Hero MotoCorp Limited (500182) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q1 FY '21 Earnings Conference Call of Hero MotoCorp Limited hosted by Edelweiss Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Shah from Edelweiss Securities Limited. Thank you, and over to you, sir.

Thank you, Piran, and good morning, everyone. On behalf of Edelweiss, I would like welcome you all to Q1 F '20 -- sorry, Q1 F '21 post-results conference call of Hero MotoCorp. We thank the management for giving us the opportunity to host the call. I shall now hand over the call to Mr. Umang Khurana, Head Investor Relations, for initial comments and introduction and then we can start with Q&A. Over to you, Umang.

Thank you so much, Chirag. Thank you, Edelweiss for hosting the call. Hello, everyone, and welcome to the Q1 FY '21 investor call. In these rather interesting times, we are pleased to e-meet you again. We have with us today from Hero MotoCorp, our CFO, Niranjan Gupta; and our Head of Sales and After Sales, Naveen Chauhan. We will begin, as usual, with our first set of comments from Niranjan and then open it up for Q&A. Over to you, Niranjan.

Good morning, ladies and gentlemen. Welcome to Hero Q1 earnings call. I hope you, your families and colleagues are staying safe and staying healthy. Q1 has been truly an unprecedented quarter. We use unprecedented many times, but I think nothing signifies more unprecedented than this quarter. The quarter faced one of the strictest lockdowns, resulting in large part of the quarter being nonoperational for everyone. As you know, we, in Hero, decided that it's a humanitarian crisis and hence, ensured that safety and well-being of our employees and our stakeholders was of prime importance. Further, we also decided to protect jobs and salaries even when there were no revenues coming. Despite the truncated quarter, amidst ramp-up and supply chain challenges, we still were able to deliver a positive bottom line as you would have seen from our release yesterday. This was made possible to all-round efforts on sales, cost, cash and productivity. In fact, if lockdown period cost of around INR 250 crores was added back, the Q1 EBITDA margin would have been 12%. Our balance sheet continues to stay strong. In fact, there, I say, even stronger now as through a very efficient working capital and liquidity management, we have been able to deliver a cash flow for the quarter in excess of INR 1,000 crores for Q1. Yes, you heard it right, cash flow more than INR 1,000 crores for Q1 on the back of pack which was INR 60 crores. What's very heartening to see is our solid gain in market shares. In domestic market, we have gained over 500 basis point and continue to maintain that lead in July as well. This has been made possible through early restart, rapid ramp-up and proactive priming up of our entire ecosystem of dealers to vendors. Further, the BS VI products have received extremely good feedback from all quarters, the customer is saying so. And talking of extremely good feedback, our premium product, Xtreme 160, is in market now. And early feedback has been very encouraging. This should help build our presence rapidly in the premium segment moving forward. Let's come to now economy part of it, the macro perspective. As far as the recovery of economy is concerned, we stay positive. There are lots of positive indicators. As you would have seen some indicators which we track [indiscernible] bill and GST collections have reached to more than 85% of pre-COVID levels. Fertilizer sales growth for July has been fantastic. Tractor registration is up on year-on-year basis. Monsoon, as we know, is tracking at normal so far on the long period average. And the crop planting is ahead of schedule. Clearly, the rural and semi-urban parts of India are leading the charge. And I'm sure urban India will soon join the race as well. Talking about the auto sector, the underlying long-term opportunity, which we have been talking about always, remained strong due to under penetration. In the short term, in fact, a clearly visible trend toward personal mobility versus shared mobility will accelerate recovery in our view. We are gearing up for a good festive season and we believe that auto sector and within auto, Hero will continue to lead the charge for economic recovery. With this, we open up the floor for your questions and suggestions. Over to the operator.

[Operator Instructions] The first question is from the line of Nitin Arora from Axis Mutual Fund.

