Recovery in Hero's 2-wheeler sales unlikely any time soon

Hero itself expects two wheeler demand pressures at industry level to continue for the next five quarters into the June quarter of 2014, before any improvement in sentiment is seen.

Sindhu Bhattacharya January 18, 2013 17:24:32 IST
Recovery in Hero's 2-wheeler sales unlikely any time soon

New Delhi: Hero MotoCorp appears to be caught in a vicious circle.

Uncertainty over its research and development capabilities post the split with Honda Motor Co, in a highly competitive environment, mean Hero has to now spend more on marketing products and in brand building. This impacts its margins negatively. And with sales volumes also not keeping up to last year's levels, Hero is in a less than pleasing situation right now.

Analysts say Hero itself expects two wheeler demand pressures at industry level to continue for the next five quarters into the June quarter of 2014, before any improvement in sentiment is seen.

So does this mean any recovery in two wheeler industry sales volumes in general and in Hero's sales in particular are at least five quarters away?

The company has already made it clear that despite degrowth, it has not abandoned its growth plans and capacity addition via a fourth plant is well on track.

Recovery in Heros 2wheeler sales unlikely any time soon

Hero is losing out to competition

Since volumes would not be a problem for Hero, perhaps the company now needs to show some spark when it comes to new launches - since competition is winning hand over fist precisely because of a slowing basket of new launches from Hero.

Bajaj Auto has recently unveiled its entry segment bike Discover 100T and Honda Motorcycle & Scooter India is gearing to launch a new product every quarter. Hero needs to step up the pace of launches.

Ashvin Shetty of Ambit Capital said in a note to clients this morning "We remain concerned of the increased competitive intensity in the 2W space, particularly in the commuter bike segment, which is the bread-and-butter segment for Hero MotoCorp. We believe Hero MotoCorp is the most susceptible to increased competition, especially emanating from the aggressive expansion plans of Honda Motor (HMSI)."

Shetty pointed out that Hero has already lost about 287bps market share (close to 3%) between April and January this fiscal in the domestic motorcycle space. He has predicted further market share loss for Hero of almost 2% in the next fiscal as well.

Binay Singh of Morgan Stanley warns that Hero's share price will fall relative to the country index over the next 60 days. "Hero reported a disappointing third quarter. Most of the miss came at the operating level and was attributed to lower gross margins of new launches (Maestro and Ignitor) and increased sales promotion costs. We have cut our earnings forecasts by 5% for this fiscal and 3% for FY14 and remain underweight on Hero."

That Hero is losing out to competition is evident with what IDBI Capital's Bhaumik Bhatia said yesterday "We continue to believe that Bajaj Auto is better placed than Hero to mitigate weak demand environment and increased aggression by HMSI, led by its diversified geography and product mix, success of recent launch of Discover 125ST and greater product pipeline visibility."

In a conference call with analysts yesterday, the Hero management indicated that demand has improved in the past few days. Bhatia has cut volume estimate for Hero for this fiscal to a negative 2% against 3% growth earlier, citing no significant new launches by Hero while competition continues to launch new models, targeting its bread-n-butter executive segment.

An agency story noted that Hero MotoCorp's scrip fell over 5 percent today after the company reported a 20.41 percent decline in net profit for the third quarter ended December 31, 2012. Due to disappointing results, the shares of the country's largest two-wheeler maker made a weak debut and further plunged 5.41 percent to a 52-week low of Rs 1,720 on the BSE, in an otherwise strong stock market. On the NSE, the stock slipped 5.42 percent to Rs 1,720.05.

The story quoted a Karvy Stock Broking report to say that Hero's performance in the December quarter "came way below our as well as street expectation as the company's net profit declined 20.4 per cent."

Hero's net profit was Rs 487.98 crore against Rs 613.03 crore in the same quarter last year due to lower sales and higher expenses. Net sales stood at Rs 6,151.31 crore against Rs 5,983.55 crore in the year-ago period. Volume sales during the quarter were down at 15,73,135 units.

Updated Date:

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