Hero MotoCorp`s Q1 results in line with weak expectations on the Street

Even before Hero MotoCorp Ltd announced its June quarter (Q1 FY20) results, the stock tanked 6.1% to ₹2,258.80, close to its 52-week low on the National Stock Exchange. As expected, the results were weak, in line with the 12.5% year-on-year drop in sales volume, announced earlier this month.

Margin pressures along with the 9% drop in net sales led to a steep 16% fall in Ebitda to ₹1,158 crore. Ebitda stands for earnings before interest, tax, depreciation, and amortization.

Two-wheeler demand has borne the brunt of the economic slowdown and cost pressures due to regulatory changes. According to Pradesh Jain, executive vice president at Yes Securities Ltd, “Increase in cost of ownership is likely to delay demand recovery. From the time insurance was hiked for vehicles till BS-VI emission norms come into force, the cost of owning a two-wheeler will increase substantially, which is bound to hurt demand."

This is what has taken the Hero MotoCorp stock downhill. On the back of falling sales and profit margins, consensus earnings per share estimate on the Street have fallen from ₹227 for FY21 to ₹181 in the past year. So, the 30% drop in share price over the period is not surprising.

On top of it, weak operating leverage dented margins, even though realizations rose by 4% year-on-year. Ebitda margin at 14.4% was about 120 basis points lower year-on-year. A basis point is 0.01%.

However, according to ICICI Securities Ltd, “The margin was better than forecast and was up 80 bps (basis points) sequentially. The beat was due to savings in other expenses as a percentage to sales, although higher employee costs and contraction in gross margins limited the benefit."

Having said that, investors must note that the reported net profit of ₹1,257.3 crore included an exceptional item of ₹737.5 crore, adjusted for which, it was around 16% lower year-on-year.

In a nutshell, Hero MotoCorp’s results did not spring any negative surprises. However, the volley of negative news for the auto sector in the recent past has only added to the headwinds of weak demand and stiff competition that may dent margins further in the coming quarters. A report by the Federation of Automobile Dealers Associations stated that liquidity continues to be a worry, both at the retail and dealer levels. A delayed monsoon may fail to improve festive season demand in two-wheelers that have significant exposure to rural markets.

With so many odds to battle along with cautious inventory and production management ahead of the BS-VI emission norms, earnings upsides for Hero MotoCorp seem capped in the near term.

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