My first question is the kind of retail market share increase you have seen, my question to all of you is, what is the strategy to sustain it? I mean this has come after a long time for any auto company, especially in a 2-wheeler industry. How do you see this of sustaining it? Because we keep hearing that the market share is increasing because of other people facing supply chain issues, so I just wanted to understand from you this kind of a solid increase, what is the strategy to retain it and maintain it? That's my first question. I'll take up one more.

Thank you, Nitin, for the question. I'll give a quick answer and I'll hand it over to my colleague, Naveen after that. Firstly, I'm glad that the questions have moved from, when are you going to improve shares to how are you going to sustain shares? So I think that's a good question, and that's hearting to see the trend of the questions changing. Look, there are multiple parts to it. Even when we say that there is a relatively more rapid restart and ramp-up, that also displays the supply chain capability, the strength of the company as such, which has helped us surge ahead. The second part, of course, is about the BS VI products, which have been received extremely well. As you know, in some of the models, we maintained what it was earlier as a core, while on some of the other models like Passion, it's a completely different design and the style, which have been received very well. And thirdly, we have foray in the premium product also coming. So we are quite positive about sustaining it ahead. Let me hand it over to Naveen to allow more color on it.

Okay. Thank you, Niranjan. So one particular point that I picked up from your question was about retail market share and not the dispatch market share. I think that's very interesting to hear the voice. So if we look at the retail market share, which is coming to public now, and if you go back 3, 4 quarters, I think every single quarter, there has been some gain that we've been making. Second piece, rural, which if you go into the recent quarters, it has always been leading growth in terms of growth numbers over the urban market. In the recent time, that lead has gone up. So -- and you know our rural play, that's very, very strong. If I look at the kind of investment that we have done in rural market, last year, we had 50,000 villages connect program and we connected with more than 50,000 -- 55,000 villages, on a digital platform called [ Sarathi ] which our rural executives carry with themselves. So that has given us huge imprint in the market -- rural market. On the -- if I look at premium side, which is one space, which is giving us a lot of headroom, Xtreme 160, the kind of rave review that we are getting, we are very, very confident about this product. Second, if we look at the kind of BS VI products, which Niranjan also stressed upon during his initial address, there is a huge response that we are getting. Passion, in a new avatar, is taking us into different markets. The refresh that we have done on Super Splendor and Glamour. Glamour, you know that it was certain select pocket product. It is going in the new markets as well. I mean take for example, if I look at MP and Rajasthan, wherein, in 125cc our numbers were very, very less. In the recent months, we are doing 5x of those numbers. So this all augurs very, very well. We have good products. Position is very, very right in terms of the pricing, and we are very, very confident that we are going to sustain it. Thank you.

One question, a follow-up here. In terms of supply chain, in terms of production, if you can throw some light where we stand? And now [ what's the ] clear path in terms of doing dispatches? Just last question from my side.

Yes, Nitin. So on supply chain, also, we have been ramping up. As I had mentioned, I think in the previous call, obviously, the demand was accelerating faster. And then supply chain has been, again, moving. In fact, almost, I would say that the -- our capability on that front is almost back to almost 80%, 90% of pre-COVID levels already. And the teams are doing a tremendous job there, whether it is a labor issue, whether it's a logistics issue, whether it's a liquidity issue, you name it, we have been able to ramp up very fast. And every successive week, the production and the supplies are ramping up faster than before.

And just to add to what Niranjan said on the supply chain side, I remember, we conducted a townhall with vendors early in the month of June, and we had indicated a figure of 5 lakhs production. Everybody was taken for surprise. But then we, internally, through the internal calls, which we were getting from the customers, we were confident. And that level of confidence was given to vendor community. And as a team, we are driving it well.

But yes, just as an add-on, one more thing, which I think we have talked about it earlier as well. From a government and authority perspective, it is important that is intermittent and local micro lockdowns do not happen because that then disrupts the demand and the supply cycle. So I think that's important. Otherwise, I think the underlying belly is very strong. Yes, let's move.

We'll take the next question from the line of Aditya Makharia from HDFC Securities.

