Hero Honda profit dips 20%, margins hit by input costs

BS 200 SCORECARD

Fierce competition has dented world's largest two-wheeler manufacturer Hero Honda's net profit by 20 per cent to Rs 209.18 crore for the quarter ended December 2006, compared with Rs 261.78 crore in the same quarter a year ago.

Total turnover (net of excise), however, rose by 14.83 per cent to Rs 2,699.63 crore from Rs 2,350.81. Net operating margin suffered a squeeze, falling to about 11.3 per cent from 16.3 per cent a year earlier. 
 

Rs crore	Quarter ended Dec
	2005	2006
Net sales	2314.77	2666.05
Other income	36.04	33.58
Total income	2350.81	2699.63
Expenditure	1936.72	2364.13
Operating profit	414.09	335.50
Net profit	261.78	209.18

Managing Director Pawan Munjal said the margins would remain under pressure for a while as the company planned to launch more vehicles."Significant investments in marketing coupled with higher raw material prices have affected our operating margins," he said.

Hero Honda launched five models during the quarter. Munjal said there would be two more launches in the premium 150cc category in the subsequent quarter.

Market analysts said the company's result was below expectation. A number of analysts tracking the company said they expected the profit in the quarter to be about Rs 235-245 crore.

"The high material costs, especially of steel, aluminium, rubber, copper, etc, continued to affect Hero Honda's margins. In addition were the expenses on the promotional and market cost of its five new launches. The company also doled out freebies during the festival season," said Arvind Jain of Religare Securities.

Industry experts said the pressure on prices, applied by reductions undertaken by rival Bajaj Auto, also played a part.

"While Hero Honda has to pay a hefty royalty per bike, Bajaj does not have to. So, a decrease in price has a bigger impact on Hero Honda's margins," said Piyush Parag of Bricks Consultancy.

For the same quarter, Bajaj Auto reported a rise in profit by 23 per cent to Rs 340 crore and maintained the net margin at 14.2 per cent, the highest in the two-wheeler sector.

Third largest player TVS Motor Company recorded a fall of 68 per cent in its net profit to Rs 14.11 crore in the quarter.