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Business News/ Companies / Company-results/  Hero MotoCorp Q1 profit rises 33% to `750.34 crore
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Hero MotoCorp Q1 profit rises 33% to `750.34 crore

Lower raw material costs help firm counter a sales decline and post higher-than-expected profit increase

Its sales by volume fell to 1.64 million units from 1.71 million during the period. Photo: BloombergPremium
Its sales by volume fell to 1.64 million units from 1.71 million during the period. Photo: Bloomberg

New Delhi: Hero MotoCorp Ltd, India’s largest maker of two-wheelers, on Monday reported a higher-than-expected profit increase of 33% for the quarter ended 30 June, as lower raw material costs helped counter a sales decline.

Net profit rose to 750.34 crore during the quarter from 562.76 crore in the year-earlier period, the company said.

Revenue fell to 6,955.26 crore from 7,036.84 crore a year earlier.

Its sales by volume fell to 1.64 million units from 1.71 million during the period.

Hero’s net profit beat the estimate of 681 crore in a Bloomberg poll of 37 analysts.

Ravi Sud, chief financial officer at Hero MotoCorp, said the company was helped by the softening of commodity prices and a cost-reduction programme.

“As you know, we work with our vendors with a lag of one quarter. So, the positive impact of softening of commodity prices was seen in the current quarter," Sud said in a phone interview.

On a sequential basis, softening of commodity prices brought down the cost of raw materials by 270 basis points, he said. One basis point is one-hundredth of a percentage point.

“Some impact will be seen in the next quarter too," he added.

But Sud cautioned that there may not be a significant improvement in the company’s performance in the July-September quarter given that the festive season, which typically boosts demand, falls mainly in the three months to 31 December.

“The inventory build-up will start towards the end of September or early October. That will have impact on the Q2 performance," Sud said.

In May 2013, Hero MotoCorp, the maker of Splendor and Passion bikes, started a four-year initiative called Leap that envisaged cost savings of 75 crore in each quarter till the end of the programme.

The programme helped company save 329 crore in 2013-14. Hero hopes to save up to 200 crore in costs in the current financial year.

In a press statement, the company’s CEO and managing director Pawan Munjal said Hero expects an uptick in the industry in the coming quarters although a lot will depend on factors such as a good monsoon, higher rural incomes and overall buying sentiment.

The company’s operating margin expanded to 15.1% during the quarter gone by from 13.5% a year earlier.

“After a long time Ebitda (margin) has also gone above 15% levels. More importantly, if I look at per vehicle Ebitda, then it is 15% both sequentially as well as year-on-year," said Mahantesh Sabarad, deputy head of research at Mumbai-based SBI Cap Securities Ltd.

Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability.

Sabarad said revenue will remain under pressure, as the two-wheeler maker has witnessed a continuous decline in monthly sales.

“But, for sure, their profitability is going to be strong," he added.

The company introduced two new variants during the quarter—the Xtreme Sports and Passion Pro.

These bikes have received a positive response from custoners, enabling Hero to strengthen its leadership position in the motorbike market, Munjal said.

“Strong demand for our products in the 125cc category has also been instrumental in driving volumes," he added.

The company plans to introduce a slew of new products, including scooters, during the festive season.

The company remained concerned about the demand situation in rural parts of the country.

“It is sluggish," Sud said. “Consumer sentiment is weak in rural India. We continue to look at monsoon graphs everyday."

A below-par monsoon last year and unseasonal winter rains that damaged standing crops have hurt farm incomes and consumer demand in the countryside.

“The major challenge for auto makers is the distress in the rural economy, and this is impacting segments like small cars, small commercial vehicles and motorcycles," said Abdul Majeed, a partner and national automotive leader at the consulting firm PricewaterhouseCoopers.

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Published: 03 Aug 2015, 08:10 PM IST
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