Yes, sir, congratulations on entering the premium segment. I think it's almost been a decade since we've come out with such a good lineup. Is there any market share targets we're looking at specifically for our bikes given that we have such a vast network on the premium side?

So Aditya -- okay. Let me again take this up, and then maybe Naveen can add a bit of more color to it. As we had mentioned earlier, that the precise mistake that we had done earlier was to put a target just as we were launching. And then one would declare a model as a failure or a success and then withdraw and then move on to another product. Our task in premium is to have a complete lineup, yes, of premium portfolio, which we have been talking about from last year itself. We talked about in Hero World as well. And that's what we are embarking on. And you see that's happening with XPulse, the Xtreme 160, and you will see more and more action moving forward every year on this. So we're going to complete the lineup horizontally as well as vertically, which means across different segments and across different CCs. Clearly, the first task would be to quickly move towards a double-digit market share and then after, take it on from there on. But primary objective is to have absolutely right fantastic product, which should be loved by customers. And have a lineup, which should then make us a credible lineup and a credible player in the premium segment and market share will follow. Naveen, you want to add anything?

Sure, Niranjan. I would only say that whatever we had planned initially in terms of market share, we are moving it upwards. Purely, this is the kind of response that we are getting and the product, which is positioned in the belly of the premium market is getting rave reviews. On the second side, in terms of the brand, we have XPulse, which is in its own market, along with the radicate that we have given is again doing fantastic for us.

Okay. And sir, just one question on this whole debate around e-carb and FI for the entry bikes, so servicing of FI is supposed to be more expensive vis-à-vis the other technology. So just any thoughts which you could share?

Right. It's very interesting how the debate on e-carb versus FI keeps changing. So let me take you back, Aditya, to where it was. Because in every quarterly call and investor interactions, we've been taking these and then interacting. The first one was around, look, e-carb is going to be cheaper than FI by almost 50% and how will Hero counter that? Jury is out in the market. The e-carb price delta is same as FI price delta, right? So I think that's the first thing that we've done a great job in ensuring that as far as delta is concerned, that is not compromised at all, and that's actually giving us an advantage. Second, technology. FI is a globally accepted proven technology, very, very clearly. And plus, this technology is also adaptable to OBD II very easily. As far as e-carb is concerned, there would still be a few ifs and buts that need to be sorted out, whether it's a cold start, start-stop problem, whether it is a fuel efficiency, whether it's fuel mixture, whether it's OBD II compliant. Of course, that technology has also evolved, but FI is already there. E-carb will have to follow to actually adopt that. So superior technology, at the same delta, absolutely gives us complete assurance that the strategy that we followed was absolutely on dot. As far as when the servicing is concerned, that's only the remaining portion, which is the next portion, we don't believe that FI servicing is any more difficult than e-carb or any more easier than e-carb. Honestly, the amount of training that we have imparted to the local technicians and to the entire ecosystem in the runup to BS VI, which started almost a year back, gears us very well -- absolutely well on dot. Plus, please also understand that large part of the market is actually FI. So the ecosystem on FI replacement, FI servicing, FI parts will develop much, much, much faster than a technology which is occupying just probably 5% or 10% of the entire industry. And that you understand, as the scale as the industry moves forward, it will be more of FI that you will have servicing available than actually e-carb. I think that debate is almost -- that's completely behind. And we are -- we were convinced earlier, and we've been proven right now that the FI strategy was the right strategy.

And just to add that to Niranjan, I think that what Niranjan explained was about the technology superiority. If I look at customer lens, the customer is looking for the right value in terms of the ride experience, [indiscernible] and for few rupees here and there, customer is not going to move out. And that's what we have recently seen, if you look at the kind of traction that we are getting and our market share is an indicative of that.

The next question is from the line of Karthik Chellappa from Buena Vista Fund Management.

A few questions from my side. The first one, can you share what has been the share of sales which have been financed this quarter? And what was Hero FinCorp's share within that? And how is the financing situation on the ground in terms of number of partners -- financing partners that you have and the amount of liquidity they are providing for the same?

