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BS-III vehicles’ ban hit Hero MotoCorp’s March quarter margins

LiveMint logoLiveMint 11-05-2017 Vatsala Kamat

For the March quarter, the country’s largest two-wheeler manufacturer, Hero MotoCorp Ltd was also saddled with the largest number of BS-III vehicles as the apex court banned the sale of these vehicles to rein in emission compliance.

So, in addition to a 6% year-on-year drop in vehicles sold during the March quarter, the company doled out discounts worth Rs193 crore to domestic customers to dispose of the BS-III vehicles. The drop in realization was not surprising for investors and net sales at Rs6,915 crore was about 8% lower than the year-ago period.

The good thing is that the management took a call to clear stocks even at the dealers’ end to resume with new vehicles in tune with the new BS-IV emission norms. But the discounts took a toll on the profitability of the firm. Add to this, although raw material costs fell in absolute terms, the lower realizations earned on sales due to discounts, led to expansion in raw material cost as a percentage of sales. Operating margin therefore was beaten down by 200 basis-points year-on-year to 13.8%, lower than the 15% forecast by 22 analysts on Bloomberg. A basis point is 0.01%.

Operating profit too fell below estimates at Rs960 crore, which was a steep 19.5% decline from the year-before period.

Will the Hero MotoCorp stock react negatively on Thursday morning to these results that came in after market hours on Wednesday? Note that it has been an underperformer compared to the benchmark indices since March. Also, net profit was dragged down by about 14% to Rs720 crore, a little lower than forecasts. Meanwhile, April sales were lower than in the previous-year period.

Still, brokerage firms don’t seem unduly perturbed. Nitesh Sharma, an analyst at PhillipCapital (India) Pvt. Ltd, says that the company’s performance will improve as the sector recovers from the impact of both demonetization and emission norms. Hero MotoCorp would be among the biggest beneficiaries in the auto sector from a normal monsoon that is round the bend. After all, about half its revenue accrues from the rural markets.

The management too, in its media release along with the March quarter results, has spelt out a bonanza of new launches for fiscal year 2018 (FY18). One cannot ignore the price hike taken by the firm across products from 1 May to offset partially the impact of commodity price increase.

In other words, with the challenges behind it, the Hero MotoCorp stock that trades at Rs3,322.40 only needs robust volume growth to back up its valuation of 17.5 times the estimated earnings for FY18.

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