Second Wave Could Make the Ride Bumpier for Hero Motocorp
Analysts see the firm’s tie-ups in the recent past such as with Harley-Davidson and Gogoro Inc. for electric vehicles (EVs) should be beneficial in the coming quarters.
Hero MotoCorp Ltd’s Q4 numbers do have some things to cheer about, no doubt. With sales realizations improving, the operating metrics exceeded the Street’s expectations. But this could not quite prop up the stock, which dipped 1.8% on Friday.
Challenges are plenty on the road ahead. With covid-19 roiling the markets, volume growth is likely to skid in the coming months.
Some of that slowdown is already visible in Q4 sales volumes, which dipped 15% sequentially to 1.56 million vehicles. On a year-on-year (y-o-y) basis though, volumes grew 17.5% because of a low base as the nationwide lockdown hit sales in Q4 last year.
Analysts point out that after two successive quarters of decent sales of more than 1.8 million vehicles in Q2 and Q3, dealer inventories have increased. This resulted in Q4 revenues dipping about 11% sequentially. One positive takeaway is that Hero managed to improve realizations considerably after several quarters.
“Fourth quarter volumes were down 15% quarter-on-quarter, but the average selling price improved 460 basis points sequentially. Gross profit per vehicle was commendably up 5% sequentially, despite commodity cost pressures,” said a Jefferies India client note.
Analysts see the firm’s tie-ups in the recent past such as with Harley-Davidson and Gogoro Inc. for electric vehicles (EVs) should be beneficial in the coming quarters.
“Hero’s longer-term strategy of global tie-ups for electric vehicles (Gogoro) and the premium segment (Harley) is encouraging. How long the current slowdown will last has to be monitored as the rural segment is now being impacted due to covid,” said Aditya Makharia, analyst, HDFC Securities.
But the ongoing second wave of the pandemic is a dampener. Investors will again be banking on the annual monsoon for two-wheeler demand to revive as May and June could see sales decline due to partial lockdowns in several states. April wholesales have declined by about 35% over March, which is a steep drop.
To top it, input costs are rising. Thus, it could become more difficult to manage costs. International steel prices have surged 27% year-to-date which could squeeze operating margins in the coming quarters.
Further, price increases may not be possible. “Price increases have to be calibrated as retail demand is weak, and might be required to be phased out,” said analysts at Dolat Capital Market in a client note.
After racing to an all-time high in February, backed by the strong recovery in the second half of FY21, the stock has hit potholes. It is down about 21% from its highs.
For now, the stock’s valuations are not too stiff at about 14 times FY23 earnings as per Bloomberg consensus estimates, but the pressure on the stock may be high till domestic recovery starts to revive after the second wave of covid-19.
Source: livemint