So I provide both a combination of a quantitative response and a qualitative response to it and then any follow-on data, I'll request my colleague, Umang, to actually send you off-line. As far as finance is concerned, again, it's an early data because we've had sales of June and then part of July. The different geographies have been ramping up differently. Rural, semi-urban have been ramping up faster. Urban has to follow, and we know the penetration in rural and semi-urban is lower and in urban financing penetration is higher. So I think it will be difficult to actually take a weighted average number and derive anything out of it. But Umang will share details with you. All I can say is most of the financials are back in the business. They've been gradually coming back. Of course, FinCorp was always there. The rest of the financials have been gradually coming back in the business. As far as FinCorp is concerned, they have financed in this quarter 1.35 lakhs vehicles, which is pretty good and denotes the support that the company is providing.

Great. My second question is, recently, there have been some changes allowed in the leadership team, which is also there in your press release. Can you give us some color on at a strategic level and operational level, what does this mean for Hero FinCorp in terms of areas of focus or areas of improvement that we can expect or look forward to?

Okay. I guess you mean Hero MotoCorp, right, not Hero FinCorp?

No, Hero MotoCorp, Hero MotoCorp. The leadership teams strengthening at Hero MotoCorp?

Absolutely, absolutely. I think this is another one where there have been discussions, there have been questions from you all around what are we doing with the leadership? What are we doing with internal grooming? And now you can see that -- and we have been saying that, look, there are lots of actions which have been taken and being taken to develop internal talent. And which is what you see as a foray of that, that you see the announcement, where you can clearly see there are 3. There's Ashutosh, there's Mahesh, there's Ravi, who are taking on larger roles from internal, groomed internally with huge experience, wealth of experience. And equally, you see some members of the leadership team who are rotating and taking on different roles. So I think this is displaying the -- one, the versatility of the talent. And the second is the internal grooming that at Hero we've been doing. So this augers extremely well for the leadership capability moving forward as well.

The next question is from the line of Gunjan Prithyani from JPMorgan.

Just shifting the discussion a bit to the margin. There is -- on a sequential basis, if I see, there's been a margin decline. Now I understand this is a bit of an ad hoc quarter, but if you can just give some color on how much of this drag is due to inventory adjustment? How much is it because of BS VI? Any color around how we should be thinking about gross margins given that it's seen BS VI transition already now?

So Gunjan, this is perhaps the wrong quarter to actually analyze margin variance because, honestly, there is no corresponding quarter. That's my simple answer to this. This is a quarter which is being built from the start with a large part of the quarter, which was under lockdown. I think what will help is -- which we have said is that if we take the lockdown period cost, fixed cost, when the operations were not existing, and you remember, in our March 31 call, we had talked about our lockdown period cost being around INR 200 crores per month. We have assessed what our lockdown period cost was because April was entirely closed, May was partially closed and then June is when we came back to 70%, 80% of the normalcy. So if you add around INR 250 crores to the EBITDA number, which is the lockdown period cost, so -- because that period did not have any revenue. So if you actually add that back, then you get an EBITDA margin of 12% for quarter 1. So I think that would have been a more comparable margin for quarter 1 than what you see the numbers because those numbers are based on a truncated quarter where you have the fixed cost for the entire quarter, but revenue, which is only for a very brief period. So I think that's basically as far as one can go with the ratios for this quarter. I hope that's helpful.

So just to -- so that I'm clear on this, what you're implying is that if the EBITDA margin of this 12% is more a normalized margin under BS VI and from here on, it is more going to be about the operating leverage. Is that understanding correct?

Possibly, yes.

Okay. Got it. The second question is around the demand side. Now clearly, the momentum that you're talking about is quite encouraging. Is there any sense that you can provide on this personal mobility and pent-up demand? What is really the key driver? I mean are you -- from the perspective, when you're seeing the incremental demand in -- let's say, in the month of August, are you seeing demand tapering off or you seeing the momentum sustain and personal mobility is a greater driver than what -- than the pent-up demand? I'm just trying to get more color on the demand, sir.

