Brakes on revenue and profit growth of two-wheeler majors

Hero, Bajaj expected to post decline in Q3 as demand remained subdued after demonetisation

After riding to record profits in the second quarter (July-September), top two-wheeler makers — Hero MotoCorp and Bajaj Auto — are likely to post a decline (YoY) in revenue and profits for the October-December quarter. The muted financial performance, a result of a double-digit decline in sales, will come after four-five quarters.

Hero MotoCorp, the country’s biggest two-wheeler maker, has posted a 13 per cent decline (YoY) in units sold during the last quarter, as the demand remained subdued after demonetisation. 

The Delhi-headquartered company had posted its best quarterly sales of 1.82 million units during the second quarter. However, sales in the third quarter declined to 1.47 million units as the number of vehicles sold in November and December was lower than in the corresponding months of 2015.

The government had announced demonetisation with effect from November 9, leading to a shortage of cash in the economy and an impact on purchases across several sectors. 

In addition to lower volumes, auto companies faced a marginal rise in commodity material prices during the third quarter. Weak commodity prices in the recent quarters were a key factor in their profitability.

Analysts forecast a double-digit decline in both revenues as well as profits for Hero MotoCorp in the third quarter. An analysis done by Kotak Institutional Equities anticipates a 13 per cent decline in revenue and 15 per cent decline in profits for the quarter.

Emkay said in its third-quarter outlook for the sector: “We expect two wheelers to report weak numbers given the impact on volumes due to demonetization.”

Bajaj Auto, the country’s most-valued two-wheeler company, is also expected to record a YoY decline in profits and revenue after six quarters. The company posted a record profit of Rs 1,123 crore in the July-September quarter of FY17. Analysts anticipate a 10 per cent decline in third-quarter revenue and a 2-3 per cent drop in net profit.

Bajaj is the largest exporter of two-wheelers from India and is the fourth-largest player in the domestic market. It is also the largest three-wheeler manufacturer. The decline has come in both the export and domestic markets. In the October-December quarter, it reported a 9.5 per cent and 17 per cent decline in two-wheeler and three-wheeler sales, respectively. Other than the volume decline, commodity prices will also weigh on the financial performance.

Ravi Sud, senior vice-president and chief financial officer at Hero MotoCorp, told analysts in October that an impact of firm steel, rubber and plastic prices could translate into a cost increase of Rs 250-300 for every vehicle.

The domestic two-wheeler industry had seen a low growth rate of 3 per cent in sales during FY16, especially due to a flat performance in the motorcycles segment. A deficit monsoon had weighed upon rural purchases. With the better rains and revised wages of government employees, companies were hopeful of double-digit volume growth in FY17.