Hero MotoCorp Faces A Tough Quarter

Hero MotoCorp announced their Q2FY13 results post market hours on Tuesday, October 23, 2012. The street was expecting a drop in figures based on the sales figures released every month, which have been highly subdued. In Q2FY13, Hero sold 13,32,805 vehicles as compared to 15,44,315 vehicles in Q2FY12, which is lower by 13.70 per cent. The situation has been seen worsening by each passing month in the quarter, with a 1.39 per cent drop in July sales, 11.88 per cent drop in August sales and 26.35 per cent drop in September sales. 

The overall slump seen in the automobile industry has also taken a grip on the two-wheeler industry. Industry body SIAM recently cut its growth forecast for motorcycles from 11-13 per cent to 5-7 per cent for FY13. This resulted in a negatively impacted financial quarter with revenues dropping to Rs 5,187.46 crore in Q2FY13 from Rs 5,826.15 crore in Q2FY12, lower by 10.96 per cent and in line with the street expectations.

The margins of Hero took a larger hit on account of an inventory build-up at the dealers’ end, unfavourable product mix on account of sales being more skewed towards less than 125 cc motorcycles and higher other expenditure probably due to increased expenditure on advertising. These factors resulted in a 188 basis points drop in the operating profit margin of Hero, which dropped to 13.86 per cent in Q2FY13 from 15.74 per cent in Q2FY12.

The net profit of Hero declined by 27.01 per cent to Rs 440.58 crore in Q2FY13 from Rs 603.62 crore in Q2FY12. This resulted in the net profit margin declining in line with the operating profit margin, down by 187 basis points. The heavy downfall in margins coupled with a revised guidance led Hero’s stock prices to reach an intraday low of 2.50 per cent. However, on account of this being in line with expectations and the beginning of the festive season, the stock prices soon caught a positive direction and ended the day positive by 2.36 per cent.

Looking forward, the automobile industry has been banking on the festive season for a revival in sales and a reversal in the downward trend. The management expressed their expectations of touching a sales figure of 2,00,000 over Navratri, translating into an average sales volume of 26,000 vehicles per day. The Navratri period in the previous year had seen similar trends, said the management. Over FY13, however, Hero estimates growth to be in line with the expectations projected by SIAM.

Moreover, the company has launched the 110 cc Passion X Pro which would be available to customers this Diwali, hoping to boost sales further. However, the monthly sales trends over the last few months and now the results are both indicative of Bajaj Auto’s performance being better than that of Hero MotoCorp. A stronger presence in the premium segment, higher dependence on exports and overall efficiency has resulted in Bajaj moving a step ahead. How Hero plays its game in the remaining half of FY13 and how macro trends fall into place will define the company’s performance in this volatile and subdued industry.