Hero MotoCorp to cut capex by 15-20 pct

New Delhi | Published: September 11, 2019 2:02:37 AM

Hit by subdued demand for two wheelers, Hero MotoCorp will cut down its planned capital expenditure by around 15-20% for FY20, while also deferring part of the expansion at its upcoming plant at Chittoor in Andhra Pradesh, people aware of the development said.

A Hero MotoCorp spokesperson said capex would be a bit lower than the earlier guidance for FY20A Hero MotoCorp spokesperson said capex would be a bit lower than the earlier guidance for FY20

By Pritish Raj

Hit by subdued demand for two wheelers, Hero MotoCorp will cut down its planned capital expenditure by around 15-20% for FY20, while also deferring part of the expansion at its upcoming plant at Chittoor in Andhra Pradesh, people aware of the development said.

The country’s largest two-wheeler maker had given an initial guidance of Rs 1,500 crore capex for the financial year 2019-20, double of Rs 700 crore it had done in FY19. The announced investment was mainly to upgrade its portfolio to conform to BS-VI emission norms, new product development, and for the upcoming plant in Andhra Pradesh.

“While investments for capacity expansion has been trimmed, some other discretionary expenses have also been curtailed till the time demand doesn’t improve,” one of the persons told FE. However, the company will go ahead with commencing production at its Chittoor plant this year.

When contacted, a Hero MotoCorp spokesperson said capex would be a bit lower than the earlier guidance for FY20. “We will keep re-evaluating this in the coming months,” the spokesperson said.

With dealers sitting on high inventory due to poor retail demand, two-wheeler volumes fell 22.24% y-o-y to 15,14,196 units, the sharpest-ever decline, as manufacturers continued to cut production to control inventory, which is at over 60 days.

Demand for two-wheelers was impacted by hike in insurance premium in September 2018 and subsequent price hikes taken by companies on April 1 on account of features provided to comply with the new safety norms.

As prices went up by over 20% since September last year, Hero MotoCorp’s sales have remained under pressure since December 2018. Volumes fell 16% y-o-y in the April-August period while production was also down by 17% y-o-y.

The company has been adjusting production since December 2018.

A dull festive demand in 2018 due to increase in insurance premium and costlier finance piled up excess stocks, as manufacturers continued to despatch in anticipation of higher demand. Despite production cuts, dealers of Hero MotoCorp have an inventory of over 60 days, while factory stockyards are also short of space. With seven manufacturing facilities, including five in India and one each in Colombia and Bangladesh, Hero MotoCorp currently has an annual installed capacity of about 9 million units. The company, however, does not want to add significantly to these numbers in the context of the current demand scenario, one of the persons said.

Slumping sales has forced automakers to shut down factories and reduce productions shifts, leading to job cuts. Most manufacturers are reconsidering their investment and expansion plans till the time demand revives. While Honda Motorcycle & Scooter India (HMSI) is reconsidering any fresh investment to increase production capacity and launch electric vehicles, Suzuki Motorcycle last week said it will hold back its planned investments on capacity enhancement.

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