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Hero Moto.: Mixed start to the year - Views on News from Equitymaster
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Hero Moto.: Mixed start to the year
Aug 13, 2014

Hero Motocorp Ltd announced first quarter results of the financial year 2014-2015 (1QFY15). The company has reported a 14% YoY growth in sales, while net profits have grown by 3% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 14% YoY during the quarter led by a 10% YoY growth in volumes.
  • Operating margins contract by 1.4% to 13.5% on account of a rise in other expenditure (as percentage of sales).
  • Net profit growth is lower at 3% YoY due to higher depreciation charges.

Standalone financials: A snapshot
(Rs m) 1QFY14 1QFY15 Change
No. of two wheelers sold 1,559,282 1,715,254 10.0%
Net sales 61,595 70,368 14.2%
Expenditure 52,443 60,896 16.1%
Operating profit (EBDITA) 9,152 9,472 3.5%
EBDITA margin (%) 14.9% 13.5%  
Other income 1,123 1,128 0.4%
Depreciation 2,744 2,915 6.2%
Interest 30 30 1.0%
Profit before tax 7,502 7,654 2.0%
Tax 2,016 2,027 0.6%
Profit after tax / (loss) 5,486 5,628 2.6%
Net profit margin (%) 8.9% 8.0%  
No. of shares (m) 199.7 199.7  
Diluted earnings per share (Rs)*   106.3  
Price to earnings ratio (x)*   24.4  

What has driven performance in 1QFY15?
  • Hero Motocorp reported a 14% YoY growth in sales during the quarter on the back of 10% YoY growth in volumes. Thus, the growth in revenues was a product of both volumes as well as realisations. Growth was largely aided by scooters, whose volumes were up by 16% YoY. Motorcycle volumes grew at a relatively lower pace of 9% YoY. This is commendable given the overall slowdown in the auto industry as well as competition in the two wheeler entry segment heating up.

  • Operating margins contracted by 1.4% to 13.5% during the quarter. While raw material costs (as a percentage of sales) remained in control, there was other expenditure increased by 0.9%. This was largely on account of rising ad spends on new models and also higher royalty led by higher sales. As a result, operating profits grew by 3.5% YoY. That said, the company has put in place a cost rationalisation program over the next five years which is expected to result in cost savings every year.

  • Net profit growth was lower at 3% YoY on account of rise in depreciation charges. The rise in depreciation was not only on account of new capacity coming on stream but also because of change in policy post the new Companies Act.
What to expect?
At the current price of Rs 2,598, the stock is trading a multiple of 11.9 times our estimated FY17 cash flow per share. Going forward, Hero Motocorp expects 10-11% growth for the 2 wheeler industry in FY15. Scooters will continue to grow at a strong pace and while the company had been facing some constraints, the new capacity at Neemrana which has come on stream is expected to bolster volumes. The company has also lined up some new product launches. The company has outlined a capex program which will largely be towards ramping capacity from around 6.9 m units currently to 9 m units. In addition to this, the exercise of amortizing royalty payments to Honda Motors has come to an end and this will bolster profits. Valuations though seem expensive and so investors should not buy the stock at the current price levels.

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