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Hero Moto: Quite a forgettable year - Views on News from Equitymaster

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Hero Moto: Quite a forgettable year

Apr 29, 2013

Hero Motocorp Ltd announced fourth quarter results of the financial year 2012-2013 (4QFY13). The company has reported a growth of 2% YoY in revenues and a fall of 5% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by a mere 2% YoY during the quarter on account of the general slowdown in the auto industry including 2 wheelers.
  • Operating margins shrink by 1.5% to 13.8% in 4QFY13. As a result, operating profits fall by 8% YoY during the quarter.
  • Led by the poor performance at the operating level, net profits decline by 5% YoY.

(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
No. of two wheelers sold 1,572,027 1,527,351 -2.8% 6,235,205 6,075,583 -2.6%
Net sales 60,349 61,458 1.8% 235,790 237,681 0.8%
Expenditure 51,097 52,960 3.6% 199,603 204,836 2.6%
Operating profit (EBDITA) 9,253 8,498 -8.2% 36,188 32,845 -9.2%
EBDITA margin (%) 15.3% 13.8%   15.3% 13.8%  
Other income 1,050 1,045 -0.4% 3,646 3,984 9.3%
Depreciation 2,804 2,655 -5.3% 10,973 11,418 4.0%
Interest 29 31 4.8% 213 119 -44.1%
Profit before tax 7,469 6,857 -8.2% 28,647 25,292 -11.7%
Tax 1,433 1,115 -22.2% 4,866 4,110 -15.5%
Profit after tax/(loss) 6,036 5,742 -4.9% 23,781 21,182 -10.9%
Net profit margin (%) 10.0% 9.3%   10.1% 8.9%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         106.1  
Price to earnings ratio (x)*         15.6  
(* on trailing twelve months earnings)

What has driven performance in FY13?
  • Hero Motocorp reported a mere 1% YoY growth in sales during the year and this was attributed to the general slowdown prevailing in the market. Although the festival period in the third quarter saw some revival in volumes, growth was once again poor in the last quarter of the year. Indeed, during 4QFY13, sales grew by a tepid 2% YoY as volumes fell by 3% YoY. As far as segments are concerned, growth in motorcycles was flat during the year, while scooters put on a much better performance. The company now has a market share of 53% and 18.5% in motorcycles and scooters respectively.
  • As operating costs grew faster than sales, operating profit margins were impacted as these shrunk by 1.5% to 13.8% during the year. This was largely due to the rise in other expenditure, which increased from 8.2% of sales in FY12 to 9.5% in FY13. This was largely on account of higher marketing and brand building spends for its new launches.

  • Cost break-up...
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw materials 44,183 44,394 0.5% 172,816 173,977 0.7%
    % sales 73.2% 72.2%   73.3% 73.2%  
    Staff cost 1,923 2,259 17.5% 7,355 8,209 11.6%
    % sales 3.2% 3.7%   3.1% 3.5%  
    Other expenditure 4,991 6,306 26.3% 19,432 22,651 16.6%
    % sales 8.3% 10.3%   8.2% 9.5%  

  • Led by the poor performance at the operating profit level, net profits fell by 11% YoY. Even a drop in tax expenses was not enough to stem the slide in the bottomline. For the fourth quarter, net profits fell by 5% YoY on the back of an 8% YoY drop in operating profits. 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 1,654, the stock is trading a multiple of 9.6 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. Having said that, given the uncertain outlook with respect to product launches post 2014 (Hero has a technology arrangement with Honda until 2014), likely increase in wage costs and increasing competition, we have a 'Sell' view on the stock.

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