Hero Motocorp’s Q2 results fine but festival sales critical to stock fortunes

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Two-wheelers have been chugging along in the second quarter with results showing that festival season pre-stocking has helped. However, post the good pent-up demand any moderation in sales could impact revenue growth. So, it’s no surprise that the Hero Motocorp stock has been flat in early trade on Thursday despite its notable Q2 numbers.

HMC delivered expected revenue growth of 24% year-on-year (y-o-y), which the Street was anyway expecting. The revenue growth has been on the back of a strong pick up in sales volumes, which grew about 7.3% y-o-y. In addition, realisations per unit have also been pretty much high showing a growth of about 15% y-o-y. But that’s largely driven by the price hike in BS-VI vehicles which also means that costs have gone up. Besides, realisations dipped sequentially by about 2.1% showing that consumers may be downsizing marginally.

The net impact of this has been seen in gross margins, which contracted about 340 basis points y-o-y. Commodity prices have also started to inch up. Analysts are attributing the fall in margins to the lack of BS-VI costs being passed on to consumers.

Little surprise, operating margins fell a tad short of the analysts’ expectations. While Ebitda margins came in at 13.7% in Q2, it still showed a dip of about 80 basis points y-o-y. This is despite the fact that volumes were well high by about 7% over the year-ago quarter. Some of the cost-saving measures were visible and supported margins, though. Ebitda is earnings before interest tax depreciation and amortization.

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Of course, the coming festival season sales and beyond is essential for the revenue growth to sustain. “Hero has outperformed other OEM in the past 5 months due to better supply management and large rural franchisee, however, 2W sales have started seen moderation due to drying up of pent up demand leads to inventory built up in the system which may impact dispatches in the subsequent months,” said analysts at Dolat Capital Markets in a client note immediately after the results. The management commentary has said that based on early estimates the momentum is expected to continue in the festival season, which is good.

Still, the recent jump in the stock price could face some headwinds. The stock is trading about 17% over its pre-covid levels which is quite sharp and already reflects the bump-up in post-covid lockdown sales. It had also risen about 34% over its pre-covid high, but has been trending lower. Nevertheless, the valuations at about 19 times FY21 earnings may be just about fair. The second half volume growth has to persist at about these levels at least, though.

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