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Hero Moto.: Hit by sluggish volumes - Views on News from Equitymaster
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Hero Moto.: Hit by sluggish volumes
May 11, 2015

Hero Motocorp Ltd announced fourth quarter results of the financial year 2014-2015 (4QFY15). The company has reported a 4.3% YoY growth in sales, while net profits have fallen by 14% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 4% YoY during the quarter led by better realisations as volumes fall.
  • Operating margins contract by 1.4% to 12.3% on account of a rise in staff costs and other expenditure (as percentage of sales).
  • Net profits, however, fall by 14% YoY on account of the extraordinary expense during the quarter. Excluding the same, net profits grow by 14% YoY.
  • The Board recommends a dividend of Rs 60 per share (dividend yield of 2.5%).

Standalone financials: A snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
No. of two wheelers sold 1,589,462 1,575,501 -0.9% 6,245,960 6,631,826 6.2%
Net sales 65,130 67,939 4.3% 252,755 275,853 9.1%
Expenditure 56,188 59,555 6.0% 217,354 240,431 10.6%
Operating profit (EBDITA) 8,942 8,384 -6.2% 35,401 35,422 0.1%
EBDITA margin (%) 13.7% 12.3%   14.0% 12.8%  
Other income 1,230 929 -24.5% 4,464 4,927 10.4%
Depreciation 2,728 897 -67.1% 11,074 5,400 -51.2%
Interest 29 8 -74.4% 118 111 -6.2%
Profit before tax 7,414 8,408 13.4% 28,673 34,839 21.5%
Tax 1,870 2,092 11.9% 7,582 9,432 24.4%
Exceptional item - (1,550)   - (1,550)  
Profit after tax / (loss) 5,544 4,765 -14.1% 21,091 23,856 13.1%
Net profit margin (%) 8.5% 7.0%   8.3% 8.6%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         127.2  
Price to earnings ratio (x)*         18.7  
*based on 12 month trailing earnings

What has driven performance in FY15?
  • Hero Motocorp reported a 9% YoY growth in sales during the year on the back of 6% YoY growth in volumes. This is decent given that the industry remained largely sluggish due to the slowing rural economy. The latter was on account of poor crop realisation and moderating wages in the rural markets. For the fourth quarter, sales growth was tepid at 4% YoY and was led by realisations as volumes declined by 1% YoY.

  • Operating margins contracted by 1.2% to 12.8% during the year. Higher staff costs and other expenditure (as a percentage of sales) led to the dip in margins, while raw material costs remained under control. Other expenditure was higher as increased competitive pressure meant that there was a rise in marketing expenses and ad spends. Staff costs increased on account of the Neemrana facility coming on stream. As a result, growth in operating profits remained flat.

  • Net profits grew by 13% YoY despite the extraordinary expense of Rs 1.5 bn during the year. This was due to the 51% YoY fall in depreciation charges. Since the amortization of royalty payments to Honda ended in 1QFY15, there was a substantial reduction in depreciation. The extraordinary expense of Rs 1.5 bn was related to impairment of equity investment in Erik Buell Racing (EBR) as the latter had filed for bankruptcy. Excluding the extraordinary expense during the year, net profit growth was better at 21% YoY.
What to expect?
At the current price of Rs 2,386, the stock is trading a multiple of 10.9 times our estimated FY17 cash flow per share. Hero Motocorp has lined up an investment of Rs 30 bn over the next two years, which will be towards adding capacities and brand building initiatives in the domestic and global markets. The company aims to expand its global footprint to 50 countries and aims to have an annual capacity of 12 m units by 2020. Valuations though seem expensive and so investors should not buy the stock at the current price levels.

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