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Hero Moto.: Decent sales despite slowdown - Views on News from Equitymaster
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Hero Moto.: Decent sales despite slowdown
Oct 31, 2013

Hero Motocorp Ltd announced second quarter results of the financial year 2013-2014 (2QFY14). The company has reported a growth of 10% YoY and 9% YoY in revenues and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10% YoY during the quarter led by a 6% YoY growth in volumes.
  • Operating margins improve by 0.6% to 14.5% in 2QFY14 due to lower raw material costs (as percentage of sales).
  • Despite the 16% YoY growth in operating profits, net profit growth is lower at 9% YoY on account of a higher tax outgo.

Standalone financials: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
No. of two wheelers sold 1,332,805 1,416,276 6.3% 2,975,097 2,975,558 0.0%
Net sales 51,875 57,262 10.4% 114,347 118,857 3.9%
Expenditure 44,683 48,935 9.5% 97,787 101,378 3.7%
Operating profit (EBDITA)     7,192     8,327 15.8% 16,561 17,479 5.5%
EBDITA margin (%) 13.9% 14.5%   14.5% 14.7%  
Other income 993     1,155 16.2%     2,038     2,277 11.8%
Depreciation     2,895     2,869 -0.9%     5,930     5,613 -5.3%
Interest     30     30 0.3%     59     59 0.5%
Profit before tax     5,261     6,583 25.1% 12,610 14,084 11.7%
Tax 855     1,769 106.9%     2,049     3,785 84.7%
Profit after tax / (loss)     4,406     4,814 9.3% 10,560 10,300 -2.5%
Net profit margin (%) 8.5% 8.4%   9.2% 8.7%  
No. of shares (m)       199.7 199.7  
Diluted earnings per share (Rs)*             104.8  
Price to earnings ratio (x)*           19.5  
Price to earnings ratio (x)*

What has driven performance in 2QFY14?
  • Hero Motocorp reported a 10% YoY growth in sales during the quarter on the back of 6% YoY growth in volumes. This was commendable given the steep slowdown that the auto industry has been witnessing for quite some time now. Price hikes taken in 1QFY14 also helped matters. The company’s retail sales were up 7% during 1HFY14 on the back of its new campaigns for products and the 5 year warranty scheme.

  • Operating margins improved by 0.6% to 14.5% during the quarter on account of lower raw material costs (as percentage of sales). Raw material costs (as percentage of sales) fell largely on account of commodity prices softening. Having said that, the management expects higher input prices (steel, nickel and copper) and labour costs to put pressure on the margins of auto players in the coming quarters. Overall, 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.

  • While operating profits grew by a healthy 15.8% YoY, net profit growth was lower at 9% 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 2,045, the stock is trading a multiple of 11.1 times our estimated FY16 cash flow per share. The company has outlined a capex of Rs 11 bn for FY14, large part of this will be towards setting up its plant at Neemrana which is expected to commence production by the end of the fiscal. The peak capacity for this plant is 750,000 units. While there is considerable uncertainty in the export markets at present, the company is hoping to corner 10% of the market by 2020. The management had earlier 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. Having said that, given the uncertain outlook with respect to product launches post 2014 (Hero has a technology arrangement with Honda until 2014), increasing competition and run-up in the stock price, we have a ‘Sell’ view on the stock.

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