Right. So Gunjan, I'll take this first, and then I'll ask Naveen to add more color on this. If you remember in our last call, we were cautious. And we said that, look, right now, there is this, let's wait and watch what happens, whether it sustains or not. We have seen the trend continuing in July. We have seen the trend continuing in the first half of August. Obviously, if something is pent-up. The pent-up gets fulfilled very quickly. The pent-up demand does not last forever. So the first month can be a slight -- okay, maybe it was pent up. But as it continues, one is feeling delighted that, look, all the things that we are talking about, first of all, that there is an underlying fundamental demand, which is there for 2-wheelers in India. And we've been talking about it. It's an underpenetrated sector. India is a story of many Indias. There are different needs that people have. Two-wheeler is a means of mobility plus an income enabler. So there's multiple drivers of 2-wheelers that we talked about in Hero World and probably all our investor conferences that we've been talking about. Because unless you have that underlying strong belly, then this kind of demand doesn't pan out. So I think we have again been happy that, okay, that -- so that's first big reason as to why one can see the resilience. Second, of course, is personal mobility, yes? One can see, one can sense psychologically or otherwise, that people moving away from shared mobility to personal mobility. Also, the availability of public transport has been less. So you can see more and more people adopting because this is then the most affordable means of moving from a share to personal mobility. So that's also panning out, and which is why we are positive about what we are doing. The other thing, of course, is that the BS VI product has been lapped up very well. Yes, because remember, I mean, for the customer to buy, they have to be appealed by the product itself as well. So I would say the technology change, the BS VI products also have been lapped up very well, and that's also contributing to the demand other than, of course, the rural and semi-urban economy that we talked about. Let me now hand it over to Naveen to add more color to it.

Yes. Thank you, Niranjan. So I'll break this question into 2 parts and look at both factors in urban and rural. As was amplified clearly by Niranjan, the fundamentals of demand on the rural side continue to be very, very strong. This is multiple factors playing out. The lockdown was holding the demand for a brief period. Moment the lockdowns opened up, the demand comes back, and we've seen a V-shaped recovery in case of rural. And hence, the pent-up as per our assessment is over on the rural side. On the urban side, due to the sentiment being low due to certain higher level of unemployment rate, there may be some bit of it which will manifest in the festive season. So that's our assessment on the pent-up side. As far as the personal mobility is concerned, in the last call, we've said that in our own internal survey that we conducted, at a current level, 10% to 12% is what preponement is happening on account of the personal mobility. We've done a deeper survey, and we looked at which kind of customers are actually coming and buying. And the contribution of the customers who are preferring to go to work, their contribution has jumped up significantly. And hence, there is an element of personal mobility, which is coming into play.

The next question is from the line of Ronak Sarda from Systematix.

Congrats on decent numbers. Sir, first question, I mean you just highlighted on -- a little bit on your market share gains. Two-part question to that. One, obviously, scooters have been lagging the overall motorcycle recovery. So once the urban markets open up, how do you see scooter demand? Do you think those can also see a sharp recovery? And the other part is in a way, how do you see your top 20 -- 15 or 20 markets? Are those urban or semi-urban or rural? And how is -- if they're urban, how have those behaved given the lockdowns are more stringent in the urban parts?

Naveen?

Okay. Yes. So the first was about scooters coming back. Yes, with urban opening, the contribution, which has come down significantly on the scooter side will definitely go up. But interestingly, in the recent times, we've seen our scooters are doing very well. Pleasure, which, if I look at last year, there were certain 7 states -- 6 states which are contributing to close to 75% of our volumes. We have another -- we have added another 8 states to contribute to -- 75% contribution to the Pleasure market, and Pleasure now is going to pan India, which is part of one of our strategy. In 125cc segment, Destini continues to do good. In fact, in the month of July, sequentially, we've had more than 30% growth in the Destini numbers. With urban markets opening up, the scooters will come back, and we are hopeful the kind of performance that our BS VI products are giving, we will have a positive impact.

Thank you, Naveen.

