Hero Moto shares plunge on disappointing Q3 earnings

Moneycontrol Bureau

Hero MotoCorp shares tumbled 5 percent in opening trade on Friday after investors gave a thumbs down to its disappointing results for the Oct-Dec quarter.

The India's largest two-wheeler maker's revenue was in-line with street estimates. However, profits missed expectations by a wide margin due to high costs and increased advertising spends to boost sluggish demand for bikes and scooters.

EBITDA margins also plunged to 12.59 percent from 15.6 percent. In comparision, rival Bajaj Auto reported a margin of 20.1 percent for the third quarter.

"We expect margins to remain under pressure over the near to medium term given competitive pressure, cost related to scale up in exports and brand building initiatives," said Arun Agarwal of Kotak Securities - Private Client Research.

He maintained a "reduce" rating on the stock and cut FY13 and FY14 earnings estimates by 8 percent and 3 percent respectively. 

Two wheeler sales have hit the slow lane for the last several months. Hero Moto sold  15.73 lakh units in the third quarter, up 18 percent sequentially, mainly due to the festive season and new launches like Maestro scooter and Ignitor motorcycle. However, the growth was flat year-on-year. And while the company hopes to end FY13 marginally higher than last year, overall the growth is expected to remain sluggish.

For FY2013, Hero is only expecting the two-wheeler industry volumes to grow 4-5 percent. Volumes should be better in FY2014 compared with FY2013, but the growth will still be in single digits, it feels.

That means, Hero's ad spends will continue to remain high. Speaking in a conference call on Thursday evening, company officials said that their ad spends, which were below 2 percent of total sales, would remain over 2 percent in the second half of the current fiscal.

At 9:30 hrs, Hero Moto shares were down 4.9 percent at Rs 1,729 on NSE.