At a time when income levels are subsiding in rural areas, Hero MotoCorp faces an uphill task of maintaining healthy sales volume. For the quarter ended March, the two-wheeler manufacturer reported EBIDTA of Rs 1,211 crore on the back of strong revenue growth.
The upside to the Hero MotoCorp stock is challenged by an inclement economic condition in rural areas where incomes have fallen in the wake of lockdowns imposed because of the second Covid wave. Additionally, rising input costs also put pressure on the upward movement of the stock.
Pressure on sales
On a year-on-year basis, the operating margin of the company grew by 100 basis points to 13.9% in the quarter ending March 2021. One of the factors that pushed Hero MotoCorp’s profitability this quarter was the higher realisation per unit. The company was successfully able to pass on the higher input costs to the customers. On average, realisations moved up by 15.4% to Rs 55,386 on every bike. Additionally, increased sales volume on spare parts also lent extra support to the margins.
As per the company’s guidance, it expects commodity cost headwinds in FY22. However, the company is also hoping to tide over these concerns by employing tight cost controls and price increases. The company also made a mention of its cost-saving program named “Leap” which helped the company in saving over 300 basis points in the quarter ending March and 200 basis points in FY21.
In the company’s analyst call discussing its quarterly results, an official said that commodity inflation for FY22 is likely to be in the range of 6-7%, and half of the bumped up costs could be passed onto customers while the other half can be reduced via cost rationalisations.
Impact of the second wave
How the company stock fares in the coming week will be determined largely by the repercussions and imprint that the second wave has on rural consumption in India. Purchases in rural areas which were still healthy during the first lockdown have stalled during the second wave’s lockdown. Market experts expect a 10-15% sales volume growth in the domestic market in FY22. On the other hand, experts forecast a whopping 70-80% growth for the exports segment. As things stand, exports currently account for 3% of the cumulative sales volume.
Hero MotoCorp sales volume faces a threat from a decline in income of rural workers and semi-skilled labourers. Currently, the company commands a domineering 65% stake in the entry-level and executive-level motorcycle domain. As the lockdown continues to disrupt and wipe out rural earnings, the motorcycle manufacturing company can witness a significant impact on its total revenue.
The management of the company said that it remains committed to expanding its portfolio of scooters, premium bikes and exports and that it is also actively working on products in the electrification segment.
An accelerated vaccination plan can help arrest the widespread reach of the virus. Contrasted with the first lockdown when the virus has not reached many rural areas and could not dent the consumption sentiment there, it seems that this time around, it is in rural areas that Covid has been causing real damage. Consumption of not just discretionary products but also basic everyday FMCG goods has also suffered.