Hero MotoCorp's Q3FY13 Net Down 20%

The country's largest two-wheeler maker Hero MotoCorp has disappointed the street once again with a poor set of Dec 2012 quarter results. The company reported a marginal decline in its sales volumes to 15.73 lakh vehicles. The sales revenues were up just 2% to Rs 6151 crore, while the net profit was down 20.4% to Rs 488 crore. The market was expecting the company to log a net profit of Rs 569 crore in the quarter.

On the margins front, Hero has seen its expenditure increasing faster than the sales, which bought down its EBITDA margins by 139 basis points to 12.58%. It said that the changed product mix and increased advertising expenses has impacted its margins.

The company has been investing in new capacities after exiting the joint venture with its ex-partner Honda. Pawan Munjal, Managing Director and CEO of Hero MotoCorp, said that they have commenced operations from its Global Parts Centre (GPS) located at Neemrana, Rajasthan. He also said that the company has started construction work at its fourth manufacturing facility, also in Neemrana. It is in the land acquisition phase for a new facility in Gujarat, and expects this plant to be commissioned in 2015-16.

During the Sept 2012 quarter, Hero had re-launched some of its bikes. The management has said that it will launch 7-8 bikes next year as well. It also said that its Ignitor 125 cc bike model has seen 40% growth during the quarter. Brands like Glamour and Splendor have also reportedly continued to show strong growth momentum, but the numbers for these have not been provided.

Just yesterday (Jan 17, 2013), Rajeev Bajaj, MD of Bajaj Auto, said that the Auto sector would witness sluggish growth in the Mar 2013 quarter. In contrast, Hero has taken everyone by surprise by saying that it sees the Mar quarter as one of moderate growth. However, the company has not disclosed how it will manage to grow its sales in the said period, especially considering it has reported a drop in sales volumes in the last two quarters (Sept 2012 and Dec 2012).

Even though the management is optimistic about its Mar 2013 quarter results, we believe that it would also be another poor one due to the subdued growth in the sector. Hero also does not have a premium range of bikes that can help its margins. Given these factors, we would ask investors to stay away from investing in Hero MotoCorp.