Weak demand, intense competition may dent Hero MotoCorp's margins

A muted wedding season, coupled with increasing competitive intensity and market share loss, is expected to weigh on Hero MotoCorp’s sales and margins. India’s largest two-wheeler maker is expected to report a 13 per cent year-on-year fall in volumes this month, the highest decline as compared to peers. Bajaj Auto and TVS Motor are expected to register sales growth of three to 15 per cent. 

After weak sales in the December quarter and in January, retail sales (barring South India) continues to fall, by 8 to 10 per cent, believes Motilal Oswal Securities. The two-wheeler segment has the highest inventory or stock levels across all automobile segments, at 40-45 days. This is against 15-20 days of inventory in passenger cars and commercial vehicles. 

One reason for the weak sales trend has been a lacklustre wedding season, a key demand driver in the March quarter. While sector sales at the retail level were down on account of high insurance costs and credit-related issues, Hero indicated that consumer sentiment had improved towards the end of January and was expecting a pick-up in sales this quarter. 

Hero is focusing on premium two-wheelers, with new launches. However, improving volumes and market share could be difficult given competitive intensity on both pricing and customer incentives.  

Bajaj Auto had announced a scheme in October 2018 that included a 5-year free own-damage insurance cover, helping it gain market share at the expense of margins. Hero announced a similar scheme to clear dealer inventory on all models, except the HF Deluxe, in February. The saving for the consumer is expected to be Rs 1,500 to Rs 6,000, across models. 

With Hero replicating Bajaj’s strategy, margins of the two-wheeler sector could be impacted over the next few years. While Bajaj Auto’s gross profit fell by Rs 263 a motorcycle on a sequential basis in the December quarter, this was cushioned to an extent by strong margin in the export segment. Analysts at Kotak Institutional Equities believe Hero’s gross profit per vehicle will be impacted more than Bajaj’s; they expect an impact of Rs 575 per bike this quarter as compared to December. In addition to the immediate impact due to higher competitive intensity, the sector is also expected to be impacted by the regulatory changes on safety and emission norms.

Two-wheeler sales, which had been pegged back by higher prices, could see more hikes as companies start integrating anti-lock braking systems, combined braking systems and BS-VI norms over the next year. Given the regulatory and industry headwinds, Hero could see its margins fall by 300 basis points over the next couple of years, from 16.4 per cent in 2017-18.  

Given the muted volumes, margin pressures and earnings cuts, the stock (down 20 per cent from its December high) could continue to see some pressure in the near term.

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