Hero MotoCorp CFO Interview: ‘We don’t think it’s a wrong time to launch 125cc scooter

Updated: May 14, 2019 4:30:16 AM

Chief financial officer Niranjan Gupta, in an interaction with FE’s Pritish Raj, talks about the company’s emphasis on scooter and premium bike segments and the need to bag the opportunity it lost due to late entry.

Chief financial officer Niranjan Gupta

By Pritish Raj

Hero MotoCorp has carved out a 3-5 years plan, which includes fastest ever launches in the scooter and premium bike segment. Chief financial officer Niranjan Gupta, in an interaction with FE’s Pritish Raj, talks about the company’s emphasis on these two segments and the need to bag the opportunity it lost due to late entry. Excerpts:

Scooter sales have been declining for many months now and April saw the sharpest decline of 25% y-o-y. Don’t you think this is probably not the right time to launch a scooter, when there is no demand and the segment is falling?

I accept that we were late entrants in this segment but if you look at the numbers, while the overall segment is flat, 125cc has grown by 50% and that’s a phenomenal growth. I agree it’s on a low base but it is becoming sizeable now as 125cc comprises more than 20% of the overall segment. Therefore, we don’t want to miss the bus and we don’t think it’s a wrong time for the launch.

But there are continued impact of high insurance cost, liquidity crunch and price increase, which has impacted the entire two-wheeler industry?

I would say that insurance cost came and impacted. If at all, gradually, the impact of that will vein out. Liquidity is improving now and with the RBI cutting rates, we know that the central bank recognises liquidity as an issue and is taking steps. All these steps will take some time and so will the sentiments. But you cannot ignore that there is a sizeable improvement happening compared to the October-November levels.

Hero’s Ebitda margins have been declining for the past few quarters and FY19 saw a significant dip. Since the profit margins on premium products are higher compared to the commuter segment, do you expect the operating margins to get back to the over 16% levels seen in FY18?

It is very difficult to say. Remember, there will be a BS VI cost impact which will come and it depends whether one is able to pass on the full cost or not, there will always be some headwinds and tailwinds. While the margins on premium products are higher, these products require more investments as well. In the last investor call, I had mentioned that we expect the operating margins to hover around the current levels in the short term. We do expect some of the factors to neutralise, like commodity, which is not as sharp as it was and thereafter, we have to wait and watch.

The company has been cutting production since December last year. April, too, saw a 12% dip in output, yet the inventory with dealers is still higher than normal. Does it mean there will be more cuts in the months to come?

Our inventory currently stands at around 45-50 days. I do agree that it is slightly more than normal, but there is also nothing to panic about. We have adjusted production as much as we could and there is no need for further correction. Inventory levels will get back to normal during the course of time and with extended credit support to dealers and schemes for customers, I believe the demand will pick up.

While the profit margins of premium products are higher, price increases on account of BS VI norms would also be more. Don’t you think a significant price hike will impact demand?

We have to wait and watch, and first of all, we need to see how significant the price hikes will be. Secondly, one has to see whether there will be a GST rate cut. We are all representing very strongly that there is no case for two-wheelers to be in the 28% tax bracket, we are expecting something there. Lastly, the need doesn’t go away. In FY21, when you see full reflection of BS VI, that maybe a soft year but it’s bound to come back, it will not fundamentally destroy the demand.

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