A steep drop in sales led to adverse impacts on HeroMotoCorp Ltd in the June quarter. But the company still sustained with a report of an operating profit of Rs 108 crore. Profit after tax stood at Rs 61 crore.
Hero MoroCorp addressed the scenario in a statement, “Delivering a positive bottom line, despite only 25% capacity utilization, reflects the resilience of the portfolio and ability to optimize costs and improve productivity.” The Friday morning trade saw the stock down 1%.
Operating profit margin dived to 3.6% from 14.4% in the year-ago quarter as a steep fall in sales volumes adversely impacted operating leverage. Because of the closure of manufacturing plants the company was unable to fully recover fixed costs. Aside from the fixed cost for the lockdown period, the operating profit margin for the quarter would have been 12%, points out Hero MotoCorp.
Earlier quarters witnessed improvements in realizations per vehicle, reflecting the benefits of BS-VI emission transition-led price hikes. Revenue for the quarter dropped 63% tracking the 69% fall in sales volumes.
Motilal Oswal Financial Services Ltd said in a note, “Gross margin declined ~90 basis points year-on-year to ~29.5% (versus the estimate of ~31.5%), impacted by lack of loading of contribution margins on BS6 cost pass-on.” Gross margins when combined with the fall in operating profit margins, see the operating earnings slump 91% from the year-ago quarter to Rs 108 crore.
After the resumption of operations post initial COVID-19 restrictions, the stock recovered, 10 higher than highs in January.
The stock benefitted with faster recovery in two-wheeler sales, the involvement of Hero MotoCorp in the economy and semi-urban, rural areas.
“We are already seeing green shoots, and expect them to sustain and get stronger as we move towards the festive season. Our July month sales were more than 95% of pre-covid sales and we do see the positive trend moving forward,” Niranjan Gupta, chief financial officer, Hero MotoCorp said in a statement. July sales were 14% up and 4% down from the year-ago month.
Sustainability remains doubtful with recoveries aided by pent-up demand, local lockdowns and reduced customer incomes.
“India’s 2W registrations, after recovering over May-to-mid-July, have come off in the last three weeks and were down 41% YoY last week (week-ending 8-August),” analysts at Jefferies said in a 10 August note.