Hero MotoCorp Sees Slowdown In Profits In FY13

Two-wheeler companies in India have had a bad year on account of tremendous pressure on demand. High interest rates, soaring fuel prices and weak consumer sentiment have hampered the sales of two-wheelers. Moreover, increased competition from foreign companies has resulted in a dismal performance by listed players in the segment.

Hero MotoCorp (HMC), the largest two-wheeler player in the Indian markets, sold 1527351 vehicles in Q4FY13. This was lower by 2.84% than the sales figure in the previous year corresponding period. For FY13 as a whole, its sales dropped by 2.56% to 6075583 units. This decline in sales volumes has resulted in a sloppy financial performance by the company.

In Q4FY13, HMC witnessed moderate revenue growth of 1.84% over Q4FY12, with revenues touching Rs 6145.75 crore. Its EBITDA declined by 8.16% to Rs 849.78 crore and net profit dipped by 4.86% to Rs 574.23 crore. This made for a significant decline in its margins. The EBITDA margin declined by 150 basis points to 13.83% and its net profit margin by 66 basis points to 9.34%.

HMC’s annual performance marked a trend no different from the one seen in Q4FY13. Sales volumes saw a decline of 2.56%, while revenues grew by a lethargic 0.80% year on year. Its EBITDA declined by 9.24% and the net profit by 10.93%. This effectively means that the EBITDA margin and net profit margin shrank by 153 basis points and 118 basis points respectively.

The company saw significant investments in FY13. It announced the investment of a sum of Rs 2500 crore for setting up its fourth plant at Neemrana, Rajasthan and its fifth plant at Gujarat, an integrated R&D centre at Kukas, Rajasthan and capacity expansion at its existing plants. It also announced investment in a global parts centre at Neemrana.

The company has also been focusing on exports in an attempt to increase the proportion of revenues from the international markets. In line with this, it had consignments sent to Burkina Faso, Ivory Coast, Peru, El Salvador, Guatemala and Honduras. It has also launched its brand identity of ‘Hero’ in Sri Lanka and Nepal.

Although short-term pressures exist on the markets that HMC has been a dominant player in, we believe performance will be better once there is improvement in conditions. Till then, sales are likely to remain downcast.