Despite the sale of commuter segment bikes such as Dawn, Deluxe, Splendor and Passion faltering in recent times, Hero MotoCorp has once again put up a strong show in the second quarter. The segment, which brings in about 70 per cent of the total volumes for the company, witnessed a 4 per cent drop in volumes year-on-year. However, double-digit volume growth in other segments, such as scooters, deluxe and premium bikes, helped net sales move up 10.4 per cent over the September 2012 quarter, to Rs 5,726 crore.
While the company did not make any price increases during the quarter, the superior product mix, along with a reduction in raw material costs (from 74 per cent of sales to 71 per cent) helped margins expand. Operating margins for the September 2013 quarter stood at 14.5 per cent (13.5 per cent). Considering the favourable operating parameters, profit growth should have been healthier than the 9.3 per cent posted. But a doubling of tax expenses, thanks to the weaning away of tax benefits for the Haridwar plant, has played spoilsport.
Outlook
The company has been able to maintain stable margins of 14.5 per cent in the first half of the year. But increased prices of inputs such as steel, copper and rubber are expected to be passed on with a lag, which may pressurise the margins in the next two quarters. This could be mitigated to a certain extent by the Rs 500-Rs 1,500 price increase taken by the company in the first week of October.
With festival season sales so far going strong, a turnaround in demand for entry-level bikes will be just what the doctor ordered. More so, because good monsoons indicate a traction in rural sales, which is the key customer segment for these bikes.