After witnessing a sharp decline in operating margins last fiscal, bike market leader Hero Honda expects profitability to remain ?under pressure? in 2007-08 as well, pulled down by discounts in a competitive market, shrinking demand and higher costs of inputs.

?Given the intense level of competition, the emergence of short-term factors like inflation and interest rates, and the impact of input prices, it has become more challenging to maintain growth,? Hero Honda managing director Pawan Munjal told company shareholders in its annual report for 2006-07.

The company said the push to gain market share ?at all costs, especially through discounts and interest-free schemes?, had started affecting bottomlines across the industry.

Margins were under pressure throughout the year because of high input costs. ?Unless these costs stabilise at a lower level, profitability will remain under pressure,? it said.

Operating margins (EBIDTA) for Hero Honda slipped to 11.9% in 2006-07 from 15.7% in the previos year just as raw material costs as a percentage of sales increased to 72.5% from 69% in the previous fiscal.

Munjal cautioned that just as the company strived for increased numbers, operating margins do not ?haemorrhage at the altar of high sales.

While maintaining that input costs remained a cause for concern, Hero Honda said higher interest rates were likely to slow down overall two-wheeler sales ?to some extent?. It also said a higher base effect might lead to lower growth rates in the two-wheeler industry. ?… maintaining double digit in the coming year might be difficult for some players,? the company said.

The company, that launched eight new models/variants last fiscal, said it had similar plans for this year. ?There are several new models and upgrades of existing models in the pipeline; these would be launched over the current year,? Hero Honda said.

The company said apart from the Haridwar plant in Uttaranchal where it plans to invest around Rs 415 crore, it will be investing Rs 170 crore as capital expenditure at its existing plants at Dharuhera and Gurgaon in Haryana.

The company expects most of the sales growth in the deluxe and entry-level segments of the market, and expressed apprehension that the Rs 1 lakh car could possibly impact the numbers in the premium segment. ?Pricing at these levels could pit the premium segment directly against four-wheelers,? it said.