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Hero Moto: A tough second quarter - Views on News from Equitymaster

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Hero Moto: A tough second quarter

Oct 25, 2012

Hero Motocorp Ltd announced second quarter results of the financial year 2012-2013 (2QFY13). The company has reported a fall of 11% YoY and 27% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 11% YoY during the quarter due to the 14% drop in volumes
  • Operating margins shrink by 1.8% to 13.9%. Operating profits fall by 22% YoY during 2QFY13.
  • Led by the poor performance at the operating level, net profits decline by 27% YoY.

(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Units sold 1,544,315 1,332,805 -13.7% 3,073,892 2,975,097 -3.2%
Net sales 58,262 51,875 -11.0% 115,079 114,347 -0.6%
Expenditure 49,091 44,683 -9.0% 97,627 97,787 0.2%
Operating profit (EBDITA) 9,171 7,192 -21.6% 17,452 16,561 -5.1%
EBDITA margin (%) 15.7% 13.9%   15.2% 14.5%  
Other income 888 993 11.9% 1,826 2,038 11.6%
Depreciation 2,785 2,895 4.0% 5,183 5,930 14.4%
Interest 29 30 1.4% 155 59 -61.9%
Profit before tax 7,245 5,261 -27.4% 13,940 12,610 -9.5%
Tax 1,208 855 -29.3% 2,325 2,049 -11.9%
Profit after tax/(loss) 6,036 4,406 -27.0% 11,615 10,560 -9.1%
Net profit margin (%) 10.4% 8.5%   10.1% 9.2%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*         122.0  
Price to earnings ratio (x)*         16.7  
(* on trailing twelve months earnings)

What has driven performance in 2QFY13?
  • Hero Motocorp reported an 11% fall in sales on the back of a 14% YoY drop in volumes. The fall in volumes was attributed to the general slowdown prevailing in the market coupled with production related adjustments that the company had undertaken for the months of August and September 2012. The company sold over 1.3 m units during the quarter as against sales volumes of 1.5 m units in 2QFY12. Given the slowdown in the sector, SIAM had revised downward its forecasts for the year and as compared to the earlier estimated growth of 10% for the two wheeler industry in FY13, SIAM has now lowered growth projections to around 5-6%. Hero Motocorp maintains this view and expects to grow in tandem with the industry or do slightly better. Product launches such as Impulse, Ignitor, Maestro and Passion X Pro are expected to bolster volumes growth going forward.

  • As operating costs grew faster than sales, operating profit margins were impacted as these shrunk by 1.8% to 13.9% during the quarter. Rise in staff costs (as a percentage of sales) from 3% in 2QFY12 to 3.5% this quarter led to the shrinkage in its operating margins. Rise in other expenditure too further added on to its woes.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw materials 42,237 37,702 -10.7% 84,685 83,727 -1.1%
    % sales 72.5% 72.7%   73.6% 73.2%  
    Staff cost 1,794 1,922 7.1% 3,439 3,968 15.4%
    % sales 3.1% 3.7%   3.0% 3.5%  
    Other expenditure 5,060 5,059 0.0% 9,503 10,092 6.2%
    % sales 8.7% 9.8%   8.3% 8.8%  

  • Led by the poor performance both at the sales and operating profit level, net profits fell by 27% YoY. Even a substantial drop in tax expenses was not enough to stem the slide in the bottomline. For the half year period, performance was better as total sales and net profits fell by 1% YoY and 9% YoY respectively due to a much better performance in the first quarter of FY13.

What to expect?
At the current price of Rs 1,838, the stock is trading a multiple of 8.2 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. For many of these tie-ups, the company will make payments depending upon the milestones reached unlike its erstwhile partnership with Honda where a certain amount of royalty was doled out every year.

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 5-6%. Given the recent correction in the stock price, we have a 'Buy' view on to the stock.

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