Although Hero MotoCorp saw a recovery in its numbers from September 2021, its earnings are on a downtrend. Its Q1FY23 net profit rose 71% YoY to Rs 624.5 crore but fell marginally (0.4%) QoQ. The profit is down since December 2021 but this hasn’t dampened the enthusiasm of the management. Despite headwinds, cost inflation, and supply-chain issues, the company has announced a positive outlook on its growth and plans.

Niranjan Gupta, the Chief Financial Officer of Hero MotoCorp believes that inflation and interest rate hikes from the Reserve of India and around the world have affected the demand and supply dynamics of the auto industry. But he is hopeful that the company will pick up growth once the interest rate hike cycle stabilizes. He notes, 'The global economy as we all know, is facing headwinds of inflation, and compulsion among central banks to raise interest rates to tame this, which has an impact on growth. We do expect however, that the rate increase cycle will stabilize in a quarter or so.'

Hero and its competitors lag in building inventory

With the economy going back to pre-pandemic levels over the last two quarters, auto demand has picked up pace. However, the trend in monthly wholesales is very erratic. Demand picked up in March, May and June, but fell in July.

The management does acknowledge the slowdown in building inventory levels. However, they say that this is a temporary phase and they are now planning their inventory to meet upcoming festive season demand.

The semiconductor shortage affected production and wholesales, not just for Hero MotoCorp but also for other big players like Bajaj Auto and TVS Motor. In TVS Motor’s earnings call the management said that although material costs have hit production, their philosophy of inventory is the same - it is maintaining an inventory of 25-30 days so that there is no loss in retail sales and the customer is always presented with a fresh vehicle.

Bajaj Auto also shows signs of stress and the management expects to build inventory levels better in Q2FY23 compared to Q1. The company’s domestic market was hit by a severe chip shortage in May 2022 which reflects in its wholesales number, as total wholesales dipped in May.

Although Hero MotoCorp faced issues in production, maintaining inventory at the dealer level, and inflation, its retail sales are better in Q1FY23 compared to Q4FY22.

This reflects in the company’s revenue growth as well. Revenue increased because of price hikes taken by the company in April. However, the effect of high input costs because of a surge in metal prices shows as Hero’s operating profit margin is around 11% in Q1FY23.

The management expects that the commodity inflation basket ‘cooling off’ will take at least a quarter to manifest and show up in the margins. Niranjan says, ‘We feel that overall prices of the commodity basket seem to have peaked and moving forward we will stabilize, or maybe even see prices coming down, depending on when all the rate increase cycles have an impact.’ The management’s target is to touch the 14% operating margin mark.

Demand to revive in rural markets while exports take a backseat for now

Despite the headwinds, Hero MotoCorp’s management remains pragmatic on the demand from rural markets. In the call, the management says that they are seeing green shoots in the rural economy as unemployment has gone down. Despite slightly deficient rainfall, the company sees consumption demand increase in rural areas, indicating that the rural economy is in a revival mode.

The Chief Growth Officer, Ranjivjit Singh says that customer confidence is at its highest now since the pandemic. The logic for expecting an increase in demand from rural markets is that, although some areas have received deficient rainfall many others had a surplus. And with the increase in spending, the company is a step ahead in planning inventory ahead of the festive season. He notes, ‘It is very clear that it is looking like double-digit growth for us.’ Other players also remain optimistic about increasing rural demand. TVS Motor’s management expects a normal monsoon to improve demand from the rural sector.

Although domestic demand is showing signs of revival, the international markets are yet to concede to that trend. Although Hero is not the leader in exports compared to its peers, the lag in demand from international markets reflects in the 2W export numbers.

Hero MotoCorp’s major market for exports are emerging economies like Bangladesh, Nepal, and Sri Lanka. Currently, these markets are battling inflation and currency fluctuations and are focused on reviving consumption within their economies post-Covid. Hero expects the export market to get better only by H2FY22. Even TVS Motor’s management says that they remain cautious with their international market approach.

Hero hopes for steady growth for the rest of the year 

Being the market leader can be a perk for Hero MotoCorp because even if it stumbles, the industry sees it as potentially bouncing back easily compared to its competitors. This reflects in the multiple ‘Buy’ calls from brokerages who recommend the stock even though it missed its estimates. Trendlyne’s Forecaster shows that it missed its net profit estimates by 21%, but 19 analysts recommend a ‘Strong Buy’ for the stock. This is slightly down from 22 analysts who recommended ‘Buy’ on the stock in July before Hero announced results.

Brokerages like Axis Securities, Dolat Capital, and Reliance Securities recommend a ‘Buy’ on the stock as they expect two-wheeler demand to revive not just in urban and semi-urban areas, but also rural markets. The company also sees exports picking up pace by the second half of FY23.

With new launches in the premium motorcycle segment and the electric vehicle (EV) segment, growth prospects look better for the company. Although the management is not saying anything specifically about its EV launch, it indicated that this would happen around this festive season.

In all, the management expects global and domestic headwinds to moderate from Q2FY23. Price hikes taken in April and July are likely to show better effects in Q2. However, crude oil price fluctuations could dampen margin growth. Niranjan says, ‘Crude continues to stay high. You may see a bit of softening here from. That can be a joker in the pack.’ A continuing fall in crude prices would be very good news, for both Hero Motocorp and the auto sector overall.