Hero Honda Q1 Net Below Forecast, Shares Sag

By Rina Chandran Posted 11 July 2006 @ 09:03 pm EET     Print     Reprint     E-Mail     Comments

MUMBAI (Reuters) - India's top motorcycle maker, Hero Honda Motors Ltd., posted a lower-than-expected 16 percent rise in quarterly profit on Tuesday and said higher raw material costs were eating into profits, sending its shares down more than 6 percent.

The company, which has about 40 percent of India's market of 6 million motor bikes a year, said it would raise prices of motorcycles by the end of this month for the first time in five years despite stiff competition from rivals Bajaj Auto Ltd. and TVS Motor Co. Ltd.

"We don't see any softening of prices of metals and other raw materials," Managing Director Pawan Munjal told a television news channel.

"We are considering some price increases to manage the raw material prices," he said.

He reiterated that pressure on margins are expected to continue for the remainder of the year.

The company said its net profit rose to 2.38 billion rupees in the fiscal first quarter to end-June from 2.05 billion a year earlier. Revenue rose 20 percent to 23.64 billion rupees.

The result lagged a median forecast for 2.54 billion rupees on revenue of 24.10 billion in a Reuters poll of 12 analysts.

"The numbers are disappointing on the operating front, and margins seem to have taken a big hit," said Amit Kasat at Motilal Oswal Securities.

"The second quarter is usually sluggish for vehicles because of the monsoon, and the concern is that they may not be able to manage margins, especially with the growing competition and the aggressive product launch plans," he said.

Hero Honda said its operating margins, a key measure of profitability, fell to 13.5 percent from 14.8 percent in the same period a year earlier.

New Delhi-based Hero Honda, in which India's Munjal family and Japan's Honda Motor Co. each own 26 percent, sold 832,692 units in April-June, up 21 percent from a year earlier.

Workers at Hero Honda's plant in Gurgaon near New Delhi organised a strike for five days in April, halting production.

Its full-year profit is forecast to rise 14 percent to 11.10 billion rupees, according to Reuters Estimates.

Its shares fell 6.06 percent at 720.45 rupees in a weak Mumbai market, after falling as low as 713.30.

They had dropped 11 percent in the past quarter, mirroring the loss of the main BSE index. The BSE auto index fell about 6 percent during the period.

Hero Honda, known for its sturdy, fuel-efficient bikes, has said that profit margins were hurt by higher costs of raw materials like steel, aluminium and rubber, but it expects double-digit volume growth in the year to March 2007.

Hero Honda's best-selling bikes such as Splendor and Glamour have come under increasing pressure from smaller rivals Bajaj Auto, Honda's fully owned unit, TVS Motor, Suzuki Motor Corp and Yamaha Motor Co.

Number-two Bajaj is expected to post a 50 percent rise in net profit on Saturday.

Hero Honda, which last month launched the country's first bike to feature a fuel-injection engine, is investing 3.2 billion rupees in a third plant to increase capacity from 3.9 million units a year, and will consider a fourth plant if necessary.