Analysts predict hard times ahead for Hero MotoCorp as its market declines

Friday 04 May 2012, 21:25 PM by

The shares of country’s largest two-wheeler maker, Hero MotoCorp went down by 6% on 3rd May, 2012. It was a day of disappointment for the auto manufacturer as the fourth quarter results were really not expected. The slow ramp up in the field of R&D and increasing competition with its arc rival and previous partner, Honda, is also a cause of major concern for the organisation.

Sales of two-wheeler soared up 14% in the financial year 2012 from the previous year to around 13 million units. As per the Society of Indian Automobile Manufacturers, this figure is likely to increase 11-13% in the next fiscal year.

In the last fiscal year, the company was able to sell 6.24 million two-wheelers, an annual growth of 15.4%. In the present fiscal, Hero MotoCorp aims for 6.8 million unit sales and hopes for the growth of industry by 9-10%. In the month of April 2012, the company sold a record units of 5, 51,557, which is maximum for any month. However, the company is worried regarding the fact that whether it will be able to uphold the same result in future as it is getting into 100 cc motorcycle.

In 2010, Hero ended its partnership with Japan's Honda and 2011-12 was the first financial year of the organisation alone. After parting its way, Honda has become quite active and is planning to bring out its 110 cc motorcycle Dream Yuga very soon. Honda Motorcycle and Scooter India is now Honda’s wholly owned unit. The new vehicle from Honda will compete against Hero's popular and largest selling two-wheeler, Splendor.

In spite of all this, in FY2012, Hero's R&D expenditure to net sales was 0.3%. The Kotak Institutional Equities says that an increase in R&D remains slow. The brokerage said, "We believe in-house R&D is critical for Hero to make swift changes to its product portfolio as Honda plans to target the executive segment with a number of 100 cc products over the next few years."

Hero MotoCorp registered a net profit of Rs. 604 crore in the fourth quarter on 2nd May, an annual increase by 20%. The total turnover of the organisation increased12% as compared to last year, which was registered Rs. 6,035 crore in January-March.

According to a CNBC-TV18 survey, the market analysts were expecting a turnover of Rs. 616 crore on Rs. 5,985 crore revenue. In FY2012, 35% production of the company took place from its Haridwar plant and in this financial year it is likely to increase by 40%. Till the month of March next year, there is a 100% tax excuse from the production of this plant. However, from the economic year 2014 on, Hero MotoCorp will enjoy only 30% tax benefit. This will ultimately increase the pressure on earnings because from this fiscal year, tax will soar to 22% from 16%.

Analysts at Citigroup regarding this said that growing aggressive pressures are obvious. This will ultimately develop a difficult situation for the company to take prices of its stock at favourable stance from the current level. In the domestic motorcycle industry, Hero’s market share was 30 bps higher year-on-year. The market share of the two-wheeler industry has gone down 150 bps, on the whole from last year yield.

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