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Hero Moto.: Higher tax plays spoilsport
Jul 24, 2013

Hero Motocorp Ltd announced first quarter results of the financial year 2013-2014 (1QFY14). The company has reported a decline of 1% YoY and 11% YoY in revenues and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 1% YoY during the quarter on account of the general slowdown in the auto industry leading to a 5% YoY drop in volumes.
  • Operating margins remain stable at 14.9% in 1QFY14 as lower raw material costs offset higher staff costs and other expenditure (as percentage of sales).
  • Despite the 2% YoY drop in operating profits, net profits fall faster by 11% YoY on account of a higher tax outgo.

Standalone financials: A snapshot
(Rs m) 1QFY13 1QFY14 Change
No. of two wheelers sold 1,642,292 1,559,282 -5.1%
Net sales 62,473 61,595 -1.4%
Expenditure 53,104 52,443 -1.2%
Operating profit (EBDITA) 9,369 9,152 -2.3%
EBDITA margin (%) 15.0% 14.9%  
Other income 1,044 1,123 7.5%
Depreciation 3,035 2,744 -9.6%
Interest 29 30 0.7%
Profit before tax 7,349 7,502 2.1%
Tax 1,194 2,016 68.8%
Profit after tax / (loss) 6,155 5,486 -10.9%
Net profit margin (%) 9.9% 8.9%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   102.7  
Price to earnings ratio (x)*   17.2  
What has driven performance in 1QFY14?
  • Hero Motocorp reported a 1% YoY fall in sales during the quarter and this was attributed to the general slowdown prevailing in the market as volumes were down 5% YoY. Realisations too were on the lower side because of the change in product mix. The 150cc segment (typically has higher realisations) faced considerable pressure during the quarter, but the 125cc and the 100cc segments for the company did relatively better.

  • Operating margins remained more or less stable during the quarter at 14.9%. Here the decline in raw material costs was offset by higher staff costs and other expenditure (as percentage of sales). Raw material costs (as percentage of sales) fell largely on account of commodity prices softening. Whereas, rise in other expenditure can be attributed to higher marketing and brand building spends.

    Cost break-up...
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials 46,026 44,556 -3.2%
    % sales 73.7% 72.3%  
    Staff cost 2,046 2,215 8.2%
    % sales 3.3% 3.6%  
    Other expenditure 5,032 5,672 12.7%
    % sales 8.1% 9.2%  

  • While operating profits fell by 2% YoY, the fall in net profits was even sharper at 11% YoY due to a higher tax outgo. The company earlier enjoyed 100% tax exemption on its plant at Haridwar and this has now been reduced to 30% over the next 5 years. Hence there was a rise in tax expenses for the quarter.

What to expect?

At the current price of Rs 1,765, the stock is trading a multiple of 10.2 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. For FY14, the company expects the motorcycle industry to grow not more than 7-8% after considering poor volume growth in the first quarter and assuming a pickup in volumes led by good monsoons and the festival season in subsequent quarters. Further, the management has reiterated that it 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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