Hero MotoCorp cuts capital expenditure for FY21 by 40% to conserve cash

Firm says retail uptick has been very encouraging; Hero hopes to clock 80% volume of what it was doing before the pandemic struck, in June

Hero MotoCorp has pared its capital expenditure for the current fiscal to Rs 600 crore as the market leader seeks to cut costs and conserve cash amid the pandemic, company’s management said in an investor call on Wednesday. The capex reduction will be applicable in all areas including capacity expansion and renovation, except research and development, the company said.

“Earlier our projected capex for the current year was Rs 1,000 crore. We have rationalised it to Rs 600 crore for the current year,” said Niranjan Gupta, chief financial officer at Hero MotoCorp.

Touching upon the demand scenario after easing of the lockdown, officials said the retail uptick has been very encouraging and majority of its dealers will reach 75-80 per cent (volume) of what they were doing before the pandemic struck, in the current month.

Hero's average monthly run rate was 500,000-550,000 units before Covid-19. Around 90 per cent of the company’s dealer outlets have resumed operations, said Naveen Chauhan, head of sales and after-sales at Hero.

On Tuesday, the maker of Splendor and Passion models reported a decline of 15 per cent in its standalone net profit for the March quarter over a year ago period. Missing the street estimates, it fell to Rs 621 crore the fourth quarter of FY20 as against Rs 730.32 crore in same period last year.

The company’s management stopped short of any quarterly or full year guidance on volumes even as they said that the ramp up on both the demand and supply said has been more than satisfactory. Citing good crop output, prediction of normal monsoon as reasons, Hero expects the rural economy to fare better than the urban economy. The region accounts for one in every two motorcycles sold by the company. “It is early days to predict a trend, we will have to watch as we move forward,” said Chouhan.

Hero MotoCorp has potential growth tailwinds in the second half of FY21 from rural recovery and downtrading in motorcycles, said ICICI Securities in a research note on Wednesday. 

However, in case urban (read high Covid impact) customers seek increased personal transportation scooter segment could stand to gain, Hero remains a weaker player in this category, said the note.

The brokerage has cut its EPS (earning per share) for FY21E/FY22E by -8.8 per cent /0.8 per cent, respectively, while maintaining  its target multiple at 15x FY22E EPS.