Right. And the other part was how do you see your 15 or 20 markets, let's say, are those mainly urban or semi-urban, rural? And how have they behaved in, let's say, Q1 FY '21 versus last year?

It will be difficult to give out a number, Ronak. But our top 20 markets from our this thing will be in semi-urban and rural. Naveen, you want to add anything?

Yes, yes. So our top markets, if you look at primarily being UP is one dominant market that we have. Bihar is another, which went for some lockdown in the month of July. But once the lockdown opened up, we see the entire recovery coming back to us. So if you look at main urban centers, it's going to be a mixed year at this point of time.

Right. Right. And sir, last question on the price hikes. I think we have taken some price hikes in this year. If you can just highlight what's been the average price hike, you can -- I mean, YTD FY '21?

Yes. So we haven't taken it across the board. We did take some price hike in July, which was, again, based on our competitive positioning, which we took on HF dealers and a couple of other models. And Umang will offline give you all the details.

The next question is from the line of Amyn Pirani from CLSA.

I have 2 questions. The first question is on the momentum of retail and production in August because we discussed these mini lockdowns happening, so the month-on-month momentum that we are seeing in both retail and supply is improving. Does that come under a bit of softness in August? So how it supplies and retail momentum progressing given all these lockdown happening?

Okay. So what is happening, Amyn, is that, obviously, as we have said, that the mini lockdowns does disrupt the rhythm and the momentum for sure. However, what we are seeing is that whenever you have a 1- or 2-day lockdown, the moment it opens up, for instance, when your weekend lockdown, then the moment Monday comes back, then the sales come back, yes, and it gets recovered. So I think it's more about predictability of these lockdowns rather -- versus the uncertainty. And obviously, any disruption then disrupts the rhythm. As far as supply side is concerned, obviously, if there are lockdowns where a part gets completely closed, which hasn't happened, by the way, then, of course, there will be disruption. And we do hope that the -- which we have mentioned also and the SIAM has also taken up that we should not disrupt the supply, we should take all precautions and the actions, but we should not be closing down a zone or something. Otherwise, the supply disruptions will again restart. Naveen, you want to add any color on the retail side on the lockdowns?

Yes. So on the retail side, if we look at August, and that was your key question, with festives now coming in, we see some positive sentiments also kicking in. The second, the whole premise was that there are fundamentals remaining very, very strong in the rural side, which continues to trigger the demand. And hence, at this point of time, we see that the positive momentum, which had begun in the month of June, carried over in the July, continues to be there in the month of August.

Okay. Okay. And even on the production side, you should be able to continue ramping up to meet, right?

Yes. Absolutely.

Okay. And my second question is actually on profitability. Actually, if I look at your gross profit per vehicle, actually, it has been pretty stable in the last 2, 3 quarters despite the BS VI changeover and raw material costs increasing. So basically, I think your pricing has just paced with your raw material cost increase. And even on the other expense side, we have seen a significant cut. So my question is on the gross profit, absolute gross profit level, should we expect this to now continue being stable or improving? And on the other expense side, how much of the cut does you seen in 1Q is sustainable? And how much is a one-off?

So I mean, firstly, again, I would repeat that please do not take quarter 1 as something for extrapolation, yes, which is why we went out and we said that, okay, to help out, look, the period fixed costs were these, which are lockdown. If you add that back, Q1 would have been 12%, and that's more a number that one can then start extrapolating from there on. As far as the gross profit is concerned, material costs BS VI, you are right, and which is what we have said that we have passed on, on absolute level. So therefore, the per-vehicle contribution of the gross margin have not been compromised, yes, as far as our pricing is concerned. As far as our overheads and other expenses are concerned, if you remember in the last call also we said that because of the situation, we have rolled out several initiatives on cost front. One is LEAP 2, which has got a double target than LEAP 1. LEAP 1 had roughly around 40 to 50 basis point, while LEAP 2 targets 100 basis point. And we had also talked about a couple of initiatives on that front. The second part is the CapEx phasing and CapEx cuts, which has helped the liquidity and the cash flow. And the third part is project mileage, which is applying to all the overheads that we have talked about, which is reducing those overheads. While I don't want to give out a number on that, but you can see some of those things coming through. And you will obviously get a more sustainable picture as you move towards quarter 2 and quarter 3. But all elements of costs are being looked at, some are low-hanging fruits like travel, hotels, conferences, et cetera, et cetera, which has moved digital, and some are other which we have taken action on how to improve productivity of every bit of spend. So every single spend, we are looking at ROI of spend. Normally, you look at return on investment of capital spend, we are looking at ROI of OpEx spend on every line item that we are looking at.

