Hero Honda: Stellar show

Performance is robust but rising input costs may cap margins in future.

Good times are here for two-wheeler makers with the country’s largest motorcycle maker, Hero Honda, reporting a 27 per cent year-on-year (y-o-y) jump in revenues on the back of a 22 per cent rise in volumes and lower excise duties. Its rural reach, existing top sellers and festive demand helped the company ensure sales of over a million bikes for the second quarter in a row and helped it maintain a 59 per cent market share in the motorcycle segment.

While the top line was marginally below expectations, the launch of new models at the top-end and efficient operations helped push up operating profit margins by nearly 500 basis points to 18 per cent. Higher sales helped the company improve its margins as raw material costs grew at a slower pace of 15 per cent year-on-year. Analysts say that raw material costs have lately gone up 10 per cent or more over the quarter and expect margins to taper down as there has been no price increases so far. Volume growth and higher sales in the premium segment will be the only way the company will be able to maintain its margins. But with the festive season drawing to a close and new models launched only recently, maintaining margins will be a tough ask.

Higher revenue growth and lower taxes helped push net profit to Rs 597 crore -- up 95 per cent year-on-year. The tax bracket at 31 per cent (September quarter, FY09) is substantially down to 22 per cent as the company manufactures a significant number of bikes at the tax free zone at Haridwar. The company will enjoy this tax-free status for the next five years. Though the market was expecting stellar results (announced after market hours), rising raw material costs going ahead is a dampener. The stock lost nearly 3 per cent to close at Rs 1,612.90 on Wednesday and is trading at 16 times its current fiscal earnings of Rs 100, indicating that there is limited scope for appreciation from these levels over the next six months.