Hero MotoCorp riding over past blues

Helped by strong festive demand, financials back to form

After many quarters of earnings disruption, Hero MotoCorp’s September quarter (Q2) results suggest it is inching back to normalcy. However, being the first quarter of accounting under goods and services tax (GST), the numbers are not strictly comparable. 

For instance, under GST, revenues are reported net of this tax impact. Under the earlier excise regime, duty paid was shown as a separate line item under ‘expenses’. Therefore, Q2 numbers on a year-on-year (y-o-y) basis might seem weak, though it shouldn’t be compared in that manner. Also, Rs 70.64 crore was received by the Haridwar plant as accrued incentives pertaining to GST.

Adjusted for these transactions, revenues rose seven per cent over a year to Rs 8,362 crore in Q2, while operating profit expanded six per cent to Rs 1,456 crore. Net profit was 10 per cent higher at Rs 1,010 crore. Operating profit margin crawled back to a comfortable 17.4 per cent in Q2. While this was a few points lower than the year-ago margin of 17.6 per cent, on a sequential basis, it is an expansion of 115 basis points (bps). On the back of strong quarterly volume growth of 11 per cent to 2,022,805 units, Hero exceeded Street expectations in Q2.

Three indicators suggest the momentum will sustain. For one, while raw material costs as a per cent of sales has increased 40 bps over a year to 67 per cent in Q2, the management has indicated it has room to increase prices, to offset rising commodity costs. Strong demand from urban and rural pockets also offers comfort. 

In a call with analysts, the management said sales from rural areas (considered a stronghold) had picked up and the trend was likely to sustain. Therefore, other factors remaining unchanged, volume growth should stabilise in the coming quarters, unlike a year ago.

Finally, in Q2, much of the growth was fuelled by motorcycle sales (up 13 per cent over a year. That of scooters was soft, down four per cent. However, with the festive season being buoyant for motorcycles and scooters, meaningful volume contribution by the latter segment is likely. New launches across both product lines should help sustain customer interest. 

On the whole, analysts give a thumbs-up to Hero’s numbers. “The worst is over, and if it is able to improve the operating margins, reasonable re-rating is likely. 

I would, however, want to wait for another quarter before upgrading,” said an analyst from a domestic brokerage. 

Trading at 17 times the FY19 estimated earnings, Hero Moto’s valuations are reasonable.