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Corporate Jul 20, 2011

Earnings preview: Testing time for Hero Honda

By Sanjit Oberai

Hero Honda will be announcing its June 2011 quarter results on Thursday. The company is expected to post sales growth of 31-33 percent and net profit growth of 10-11 percent over the same period a year ago, according to analyst estimates.

The price increase of Rs500-Rs1,000 undertaken by the company in the beginning of March 2011 should lead to a 7 percent increase in realisations for the June 2011 quarter year-on-year, said Motilal Oswal. Towards the end of June 2011, prices were further hiked by another Rs 500-600; however, the hike would be reflected mainly in the next quarter.

Now could be a testing time for Hero Honda as it needs to address challenges related to new product development, brand transition and developing export market Photo by N.J/ Flickr

While total volume growth for the quarter rose by 23.9 percent to 1.53 million units, domestic volumes grew by 23.6 percent to 1.49 million units owing to a 22.9 percent and 34 percent growth in the motor cycle and scooters segment, respectively. Hero Honda's product mix is largely skewed towards its two best selling bikes, Splendour and Passion, which account for almost 60 percent of the company's total sales.

However, company's operating margins are expected to contract by 205 basis points to 12 percent due to a sharp increase in its other expense and the royalty payments to Honda, Japan. While promotional activity related to IPL and rebranding will lead to a rise in operating expenses, royalty payment of around Rs 2,400 crore payable to Honda, Japan would lead to a further contraction. This amount would be payable on a quarterly basis till June 2015 quarter. For a like-to-like comparison, the royalty payment has been treated as an operating expense, said PINC research.

All said and done, the company has so far managed to maintain its leadership position in the two wheeler segment. Now could be a testing time for Hero Honda as it needs to address challenges related to new product development, brand transition, developing export market and maintaining its market share, said Motilal Oswal.

by Sanjit Oberai

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