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Hero Moto: Sales grow in tough environment

Jul 19, 2012

Hero Motocorp Ltd announced first quarter results of the financial year 2012-2013 (1QFY13). The company has reported a growth of 10% YoY growth in sales and net profits each. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10% YoY during the quarter led by a 7% increase in sales volumes. The company sells over 1.6 m units during the quarter (around 1.5 m during 1QFY12).
  • Operating margins improve marginally by 0.4% to 15%. Operating profits grow by 13% YoY during 1QFY13.
  • Net profits grow in tandem with the growth in sales at 10% YoY.

(Rs m) 1QFY12 1QFY13 Change
Units sold 1,529,577 1,642,292 7.4%
Net sales 56,817 62,473 10.0%
Expenditure 48,536 53,104 9.4%
Operating profit (EBDITA) 8,281 9,369 13.1%
EBDITA margin (%) 14.6% 15.0%  
Other income 938 1,044 11.4%
Depreciation 2,398 3,035 26.6%
Interest 125 29 -76.6%
Profit before tax 6,696 7,349 9.8%
Tax 1,117 1,194 6.9%
Profit after tax/(loss) 5,579 6,155 10.3%
Net profit margin (%) 9.8% 9.9%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   122.0  
Price to earnings ratio (x)*   17.2  
(* on trailing twelve months earnings)

What has driven performance in 1QFY13?
  • Hero Motocorp reported a revenue growth of 10% YoY on the back of a 7% YoY increase in sales volumes. The company sold over 1.6 m units during the quarter as against sales volumes of 1.5 m units in 1QFY12. While motorcycles grew faster than the industry (which grew at 9%), growth in scooters lagged a bit. The company does not expect industry growth to exceed 10% and expects to grow in tandem or do slightly better. Product launches such as Impulse, Ignitor and Maestro are also expected to bolster volumes growth going forward.

  • Hero Motocorp put up a good performance at the operating level as profits grew by 13% YoY during the quarter. This was because operating margins increased by 0.4% to 15%. Decline in raw material costs (as a percentage of sales) from 74.7% in 1QFY12 to 73.7% this quarter enabled the company to expand its operating margins.

    Cost break-up...
    (Rs m) 1QFY12 1QFY13 Change
    Raw materials 42,448 46,026 8.4%
    % sales 74.7% 73.7%  
    Staff cost 1,645 2,046 24.4%
    % sales 2.9% 3.3%  
    Other expenditure 4,443 5,032 13.3%
    % sales 7.8% 8.1%  

  • Net profits grew at a slower pace of 10% YoY and this was largely due to the increase in depreciation charges. It should be noted that the same came in high because the company decided in 4QFY11 to amortise the license fee payment that it will pay to Honda over the next 14 quarters. Further, the company expects the effective tax rate to increase going forward as the tax benefits on its plant on Haridwar begin to ease off.

What to expect?
At the current price of Rs 2,037, the stock is trading a multiple of 9.1 times our estimated FY15 cash flow per share. Hero Motocorp has announced a capex of Rs 25 bn over the next 18-24 months. This will involve setting up plants in Rajasthan and Gujarat both of which will come on stream in FY14. This is expected to increase its capacity from the current 6.6 m units to around 9 m units by that time. Further, the company also intends to set up an R&D centre at Jaipur to develop technology for new products post its split with Honda Motors. With regards to this the company has already entered into tie-ups with the US based EBR (for higher cc bikes) and the Austria based AVL. The company is also open to more such tie-ups going forward.

For the near term atleast, there is likely to be some pressure as the Indian economy has slowed down and the industry is not expected to grow more than 10%. After the declaration of FY12 results, we have factored in estimates for FY15 and based on them we recommend investors to hold on to the stock.

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