INDIA BUSINESS WORLD - JULY - AUGUST - 2007
The Month that was ...

HERO HONDA'S PROFIT DIPS 20% TO RS 1,898 CR

FIGHTING high interest rates, volatile raw material costs and fierce competition in the two-wheeler market, motorcycle market leader Hero Honda - the maker of Splendor and Passion motorcycles and Pleasure scooters - posted 20% dip in profit for the quarter ended June 30.

Net profit for the April-June quarter dropped to Rs 1,898 crore from Rs 2,377 crore in the same quarter last year. Net sales (minus excise duty) rose a marginal 3.5% to Rs 24,480 crore in the quarter. EBITDA margins fell to 10.8% from 13.5% in the year-ago period.

Battling slowdown in the two-wheeler market, Hero Honda reported a fourth consecutive dip in quarterly profit. It has already delayed the launch of its third factory at Haridwar in Uttarakhand by six months, and had cut production in June as demand slowed in the domestic market. Sales in the quarter fell 3.6% to 802,853 units.

To buck the slowdown in the two-wheeler market, the company launched two new variants of its popular Super Splendor and Passion Plus bikes in the mass-market 100cc and 125cc ranges.

Hero Honda VP (marketing and sales) Anil Dua said: "Despite the general slowdown, our decrease in sales (3.6%) was much less compared to the 11% dip in the industry. Through our multi-focus approach, we have been able buck industry pressure and sustain demand. While the current quarter is expected to show similar sentiments, the fundamentals of the economy remain robust and we are hopeful that closer to the festive season (October-November), the industry will be back on the growth path. We would also be launching some new products to meet the expected demand in the second half of the fiscal."

However, the prevailing sentiment in the two-wheeler industry is likely to continue and analysts remained sceptical over Hero Honda's performance in the second quarter too.

Religare Securities auto analyst Arvind Jain said: "Hero Honda's margins would remain under pressure as there are no signs of improvement in the market. Two-wheeler makers are forced to offer discounts to win buyers even as they pay more to buy steel, aluminium and other raw materials, which has impacted profits. Hero Honda would be under pressure for the entire year, until it starts operating its plant in the tax-free Haridwar area, which could lift profitability to some extent."

Another analyst said the Hero Honda results were 'expected' and the company would maintain a flat growth in the current quarter too. "Hero Honda's top line would improve only in the second half. The company would post lower profit margins in the current quarter too, and its financial position would ease only with demand picking up during the festive season," said Angel Broking auto analyst Vaishali Jajoo.

The second largest player in the two-wheeler segment, Bajaj Auto, had posted similar trends in its first quarter results. Its net profit was down by 15% at Rs 226 crore for the June quarter versus Rs 266 crore in the corresponding period. The company's total sales for the first quarter were down 4.2% at Rs 2,109 crore from Rs 2,203 crore last year. Bajaj Auto's volumes plunged 24% at 3.85 lakh units during the same period.

Motilal Oswal senior analyst Amit Kasat, who tracks the auto sector, said: "The new platform could spell a change for Bajaj Auto. It could shift the entire focus of motorcycles from the current volume-generating 100cc entry level to the higher powered 125cc deluxe segment. It would make competition very tough for Hero Honda and TVS Motors, who would have to continue product upgrades to meet the challenge and maintain demand for their products."

According to industry players, the next quarter is not expected to revive sales in the two-wheeler market and all the companies are likely to continue with the current negative sales charts.

The two-wheeler market shrank 9% to 1.74 crore units for the June quarter, while Chennai-based TVS Motors registered the sharpest fall of 16% at 2.93 lakh units in the same period.