Scooters drive Hero MotoCorp revenues

But, the larger motorcycle portfolio continues to struggle

Hero MotoCorp’s numbers for the quarter ended December were broadly in line with estimates, with revenues growing nearly six per cent year-on-year (y-o-y). Margins at 15.6 per cent, however, were ahead of consensus estimates.

Higher revenues were on account of a three per cent increase in volumes and a three per cent growth in realisations on the back of price increases taken in the last few months. While topline growth helped, operating profit margins were boosted by lower raw material costs as well as the cost reduction programme (called Leap) undertaken by the company.

The management indicated that the gain so far in the financial year because of the programme has been 80 basis points (bps) and for the full financial year the company intends to achieve a gain of about 110 bps at the operating level.

Bajaj Auto, too, benefited from falling raw material costs and better product mix, achieving operating profit margins of 21.4 per cent though its revenues fell by 1.3 per cent and volumes were down 3.4 per cent in the December quarter. The key difference, however, between the two is while exports accounts for 43 per cent of volumes for Bajaj Auto, it is negligible for Hero MotoCorp. Volume growth for Hero came from scooters, while Bajaj relies on its motorcycle and three-wheelers portfolio.

While Hero MotoCorp has been doing better than the domestic two-wheeler industry because of the strong growth of the scooters portfolio, the management is guarded about the prospects in the first half of the current calendar year. For the 10 months of the financial year, the sector has grown at a per cent, while the motorcycles segment fell 2-3 per cent. Scooters have so far held up with 10 per cent growth. Hero’s sales in the period were three per cent lower, largely due to sluggish motorcycles sales.

The company expects volumes to grow in the low single digits for the sector in the first half of FY17 and expects a better performance in the second half. Hero is now focusing on increasing sales of scooters beyond urban centres. Driven by the successful launch of scooters Maestro Edge and Duet, the company’s sales were up 20 per cent y-o-y in January 2016, while overall sales for the month were flat.

A lot, however, will depend on the way the monsoon progresses, as a significant portion of Hero’s sales comes from the rural segment. Scooters account for about 30 per cent of two-wheeler sector sales and about 12 per cent for Hero MotoCorp, so there is scope for an increase in revenue share and growth.

But, the time might not be right to enter two-wheeler counters. Given the uncertainties about the monsoon and the company's slow moving motorcycles portfolio, and Bajaj Auto’s headwinds in the export market due to sharp devaluation of export market currencies, investors should wait for a sustainable pick up in volumes before committing to either stock which are trading at 15-16.5 times their FY17 estimates with Bajaj at a slight premium.