Moped - Hero Honda slips on costs

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GMI

5 MN BIKES-A-YR-MKT

Hero Honda slips on costs

REUTERS

Mumbai, July 19: India's top motorcycle maker, Hero Honda Motors Ltd., posted a weaker-than-expected 7 per cent rise in quarterly profit as high raw material costs weighed on robust sales in the world's number-two bike market.

Analysts warned that margins would remain under pressure in the coming quarters due to growing competition in the market of nearly 5 million bikes a year, second in size to China's.

Hero Honda, known for its sturdy, fuel-efficient Splendor bikes, has driven a motorcycle boom in the $4 billion Indian bike market, fuelled by cheap loans, rising incomes, new models and a shift in consumer preference to motorbikes from scooters.

But rivals are launching new models at comparable prices to dent Hero Honda's share, which fell to 49 per cent in the quarter.

Firms have been hit by higher prices for steel, rubber and plastics, while more money goes on advertising and discounts in a cutthroat market. Most manufacturers, including Hero Honda, increased prices by 1-3 per cent from April as steel prices rose.

Hero Honda, in which India's Munjal family -- owners of the world's biggest bicycle company -- and Japan's Honda Motor Co. each hold 26 per cent, said net profit rose to 2.04 billion rupees ($47 million) in the first quarter to the end of June from 1.9 billion a year earlier.

The result lagged a consensus forecast for 2.1 billion rupees in a Reuters poll of 11 analysts.

Net sales rose nearly 15 per cent to 19.77 billion rupees, compared with a forecast 14 per cent increase.

But operating margin, a key gauge of efficiency, fell to 14.8 percent from 16.6 percent a year ago as raw material costs rose 17 percent to 1.41 billion rupees.

"Margins will continue to remain under pressure on raw material costs and increasing competition, which will prevent price increases, so the company will need to focus on growing volumes and cutting costs," said Dipen Sanghvi at Pranav Securities.

Shares in Hero Honda, valued at $2.8 billion, rose 4.2 perent to 654.35 rupees in a market that hit a new high. The stock rose 5 per cent last quarter, or half the gain of the sector index and a 10.8 per cent rise on the main Bombay index.

COMPETITION THREAT

Bike makers are betting on continued growth as more than half of India's billion-plus population is below the age of 25.

Manufacturers should also benefit as steel prices soften, and higher car prices, on the back of new anti-pollution rules, may deter some bike riders from switching to cars.

"We've only seen a marginal reduction in steel prices. Only if we see prices consistently go down, will it make a difference," Managing Director Pawan Munjal told a TV channel.

Hero Honda launched the premium Glamour 125cc bike in southern India, and will take it to other markets this quarter. Its third plant will begin operations by the end of next year, Munjal said.

Hero Honda's sales rose 13 per cent in April-June to 687,567 bikes, falling well short of industry growth of 21 per cent and rival Bajaj Auto's 35 per cent surge.

Bajaj bikes have done well at the low and premium ends, chipping away at Hero Honda's dominance. It reported on Saturday a 28 per cent rise in net profit, below forecasts for 31 per cent.

Hero Honda faces new rivals in Honda Motor's wholly owned Indian unit, which aims to launch more bikes, and Suzuki Motor Corp., which will launch its first motorcycles and scooters later this year.

"We will still see a great volume growth story, but margins and profitability will continue to be under pressure as players will not be able to raise prices and they will also have to be prepared to surrender some market share," Sanghvi said.