Downhill ride

Hero Honda reported disappointing quarterly numbers with its net profits down 20% primarily on account of exceptional one-time expenses. A decline in its operating margins also weighed on the bottomline.

The company continues to witness pressure on its operating margins for the third successive quarter due to rising raw material costs. The company which had reported Ebitda (earnings before interest, taxes, depreciation and amortisation) margins of 14% and 13.4% in the previous two quarters of this fiscal, reported 606 basis points year-on-year (y-o-y) decline in its operating margins to 11.26%. The sharp increase in input costs resulted in raw material costs as percentage of net sales to rise by almost 600 bps on y-o-y basis and 114 bps sequentially to 74.54%. Also, the company saw its other operating expenses as percentage of net sales rising by 80 bps on y-o-y basis and almost 130 bps sequentially on account of higher selling and distribution spends during the festive season. The employee costs, however, came down a bit by 55 bps on y-o-y basis and 25 bps sequentially. As a result of higher operating costs, the Ebitda, or operating profits dropped by 12.8% to Rs576.6 crore.

However, the world’s largest two wheeler manufacturer with a market share of over 44% in India, saw strong topline growth. The company’s quarterly net revenues went up 34.2% to Rs5118.20 crore on back of a 28.5% increase in vehicle sales. The company, which has consistently sold over 4 lakh two wheelers in the last nine months, sold 14.28 lakh vehicles in the December quarter.

The average net realisations per vehicle also went up by 4.4% on y-o-y basis and 2.15% sequentially to Rs35,841, led by price hikes.

The sharp decline in company’s net profit to Rs429 crore can be attributed mainly to exceptional one-time expenses of Rs79.84 crore.

The company has made provisions towards probable claims arising out of litigations related to excise duty benefits on motorcycle sales from its Haridwar plant. The saving grace for the company was lower taxes this quarter. The company saw its tax expenses coming down by nearly 43% to Rs79.03 crore with the effective tax rate falling from 19-20% levels in previous quarters to 15.56% in the December quarter as it produced higher number of vehicles from the Haridwar plant.

Going ahead, the management is confident of maintaining its volume growth but expects margins to remain an issue due to higher raw material costs.

Post the disappointing results, the stock of Hero Honda fell to its yearly low, closing the day at Rs1523.05, down 5.27% on BSE. Most of the analysts have already revised their earnings forecast for the company downwards and maintained a hold rating on the stock at current levels. The stock may see some more downside in the near term