Hero MotoCorp Q2: Demand in sickbay, but you can take a ride
Tough macroeconomic conditions and multiple headwinds are making it hard for Hero MotoCorp Ltd (CMP: Rs 2,712, Mcap: Rs 54,170 crore) as it posted a weak set of quarterly numbers. A big drop in volume took a toll. The depressed volume pulled down top line for the three months to September and led to a contraction in operating profitability. The only saving grace, however, was improvement in realisation.
Demand is expected to remain muted in the near to medium term. However, we believe that long-term demand outlook in India is very promising. We advise investors to accumulate this fundamentally strong business at a reasonable valuation (14.4 times FY21 earnings).
Key highlights
On a year-on-year (YoY) basis, Q2 net operating revenue fell 16.7 percent, weighed down by volume decline of 20.8 percent. Average realisation, however, rose 5.1 percent on the back of a price increase and higher sales of spare parts.
Earnings before interest, tax, depreciation and amortisation (EBITDA) took a hit of 20.1 percent due to negative operating leverage. EBITDA margin too contracted 62.1 bps YoY.
One percentage is 100 basis points (bps).
The demand worrylines
Demand outlook continues to be sluggish for the two-wheeler industry. A lot of factors are at work, namely the liquidity crunch, non-availability of retail finance, increase in total cost of ownership after implementation of long-term mandatory insurance and safety regulations, and slowdown in economic activity.
The management sees subdued demand conditions for the near term as well. It, however, is of the view that the momentum is building up in the festive season. It also indicated that the real signs of recovery would be visible in November when Rabi sowing starts. Additionally, pre-buying ahead of BS VI implementation is also a trigger for the industry.
In the long term, however, we believe that India offers a huge potential for the two-wheeler industry, which is expected to ride well on a likely strong demand from both rural and urban areas. This is a possibility because of low penetration and rising disposable income. Rural market is also expected to get a boost from the government’s focus on rural areas and increase in minimum support price (MSP).
Demand is expected to remain muted in the near to medium term. However, we believe that long-term demand outlook in India is very promising. We advise investors to accumulate this fundamentally strong business at a reasonable valuation (14.4 times FY21 earnings).
Key highlights
On a year-on-year (YoY) basis, Q2 net operating revenue fell 16.7 percent, weighed down by volume decline of 20.8 percent. Average realisation, however, rose 5.1 percent on the back of a price increase and higher sales of spare parts.
Earnings before interest, tax, depreciation and amortisation (EBITDA) took a hit of 20.1 percent due to negative operating leverage. EBITDA margin too contracted 62.1 bps YoY.
One percentage is 100 basis points (bps).
Demand outlook continues to be sluggish for the two-wheeler industry. A lot of factors are at work, namely the liquidity crunch, non-availability of retail finance, increase in total cost of ownership after implementation of long-term mandatory insurance and safety regulations, and slowdown in economic activity.
The management sees subdued demand conditions for the near term as well. It, however, is of the view that the momentum is building up in the festive season. It also indicated that the real signs of recovery would be visible in November when Rabi sowing starts. Additionally, pre-buying ahead of BS VI implementation is also a trigger for the industry.
In the long term, however, we believe that India offers a huge potential for the two-wheeler industry, which is expected to ride well on a likely strong demand from both rural and urban areas. This is a possibility because of low penetration and rising disposable income. Rural market is also expected to get a boost from the government’s focus on rural areas and increase in minimum support price (MSP).
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