Hero Motocorp Q2 net profit slips 10.4%

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Published: October 24, 2019 2:33:53 AM

The company, however, surpassed the Bloomberg consensus estimate of Rs 773.52 crore.

Consequently, EBITDA dipped 20% y-o-y to Rs 1,101 crore.

Hero MotoCorp on Wednesday reported a 10.4% year-on-year (y-o-y) decline in its net profit at Rs 875 crore for the quarter ended September 2019, impacted by subdued volume growth amid a prolonged slowdown in consumer demand. The company, however, surpassed the Bloomberg consensus estimate of Rs 773.52 crore.

The fall in profits would have been steeper, but a massive 65.5% y-o-y dip in tax expenses and lower raw material costs helped the company arrest that. Analysts had expected profits to fall anywhere between 12% and 20% y-o-y.  The operating profit margin contracted by 70 basis points to 14.5% due to higher employee benefit expenses and discounts. Consequently, EBITDA dipped 20% y-o-y to Rs 1,101 crore.

Niranjan Gupta, chief financial officer, said there are short-term demand challenges now, but the company sees positive growth during the festival season, albeit in single digit. “Sustained recovery may still take time; in the long term, we are optimistic. We are focusing on all levers of growth and not just discounting,” Gupta told analysts at the post-results conference call.

The company has been facilitating lower-interest loans to customers, apart from offering minimum down payment facility. The financing levels for Hero MotoCorp increased to 46% of the total sales in Q2, compared with 36% in the April-June quarter.

As volumes fell by a sharp 21% y-o-y to 16.91 lakh units in the July-September quarter, the company’s revenue from operations declined 17% y-o-y to Rs 7,570.70 crore. Volumes fell as domestic demand remained weak, impacted by rise in prices on account of safety features added and higher insurance premium. Besides, costlier finance options had also hit demand. Raw material expenses fell 16% y-o-y to Rs 5,378.71 crore while tax expenses were lower at Rs 162.94 crore.

Analysts said the company’s sales in the scooter segment is weak compared to the industry which can impact volume growth in future. “Hero’s scooter volumes have been weak. We believe the company needs to improve its performance in this segment for further re-rating,” analysts at Nomura noted.

Sanjay Bhan, head – sales & after sales, said the company will aggressively focus on scooters going forward. “There was some setback in the past but we will come back soon with a range of products,” Bhan told analysts.

Analysts further said volumes could disappoint further if the excess inventory is not cleared during the festival season. As per estimates by the Federation of Automobile Dealers Association, two-wheeler inventory including those of Hero MotoCorp is still at over 45-50 days owing to poor retail demand, against a normal of below 30 days.

Bhan said the company is looking to bring down the inventory levels to 30 days. “Usually for Hero, 45 days is normal given our network, but when the demand is poor, even 45 days are higher.”

Shares of Hero MotoCorp closed 1.45% up at Rs 2,712.25 on the BSE. The results were announced after the market hours.

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