Hero MotoCorp Q1 profit may fall over 15% amid subdued volume; sequential growth seen on all counts

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India's largest two-wheeler maker Hero MotoCorp is expected to report subdued earnings performance year-on-year in June quarter (Q1) due to decline in volumes, but brokerages see sequential growth in single-digit on all parameters.

Most brokerages feel the profit could decline more than 15 percent YoY and revenue degrowth could be in the range of 6-8 percent compared to the year-ago period. This is mainly due to a slowdown in the auto industry as it grapples with issues such as liquidity crisis, regulatory and policy changes among others.

"Highly subdued volume performance coupled with product-mix would impact its revenues, while competitive pricing pressure and limited pricing power would impact its operating margin and profitability on YoY basis," said Reliance Securities which expects profit to fall by 16.7 percent and revenue by 7.3 percent YoY.

Narnolia also expects a 17 percent decline in profit. According to the brokerage, revenue is expected to decline 6 percent YoY due to the contraction in volumes, but realisation may grow by 7 percent YoY because of price hikes related to ABS-CBS norms and improvement in product mix.

The company's volumes declined by 12.4 percent YoY to 18 lakh units, but sequentially volumes grew by 3.5 percent.

Earlier the management also said, "the company expects its first half of FY20 to remain flattish due to the correction of inventories while the second half of FY20 is expected to grow by 5-7 percent due to improving liquidity issues, good monsoon, Kharif output, festive seasons and pre-buying ahead of BS-VI implementation."

At operating level, most brokerages expect 15-20 percent fall in earnings before interest, tax, depreciation and amortisation (EBITDA) and triple-digit contraction in margin YoY, but there could be growth on sequential basis.

Among brokerages, Motilal Oswal expects the maximum decline in EBITDA at 21.6 percent YoY and margin contraction of 230bps YoY while Prabhudas Lilladher expects operating margin to contract 140bps YoY but,

with better product mix, rise 60bps QoQ.

Hero's capex guidance for FY20 is Rs 1,500 crore which will include investments in Andhra plant and addition of BS-VI manufacturing lines.

Key issues to look out for include an update on demand trend in rural and urban markets, level of inventory in the system, new product launches and the timelines, and outlook on exports.

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