With tax benefits at its Haridwar plant expiring and margin pressures continuing, analysts expect Hero MotoCorp’s Q2FY19 Ebitda (Earnings before Interest, Tax, Depreciation and Amortisation) margin to be down 200 basis points year-on-year.
Margins have been under pressure because commodity prices have been elevated, which is affecting the profitability of the company.
Hero MotoCorp recorded an Ebitda of Rs 1,377.3 crore, up by 6% year-on-year in Q1FY19, which was 5% lower than estimates due to lower than expected spare part sales and high raw material costs, analysts at Edelweiss said. The company witnessed the growth in its Ebitda margin by 15.6% in Q1FY19.
Rising commodity prices (for example spike in steel prices) is putting pressure on margins. “The impending sharp increase in cost over a relatively short period of time is a risk for two-wheeler OEMs which are already struggling to maintain gross margins,” analysts observed.
Hero’s volumes in the three months to September were 2,074,858 units. “After four quarters of double-digit volume growth, Q2 has been relatively weak for Hero with growth decelerating to 5% partly on account of a delayed festive season,” analysts at Jefferies said.
“High exposure to entry or executive motorcycles where cost increase will be highest implies risks for Hero despite strong brands. While Bajaj has higher exposure to exports, premium motorcycles, its aggressive pricing strategy in entry implies risks,” analysts said.
Analysts also shared their concerns regarding Hero’s inability to create strong brand in scooters and premium motorcycles, which remains the biggest risk.
“The market share has been declining every year by 100 basis points due to shifting preference by customers towards scooters and premium motorcycles,” analysts at Edelweiss observed.