In a flat market today, the Hero MotoCorp stock is trading almost 1 per cent up, thanks to better-than-expected third quarter results.
The company posted only about 2.6 per cent drop in net profit, despite the steep fall in sales volumes during the quarter and a rise in input prices.
Although the company had a reasonable volume growth of 3.6 per cent in the festival month of October (over October 2015), the cash crunch post demonetisation took the wind out of its sails.
With the motorcycle segment usually seeing more cash purchases than cars, volume growth for the company dropped by about 13 per cent and 34 per cent, respectively in November and December 2016, over the same period last year.
Thus the 12.8 per cent fall in overall volume growth during October-December 2016 quarter reflected in the drop in sales posted by the company in this period.
For the quarter ended December 2016, gross sales fell 11.8 per cent over the quarter ended December 2015.
What added pressure at the operating level, was also the rise in raw material costs. Raw material costs as a percentage of net sales stood at 69.2 per cent in this quarter, compared with 67.6 per cent for the three months ended December 2015.
This rise dented the operating margins, which came in at 15.9 per cent, about 140 basis points lower than the year-ago period.
A 46 per cent rise in other income and flat tax expenses during December 2015 quarter though gave net profit a boost. Despite the double-digit fall in both volumes and sales, the fall in bottomline was contained at 2.6 per cent at Rs 772 crore.
Outllook
While the cash crunch has continued to affect sales volumes in the month of January, the impact of demonetisation is expected to wean off in the coming months.
The RBI for one has announced the removal of restrictions on withdrawals from mid-March 2017. Secondly, with the company being the market leader in entry-level bikes and having a strong foothold in the rural areas, the many measures taken to push agricultural and rural growth in the Budget will have its trickle down effect on bike demand.