Hero Motocorp: Q1FY19 Higher volumes & subdued profit

Hero Motocorp Ltd.’s Q1FY19 net sales grew 10.4% YoY to ₹8809.8 crores v/s  ₹7979.7 crores and EBITDA grew 6.3% YoY to ₹1377.3 crores. EBIDTA margin declined by 60 bps YoY to 15.6%. PAT for the company de-grew by 0.4% YoY to ₹909.2 crores. PAT margin declined by 110 bps YoY to 10.3%. For Q1FY19, the company sold 21,06,629 units of 2-wheelers which was 13.6% higher YoY.

Hero Result

What’s good about the company?

  • The company is focussing on entering the high margin 125cc scooter segment which is growing at a rapid pace. Extreme 200R (ABS compliant) and 125cc scooter will be launched during this Diwali season.
  • The rural demand growth is outpacing the urban demand growth by ~2-3%. This is good for the company as it commands a 44% and 13% market share in the Indian motorcycle and scooter sub-segment respectively.
  • The company is diversifying its portfolio and venturing into e-scooters with 130 crores invested in Ather Energy Pvt. Ltd.

Challenges faced by the company

  • The company is witnessing a continuous increase in raw material prices due to the higher commodity prices. The realisations have gone up and the company is looking to take a realisation hike in September.
  • In West Bengal, the driving license has been made mandatory for the buyer to purchase vehicles.
  • The company is facing losses in Columbia as the operations are still ramping up. The management is optimistic that once the operations scale up, along with Bangladesh, Columbia will also turn profitable.

How does it fare against peers?

Hero ROCE

Hero Motocorp Ltd (CMP: Rs 3,126, M.cap: Rs 62,340 crores) is trading at a PEG ratio of 1.3 over the period FY18-20 and the highest ROCE amongst peers of 37.4%.

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