If commodity costs remain where they are, the improvement in margins too could be sustained. These short-term positives are likely to perk up investor sentiment. Photo: Ramesh Pathania/Mint
Hero MotoCorp Ltd’s results hold out the promise that better times may be ahead, notwithstanding fears of what a poor monsoon could do to rural demand. The two-wheeler company beat the Street’s consensus estimates on several fronts. The highlight was its operating profit margin of 15.8%, at a five-year high. It was 230 basis points (bps) higher than a year ago and 100 bps higher than Bloomberg’s consensus estimates. One basis point is one-hundredth of a percentage point.
One reason was, of course, lower raw material costs which contributed to higher gross margins. But that was not all. The company’s marketing efforts worked, with a much better product mix, leading to a 6% increase in the per-vehicle realization. This was better than the 4% pencilled in by the Street.
According to Kaushal Maroo, analyst, Emkay Global Financial Services Ltd, “the operating margin surprise is driven more by a better product mix than fall in commodity price”.
This increase in realizations helped offset the 7% decline in sales volumes, which had made investors pessimistic. Although net revenue was a tad lower, it beat the consensus forecast by about 12% at Rs.6,837.1 crore. This along with a better profit margin fuelled the quarter’s operating profit by 16% to Rs.1,083.4 crore.
Hero’s net profit at Rs.772 crore beat Bloomberg’s consensus by about 9%, although it was only a tad higher than a year ago.
The number of pleasant surprises in Hero’s September quarter results could see investors view the share more favourably. So far, the rural slowdown and decline in motorcycle sales growth rates had weighed down the stock.
Hero MotoCorp’s shares have underperformed the broader benchmark indices, the BSE Auto index and the BSE Sensex since the beginning of 2015.
The coming festive months should see Hero MotoCorp hold on to the mix-related effects that are evident in the September quarter’s results. If commodity costs remain where they are, the improvement in margins too could be sustained. These short-term positives are likely to perk up investor sentiment. That said, the company’s progress in new frontiers—export markets—is something to watch for, besides a potential deepening of rural distress, and prospects for scooter sales in the coming quarters
[“source -livemint”]
