Hero Disappoints, Except On Operating Margin
DSIJ Intelligence / 25 Jul 2013
Hero MotoCorp saw a decline in its volumes, revenues, EBITDA and net profit in the June quarter. The only positive about it was the operating profit, which expanded by 27 basis points, resulting in a significant upward movement in its stock prices.
The company has been trying to foray into the international market. It has set an objective for international sales to make up for 10% of its total revenues in the next 4 to 5 years. In line with this objective, it launched its brand in Guatemala, El Salvador and Honduras in Central America and Kenya, Burkina Faso and Ivory Coast in Africa. It has also set up an assembly unit in Kenya. To further boost its international presence, Hero is expecting to launch its brand in the Latin American markets of Peru and Ecuador in the month of August 2013.
Even with the drop in revenues and amid a challenging operating environment marked by subdued consumer demand, the automobile company has managed to improve its operational efficiency. In Q1FY14, its operating profit grew by 1.18% to Rs 640.84 crore on a yearly basis. This translates into an expansion in its operating profit margin of 27 basis points to 10.40%.
However, the company’s net profit declined by 10.87% to Rs 548.58 crore in Q1FY14. This drop was mainly due to higher tax rate on account of the expiry of 5 years (April 2008 to March 2013) of 100% exemption in Haridwar, where the company’s largest manufacturing facility is located. Moreover, the newly levied surcharge in the Financial Bill 2013 also weighed on the net profit. These factors resulted in an effective tax rate of 26.9% in Q1FY14 from 16.3% in Q1FY13.
Although the financial performance of Hero has been unimpressive in the quarter, the period was marked by several significant developments. Apart from international launches, the company also announced the acquisition of 49.2% stake in Erik Buell Racing for USD 25 million. It also launched its retail finance arm Hero FinCorp with a phase-wise expansion plan.
Although sales have been low because of a major slump in the domestic automobile market, Hero MotoCorp has been taking steps to achieve long-term growth and technological advancement.
Note: All comparisons are made on a yearly basis (year-on-year)
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