Volume woes indicate a bumpy ride for Hero Motocorp

Company’s prospects dented by lack of firm demand trend

A weak March quarter (Q4) performance and demand worries dented the Hero Motocorp stock, which fell 4 per cent in trade on Wednesday. The country’s largest two-wheeler maker refrained from giving growth guidance for FY21, given the gradual relaxation of the lockdown across the country and the lack of firm trends of a demand reversal.

While the June quarter may be a near washout, volumes for Q4 were down 25 per cent year on year (YOY). Revenue fall, however, was limited to 21 per cent, given the 5 per cent uptick in realisations on account of price hikes taken to offset costs related to its BS-VI transition.

Weak operating leverage and higher raw material costs as a proportion of revenues at 69.2 per cent led to a sharp deterioration in profitability. Operating profit margins fell to multi-year lows at 10.6 per cent, which was down 300 basis points (bps) over the year-ago quarter and 420 bps over the December quarter.

The management, however, indicated that revenues and margins would have been higher in the quarter if it wasn't for the Covid-19 impact. They highlighted a loss of 230,000 units because of the pandemic, in the absence of which operating revenues would have been about 19 per cent higher, at ~7,400 crore. Margins, too, would have been higher at 13.5 per cent if it had not been for the discounts and dealer incentives to liquidate the BS-IV inventory.

The management indicated multiple positives, including lower levels of inventory, opening up of 90 per cent of the retail network, lower raw material costs, and cost reduction efforts. The firm is also hopeful of a better show by the rural segment given higher sowing levels, expectation of normal monsoons, and fiscal stimulus focussed on the rural segment. About half of Hero’s sales are accounted for by the rural segment.

While the management was optimistic about improvement driven by pent-up demand, social distancing, and multiple financing options, analysts were cautious about the firm’s near-term prospects. An analyst at a domestic brokerage believes that there is a lack of clarity on growth despite the uptick in enquiries indicated by the management. With job losses, salary cuts, and growth challenges, most brokerages expect two-wheeler volumes of the sector to fall by over 20 per cent in FY21. There could be pressure on the stock in the near term, as monthly volumes, which were hovering around the 5-lakh mark during the pre-covid period, may see a drastic fall in the coming months.