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Feb 18, 2013, 10.08 AM IST | Source: CNBC-TV18

Why analysts are cheering Hero Moto's IPL exit

Two years after severing ties with its erstwhile Japanese partner Honda, the company has not only lost market share in the motorcycle segment this fiscal but is seeing pressure on profitability. Also, the wage negotiation talks with its workers at Gurgaon have so far failed to yield results.

It has not been an easy ride for Hero Motocorp . Two years after severing ties with its erstwhile Japanese partner Honda, the company has not only lost market share in the motorcycle segment this fiscal but is seeing pressure on profitability. Also, the wage negotiation talks with its workers at Gurgaon have so far failed to yield results.

This is the moment of reckoning for Hero Motocorp, which would even test the astuteness of the Munjals who have assiduously built the country's largest two-wheeler company over 25 years.

Sensing the enormity of the challenges the markets have punished the stock that has declined 11% since the start of the calendar year. Analysts say that Hero Motocorp’s first task ought to be to improve EBITDA margins that declined to 12.5% in the third quarter of this fiscal as compared to 15.6% a year ago.

As a first step in that direction Hero Motocorp has pulled out of the IPL. The two-wheeler major will no longer be the associate sponsor and will also cease to be the team sponsor for Mumbai Indians.

The decision has been given thumbs up by brokerage houses who say it will improve the profitability as Hero Motocorp stands to save up to Rs 50 crore a year. They however caution against the short-term challenges that the company is likely to face.

The move to pull out of the IPL could not have come at a better time. In the third quarter while the company's net profits declined 20% Hero Motocorp's costs under the head other expenses a chunk of which goes into marketing  and advertising expenses jumped over 25% to Rs 625 crore as against Rs 498 crore in the corresponding period last month.

The company says that in the second half of the year its marketing spend could be more than 2% of its net sales.

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