Hero Moto braces for impact of unsold inventory, high costs

Hero Motocorp Ltd is set for a bumpy ride as unsold older models, rising raw material prices, and weak demand take their toll on profit in the coming quarters at India’s No. 1 maker of motorcycles and scooters.

India switches to stricter Bharat Stage IV (BS-1V) emission norms from April 1, when sale and registration of the more polluting BS-III vehicles will stop. Hero has a pile of them (as do other two-wheeler makers).

On average, the prices of BS-IV compliant scooters and motorcycles are expected to be ₹1,500 higher than the BS-III versions of the same models. With demand flagging, companies may not be able to pass on all of the additional cost to consumers.

“We expect margins for twowheeler companies to be under pressure at least for the next two quarters as a weak market prevents them from passing on the entire cost hike in one shot,” said Nitesh Sharma, an analyst at Phillip Capital India Ltd.

Hero Motocorp, which sells one in every two two-wheelers sold in India, will be hit hard, he added. “Our channel checks reveal Hero has an inventory of BS-III models for two months.”

A Hero dealer confirmed this. “Inventories are on a higher side definitely, and I don’t see it correcting any time soon.”

Demonetisation has hit sales of two-wheelers, especially in rural areas where most of the sales are in cash. In the three months ended December, Hero Motocorp sold 12% fewer vehicles than a year ago. Its net sales in the quarter fell 11% ₹6,898.64 crore.

Sales of two-wheelers in India have been in the negative terrain since the note ban. Sales skidded 22% in December— the steepest in eight years, according to the Society of Indian automobile Manufacturers (Siam). Sales fell 7.39% to 1,262,141 units in January, compared to a year ago.

A Hero spokesperson sidestepped answering a query on inventories. “Majority of Hero models have already transitioned to BS-IV and we would have fully transitioned to producing only BS-IV vehicles from the first week of March 2017,” he said.

Higher raw material prices are also likely to hurt Hero and its peers. “Two-wheeler firms have received significant benefits from lower commodity prices. With recent spike in commodity prices, these benefits may reverse,” Joseph George, an analyst at IIFL Ltd, had said earlier. The Hero Motocorp spokesperson admitted this but said the company would take a decision on increasing prices “based on our review of the overall market situation.”