In 2QFY19, Hero Motocorp (HMCL) reported an EBITDA margin of 15.2%, lower by 40bps QoQ, owing to higher other expenses.
In 2QFY19, Hero Motocorp (HMCL) reported an EBITDA margin of 15.2%, lower by 40bps QoQ, owing to higher other expenses. As two-wheeler demand was muted during 2QFY19 due to increase in fuel price and insurance premium, all eyes are on the response to the festive sales. The management indicated that the first few festive days have witnessed flat growth YoY, but sales are gradually picking pace. Recent hike in MSPs will boost rural sales.
However, there is still uncertainty over volume growth post the festive period. Although new model launches ‘Xtreme 200R’ and 125cc scooters will support sales, we remain cautious due to heightened competitive intensity and increase in two-wheeler ownership cost driven by regulatory changes and fuel prices. We have revised our volume/margin growth estimates and cut EPS by 4% / 7% for FY19/20. We maintain ‘Buy’.
Limited success of new launches and inability to gain market share in premium motorcycles and scooters are key risks.
In 2QFY19, HMCL reported net sales of Rs 90.9bn, in-line with our estimate. Volumes for the quarter at 2.1m grew 5.5%YoY, +1% QoQ.
During the first five days of “Navratri”, retail sales have been flat. However, sales momentum is picking up and overall festive growth is likely to be 8-10%. Management reiterated its full year guidance of 8-10% volume growth, driven by anticipation of strong rural demand supported by recent increase in MSPs. During the quarter, industry scooter sales were flat, due to high base and multiple ownership with-in households. However, 125cc (scooter) segment continues to outpace 110cc segment. HMCL is set to introduce two new scooters in the 125cc segment in a phased manner within next one month.
The new models will aid volume growth and mitigate risk of market share loss in two-wheeler segment. Marketing and sales promotion cost is likely to be on the higher side due to new model launches. The company has hiked prices by up to `900 during Oct’18, to contain cost pressure. Also, the management allayed concerns about liquidity issues in two-wheeler financiers.