High costs, ad spends drag Hero Moto Q3 net down 20%

Nachiket Kelkar
Moneycontrol.com

Hero MotoCorp missed street expectations by a wide margin as high costs and increased advertising and promotional spends to boost sluggish growth dragged third quarter net profit down 20 percent year-on-year to Rs 488 crore. The India's largest two-wheeler maker's net sales for the Oct-Dec quarter were up 3 percent to Rs 6,151 crore. Analysts on an average were expecting net profit at Rs 608 crore on revenue of Rs 6,142 crore, according to a CNBC-TV18 poll. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin dropped drastically to 12.59 percent in Q3 from 15.6 percent in the year ago quarter. Analysts had expected margins at 14.8 percent. In the last quarter, the company's total expenses rose 6 percent year-on-year to Rs 5,692 crore, while other expenses, which include ad spends, jumped 25 percent to Rs 625 crore. Ravi Sud, the company's CFO said that the company's input costs had increased due to change in produce mix following new model launches and the company had also increased advertising spends, which hurt profits. The company expects its ad spends, which were below 2 percent of total sales will remain above 2 percent in the second half. The new launches like the Maestro scooter and Ignitor and Glamour motorcycle and festive season demand helped Hero's sales rise 18 percent quarter-on-quarter to 15.73 lakh units, although they were flat year-on-year.  Anil Dua, the company's marketing chief said that the company is growing faster than the overall market and gaining market share in the scooters and the 125cc motorcycle segment, driven by the new launches. Hero Moto is taking steps to ensure growth in the fourth quarter is better than the third quarter and it hopes to end the financial year with a marginal growth, versus a decline many analysts expect, Dua said. Overall for the industry, Hero Moto feels, the sluggish growth will continue into the first quarter of next financial year and then hopefully begin to recover. For FY2013, it 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. Hero will stick to its strategy of introducing 7-8 new products next financial year, which will include refreshes, new variants of existing models and some new launches, Dua said. On the exports front, the company "remains committed" to enter new markets this financial year and it is still sticking to its target to achieve 1 million unit sales in international business by 2016-17. Hero Moto recently began construction at its Rajasthan plant. That plant will be operational in the second half of FY14. It, however, is still in the land acquisition stage as far as the Gujarat plant is concerned. That plant should be ready sometime in FY15, company officials said. Post the completion of the Gujarat plant, Hero will have a production capacity of 8.4 million vehicles. Meanwhile, its tax rate is set to go up next fiscal as the tax benefits the company enjoyed at Haridwar plant expire this year. Elsewhere at its Gurgaon plant, Hero officials say that the wage negotiations are progressing peacefully. Accordng to several media reports in the past few days, the workers at the Gurgaon plant are unhappy with the wage hike that Hero has offered. A report on Thursday said that the workers had, in fact, given the management two-week notice for the wage settlement or they would go on a strike. Hero officials, however, maintain that the company has always followed a "pro-employee" policy and are hopefull that a amicable solution would be arrived at soon. Hero Moto shares closed down about 1 percent at Rs 1,818.70 on NSE. nachiket.kelkar@network18online.com