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Hero MotoCorp’s Q2 gets a boost from better Realisations: Exports pick up. Watch this counter:EV firms to do well:

The price hikes undertaken by Hero MotoCorp meant that per-unit realizations at ₹58,760 were up about 14% year-on-year, as per analysts’ calculations.

Weak demand and rising commodity costs continue to hurt the performance of two-wheeler manufacturers. Hero MotoCorp was no exception. Muted demand continued to spoil the show in the September quarter, despite the company managing the rise in commodity costs well.

Some price hikes undertaken by Hero MotoCorp led to better realizations. The company was also proactive and had strong cost controls in place. These factors boosted Street sentiment, lifting the stock more than 3% in early trades on Monday.

However, weak volumes meant overall performance was tepid.

The company sold 14.38 lakh units of motorcycles and scooters during Q2 FY22. While the sales volumes grew 40.4% sequentially, it should be noted that the company had felt the heat of the pandemic-led lockdowns in the first quarter. On a year-on-year basis, vehicle sales slumped 20.7%.

While overall demand dynamics remained weak, erratic monsoon season also hit rural income, further delaying demand recovery.

Price hikes undertaken by the company, however, meant that per-unit realizations at ₹58,760 were up about 14% year-on-year, as per analysts’ calculations. Better realisations supported and net revenue from operations at ₹8,453 crore, declined 9.8% year-on-year despite a steep fall in volumes. Sequentially, revenues were surged 54.1% year-on-year.

With rising prices of key commodities such as steel, and aluminium among others, the company saw raw material cost percent to sales rise to 72.3% from 71.1% in the year-ago quarter. Better realisations helped and cost controls also remained strong. However, with weak volumes, Ebitda declined about 17% year-on-year.

Moving forward, as the ongoing festival and wedding seasons help, all eyes will be on structural demand recovery. Analysts said, “We expect a gradual recovery in domestic volumes, supported by improving macros, and opening of educational institutions/hospitality sector”. They are building in a 12% volume CAGR (compound annual growth rate) in the domestic market over FY22-24.” In addition, they expect exports to see a 15% CAGR, owing to improved penetration in Africa and Latin America regions.

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Meanwhile, progress in electric vehicles (EVs) remained another key area of interest for investors. The company said it is committed to bringing sustainable mobility solutions to its customers and is accelerating its focus on producing electric vehicles as an integral part of its product portfolio. The company’s EV project is in its advanced stages and the product will be manufactured at its plant in Andhra Pradesh’s Chittoor.

Analysts at Emkay Global Financial Services said Hero MotoCorp has a low vulnerability to EVs as it gets just 8% of volumes from scooters. The core 100cc motorcycle business is less prone to EV disruption and the company is a good proxy on the rural market recovery, with a stronghold in the 100cc motorcycle segment. “They are building in a 12% volume CAGR in the domestic market over FY22-24, while they expect to build in revenue and earnings CAGRs of 14% and 18%, respectively, over FY22-24 with healthy FCF (free cash flow) generations.”

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