Okay. Okay. That's very helpful. And just lastly, can you share what are the inventory levels looking like right now?

So Amyn, on the inventory level, while I won't give out an exact this thing, but as I mentioned, the demand has been outstripping the supplies. So that's a good -- happy situation to be in. Some buildup we have started. It is still below the normal levels that we would like to operate. As we move forward, obviously, August, September, we would like to build it up for the festive, which is what the plan is.

The next question is from the line of Pramod Kumar from Goldman Sachs.

Yes. My first question is on the ASP side and rather on the sustainability of the ASP side. I understand this quarter is not a reflective quarter. You'd have had higher non-vehicle revenues. But does this kind of elevated ASP levels are sustainable? And does it also include the full pass-through of the BS VI pricing actions from their side?

And firstly, I think before answering your question, I do remember all your earlier questions. And I hope now you are satisfied where your questions were relating to earlier the engine performance, whether we'll be able to do that or not? Whether the BS VI, we will come on time or not? Whether our products will succeed or not? Whether the e-carb will play a spoil sport? So I hope you're satisfied on all those fronts with our products actually roaring in the market on all fronts, whether it is the capability engines, FI, et cetera, et cetera. So now I come to your average selling price this thing. Selling price, as far as if you look at the parts revenue, which is included, that's also sustainable. It is around 10% of the revenue included in quarter 1. FY '20 was also around 10%. So we don't see that changing much. In fact, it improved from 8.5% of FY '19 to 10% of FY '20, and we see actually more potential in the past business. And as you know, that's the higher-margin business moving forward. So that actually should help as an uptick on the ASP. Other than that, from a mix perspective or the selling price, it's definitely sustainable. As you know, we were the first one to roll out the pricing of BS VI products in the market, which actually set the tone. And I remember at that time, also, there were questions about would industry underpart, would there be a pricing war? None of that has happened, and it's really -- I'm really glad that there is a very sensible pricing -- rational pricing that has prevailed. And you have seen actions from everyone. Everyone is maintaining a sensible price, which ensures that customer gets value, while equally the companies also are able to deliver profitability. So I honestly don't see any issue as far as sustainability of ASP is concerned.

And yes, I think it's been a great ride so far for you guys with the BS VI transition and also rural buoyancy, and let's wait it out for a few more months from scooters which you said. On the premium motorcycle as well, I think I wish you all the luck there. And Niranjan, the second question is on the Hero FinCorp side. You've seen recently they did the investor presentation, talked about something like a 10% GNPA and a 30%-plus morat book. And given the financials there, do you envisage that there could be another round of capital infusion there, which may be required in the next 12 to 15 months? And how do you see Hero Motor's strategic interest there as a business because I believe your shareholding is going up with the latest investment round. And are you open to increasing your stake further in that financing arm?

Yes. Pramod, our shareholding is not going up. Our shareholding remains within 41% to 42%. The shareholding has gone up in Ather. It's not gone up in FinCorp. As far as FinCorp is concerned, they are doing well. As you even saw from the 2-wheeler financing numbers, that's been a great performance. Their loan book or the AUMs will start growing after the quarter as obviously, right now, they are balancing it out. We don't see any capital infusion in the short term, which is required beyond the fall money, which is there from the last raise that they did in the month of March. Relatively, I would say that FinCorp is amongst the top NBFCs because NBFC sector will see consolidation because there are huge numbers of NBFCs, if you've been tracking them, that will see consolidation. And what will remain probably is the top 5, 7 or top 10 and Hero FinCorp is up there with its parented, with its asset quality and with its performance. I don't see the 10% GNPA number, by the way. The GNPAs, the NPAs have gone up close to around 1% in the last quarter. In fact, in quarter 1, also, despite all those provisioning, they have declared a profit in quarter 1 as well, which is, again, very resounding the way FinCorp is being managed, Pramod.

