth to pick up in the fourth quarter.

  • As operating costs grew faster than sales, operating profit margins were adversely impacted as these shrunk by 3% to 12.6% during the quarter. There were two major reasons for this. The first was the rise in raw material costs from 72.9% of sales in 3QFY12 to 74.1% in 3QFY13. This was attributed to the product mix notably focus on the 150cc segment and launch of new models. Other expenditure also increased from 8.2% of sales in 3QFY12 to 10.1% in 3QFY13. This was largely on account of higher marketing and brand building spends for its new launches.

    Cost break-up...
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Raw materials 43,948 45,854 4.3% 128,633 129,581 0.7%
    % sales 72.9% 74.1%   73.3% 73.5%  
    Staff cost 1,993 1,982 -0.5% 5,432 5,950 9.5%
    % sales 3.3% 3.2%   3.1% 3.4%  
    Other expenditure 4,943 6,253 26.5% 14,446 16,345 13.1%
    % sales 8.2% 10.1%   8.2% 9.3%  

  • Led by the poor performance at the operating profit level, net profits fell by 20% YoY. Even a drop in tax expenses was not enough to stem the slide in the bottomline. For the nine month period, total sales grew by 1% YoY, while net profits fell by 13% YoY. Tax expenses are expected to increase going forward as the tax benefits accruing to the plant at Haridwar come to an end.

What to expect?
At the current price of Rs 1,773, the stock is trading a multiple of 7.9 times our estimated FY15 cash flow per share. The past several quarters have been tough for Hero Motocorp as a subdued environment in the auto industry including two wheelers has been a drag on performance. Going forward, the management intends to introduce 7 new products every year which will be a combination of completely new products, refreshing existing products and launching new variants. Marketing spend could remain firm as it focuses on bolstering volumes amidst increasing competition including that from its erstwhile partner Honda. Issues with the labour force at its Gurgaon plant could also impact growth depending on how the scenario pans out. Based on the performance in 9mFY13, we will have to revise our estimates downwards for the full year. Consequently, we have a 'Hold' view on the stock.

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