An employee walks past a Hero MotoCorp Ltd. Splendor Pro motorcycle. (Photographer: Kuni Takahashi/Bloomberg)

Q1 Results: Commodity Costs Hurt Hero MotoCorp In Record-Breaking Quarter

Hero MotoCorp Ltd. sold a record number of two-wheelers in the April-June quarter. That wasn’t enough to beat earnings estimates though, as higher commodity costs and an end to tax benefits for its key Uttarakhand plant took toll.

Net profit of India’s largest two-wheeler maker remained flat at Rs 909 crore in the first quarter, according to its exchange filings. That’s lower than the Rs 1,010-crore consensus estimate of analysts tracked by Bloomberg.

  • Revenue rose 10.4 percent over the year-ago period to Rs 8,810 crore—lower than the Rs 9,060-crore estimate.
  • Operating profit rose 6.3 percent to Rs 1,377.3 crore.
  • Operating margin contracted to 15.6 percent from 16.2 percent.

The contraction in profit margin comes amid investor worries that Bajaj Auto Ltd.’s push to gain a bigger share of the low-cost market will increase competition and hurt industry margins. Entry-level motorcyles are key for Hero MotoCorp—its market share in the segment increased to 60 percent on better demand in rural areas. As Bajaj Auto steps up its challenge, Hero MotoCorp plans to strengthen its higher-end portfolio.

“We are geared up to ride the positive momentum with new premium motorcycles and scooters, lined up for launch in the coming months,” Pawan Munjal, chief executive officer and managing director at Hero Group, said in a statement.

The two-wheeler maker plans to launch the Hero Xtreme 200R to compete with the Bajaj Auto’s Pulsar range of bikes. It’s also expected to launch the Hero XF3R, its most powerful bike yet, to take on Bajaj Auto’s flagship Dominar.

Also read: Bajaj Auto’s Low-Cost Motorcycle Push Leaves Investors Anxious

But commodity prices will remain a concern, along with rising competition, for Indian motorcycle maker, analysts at Jefferies India and Deutsche Bank warned

“The industry has been adversely impacted by the volatility in commodity prices driven by global trends,” Munjal agreed. “Despite these challenges, the industry will maintain the growth momentum in the remaining fiscal, with consumption expected to remain high due to normal monsoon and the upcoming festive season,” he said.

Tax incentives for the company’s Haridwar factory ended, which impacted profit, the management said in a conference call. But the benefits at its Halol, Gujarat plant will partly offset that, it said.

Other Highlights

  • The company’s quarterly sales grew 13.6 percent year-on-year to 21.06 lakh units, its best ever in a three-month period.
  • It plans to invest another Rs 130 crore in electric scooter startup Ather Energy by August-end.
  • Hero FinCorp financed 13 percent of Hero’s total sales in the quarter.

Shares of Hero MotoCorp were trading 0.8 percent higher on Thursday, tracking the Nifty Auto Index as of 12:45 p.m.