India's largest two-wheeler maker Hero Motocorp missed street expectations for the quarter ended June due to higher depreciation costs and significant rise in other expenses.
In a discussion on CNBC-TV18, auto analyst Nishant Vass of ICICI Direct believes the major trigger for the stock now would be whether the margins that the company has guided for any improvement on the same can happen over the next two quarters.
As of now, Vass has a hold rating on the stock with a target price of Rs 2,400.
However, Mitul Shah, senior research analyst (Auto & Auto Ancillary), Karvy Stock Broking believes the numbers were inline with expectations with the only surprising element being the depreciation increasing to Rs 291 crore.
Below is verbatim transcript of the discussion:
Q: What would your reaction be to a 13.5 percent margin?
Shah: Nearly 14 percent margin and street estimate was also close to that and so, it is a bit of a disappointment on the margin front. It is more or less inline with the anticipation, the way TVS reported lower-than-expected margins, Bajaj Auto also reported slightly disappointing margins. So, inline with other two-wheeler makers this margin disappointment of around 50 basis points is more or less anticipated.
However, the profit coming roughly 15 percent below the estimate is more disappointing. We need to look at the EBITDA, which is probably due to depreciation or anything lower other income or due to tax rate any impact is there.
Q: The other expenses have gone up quite a bit and has come in at Rs 710 crore versus Rs 567 crore same time last year. The depreciation amount has also gone up to Rs 291 crore versus Rs 274 crore. So, what would your reaction be? Has the increase in other expenses put a bit of pressure on the margin performance this time around?
Shah: Other expenses are also more or less inline with the way volume has gone up. Volume has improved by 10 percent and company's realisation has also improved by 4-5 percent and so, net revenue has gone up by 15 percent.
The higher other expense is more or less inline with the way the company has been spending, the product launch expenses and promotional expenses have increased as compared to last year Q1. So, it is more or less inline with Q4 numbers and is not surprising. Surprising element would be like depreciation increasing to Rs 291 crore as against estimate of around Rs 280 crore. So, marginally expenses have increased on that front.
Q: How would you react to these numbers and what would your call be on the stock now?
Vass: The numbers are disappointing to a certain extent. We had a profit estimate of around Rs 580 but still it is lower than that. The key reasons for the same are higher depreciation costs and significant rise in other expenses. On a quarter on quarter basis, as a percentage of net sales, there is increase of nearly 70 basis points.
The major trigger for the stock would be whether the margins that the company has guided for any improvement on the same can happen over the next two quarters. We have a hold rating on the stock as of now. We have a target price of Rs 2400 and have our concerns over the fact whether the savings on the royalty front will come to the EBITDA and the profit level or whether there would be passed on in terms of marketing and additional ad spends.
Q: In some ways this additional ad spends was expected because of the various new launches that they have especially in FY15. What would you be factoring in? This time the other expenses are at Rs 710 crore. Do you think this is the kind of run rate that they would have to cloak-in in ad expenses going ahead as well?
Vass: We had factored an increase from the stated number to close to Rs 750-800 crore kind of broad number from the second half. However, since we are seeing that the rise is happening from Q1, there might be a further increase as new launches come through over the second half of the year. So, that is the key monitorable, what savings the management can flow through the bottom-line because a lot of earnings growth is based on the savings from the royalty.
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