Hero MotoCorp: Record quarterly rise in profit

Operating margin declines 100 bps as total expenses spike

Hero MotoCorp's second quarter profit growth has beaten the Street's estimates. The company's net profit grew 59 per cent year-on-year (y-o-y) to Rs 763 crore, the highest ever in any quarter, as royalty payouts have come to an end. Sales grew 21 per cent y-o-y to Rs 6,863 crore. The sales growth was driven by a 19.5 per cent rise in volumes and one per cent increase in realisations. Analysts presume the company's product mix has improved, which has driven the improvement in realisations.

The current financial year has been positive for Hero, as demand has remained robust. Also, the festive season in September helped Hero clock record volumes of 600,000 units, which itself is a record as the company has crossed this figure only twice in the past.

Though the headline numbers look very good, the company's operating margins have declined 100 basis points y-o-y to 13.5 per cent. A major reason for this is the steady rise in other expenses and employee benefit costs. Raw material cost as a percentage of sales is up 36 basis points to 72 per cent y-o-y during the quarter. During the quarter, other expenses rose 27 per cent y-o-y to Rs 724 crore, while employee benefit expenses increased 24 per cent y-o-y to Rs 284 crore. Total costs have gone up 17 per cent compared to the corresponding period last year.

A major reason for the increase in costs could be the spike in advertising costs, as the company's invested in two key sports properties. Hero MotoCorp has become the title sponsor of the Indian Super League, a franchise-based football league. The company has also become the title sponsor of the World Challenge tournament in golf, which is to be hosted by the Tiger Woods Foundation at the Isleworth Golf & Country Club at Orlando in the US.

The quarter has also seen Hero foraying into Columbia. The company launched operations in July 2014 through a wholly-owned subsidiary called HMCL Colombia SAS. The company is in the process of constructing a manufacturing plant at Villa Rica, Cauca, which will be operational by mid-2015 with capacity of 78,000 units.