Brokerage CLSA has said Hero Motocorp’s claim of gain in market share during January-June is “optical”, and expressed concerns the company may have to resort to heavy discounts or production cuts going ahead if the festival season demand is not strong.
CLSA has downgraded Hero Motocorp to sell.
Following are the important points from the report:
“If we remove the inventory buildup (about 250,000 units) from Hero’s January-June volumes, then volume growth drops to 0 percent over this period as against the reported 8 percent growth. This is the same as Bajaj Auto’s domestic 2-wheeler volume growth over January-June,” it said.
Bajaj Auto preferred
The brokerage also said it preferred Bajaj Auto to Hero Motocorp as the former offers better earnings growth thanks to currency and is also cheaper.
It expects the pressure on Hero Motocorp’s margins to continue, given the business environment remaining tough.
No pricing power
“The weak demand environment seems to have impacted Hero’s pricing power. Margins should slip further in 2Q due to higher adspend on the upcoming relaunch of premium bikes,” it said.
The brokerage said the 50 basis points contraction in gross margins in April-June came as a surprise as the company had increased the prices during the quarter.
Hero Motocorp’s management also admitted that there has been an increase in inventory to four weeks, which, the brokerage said, gave rise to risks on the volumes and margins fronts in the second half of the year.
Shares of Hero Motocorp declined 0.7 percent a day after the company reported a lower-than-expected 10 percent rise in net profit. Bajaj Auto, which had reported a net profit of Rs 718 crore from Rs 711 crore a year ago, was up 1.8 percent.