The next question is from the line of Sonal Gupta from UBS.

Sir, could you first share the spare part and other operating income revenue for the quarter?

Yes. So as far as other operating revenue for the quarter is concerned, that is INR 67 crores, and parts revenue for the quarter is INR 293 crores.

Okay. And just in terms of -- I mean, like the other question I had was -- because already everybody starts talking about retail and a lot of questions around retail. But in terms of -- I mean -- and then we've had the industry dealer association, et cetera, also publishing stuff. So I just want to get your thoughts on how do you see the VAHAN data? And how accurate is it in terms of reflecting the retail trends that you're actually seeing? So I understand there could be a lead lag between the registration of the vehicle versus then you sort of think of it as a retail, but just your thoughts because, I mean, a lot of people are looking at that and then just trying to say that things are not improving. So any thoughts around that?

I think there's a question of -- like you said, there's a question of lead and lag, yes, which happens. And there could be some parts which are not covered by VAHAN. So VAHAN is not 100% there in India across geographies, for instance, part of MP, AP and Telangana, right, are parts where it is not covered. So the coverage is not full. But wherever there is coverage, there the data would be reliable. So I think that's -- the important point is that over a sustained period, if you look at it, our sales and our -- what we take out, then that will be correlated to the market share because, obviously, you cannot either keep on building inventory or you cannot keep reducing the inventory. So I think this is the data that with the lead and lag should match. And if you discount the percentage coverage, which is not there.

Yes. Just a final view because the VAHAN data is a registration data. And hence, from the date of retail to the data appearing in VAHAN portal, there will be a lag. But as Niranjan said, if you look at over the longest period of time, you'll get a fair view.

Okay, sir. Sure. And just the last question, if I could ask, was -- I mean, now that -- I mean, clearly, you're very successfully transitioned on the BS VI and our checks are indicating the same as your feedback is, so congratulations on that. But now that we are over this hump in terms of the major BS VI transition and clearly, the investments that the company has made in R&D side, so do we now see a more regular flow of new products coming through from the company, like 1 or 2 new launches every year? I mean is that what we can expect?

Absolutely. You've hit the nail on the head. In fact, talking about R&D spend, we did talk about that over the last 5 years, our R&D spends were 2x to a twice nearest competitor. And that has helped. We've been ramping up R&D capability and a lot of you were there in Hero World to see yourself the capability of R&D. And then, of course, on ground products of BS VI success has actually demonstrated that capability that we have been talking about. Obviously, over the last 3, 4, 5 years, the pipeline has been building on the products. And you're absolutely right, you will see more and more launches coming every year now because as the pipeline builds, every year now something comes out from that. Even the last year, for instance, FY '20, we've spent, I think, on R&D, if I remember right, more than INR 700 crores, which would be almost 30%, 35% more on a year-on-year basis on R&D spends. So we've been really, really fronting the spends on R&D, allocating our capital where it is required, focusing on the long-term capability and the products and branding, which is what matters for a long-term sustainable value creation.

The next question is from the line of Pramod Amthe from CGS-CIMB.

First of all, congrats for the entire Hero team for getting the production up and running at the fastest manner that too with not much of a fanfare in the media. My first question is with regard to the supply chain. Specifically, if we have to look at the first quarter where you had substantial increase in imports possibility because of BS VI, and there was a tension across the border, how you have been able to pull-through the same in the short term? And second, what is the import content now? And as part of your LEAP program, how you plan to reduce it in the medium term?

Right. So firstly, thanks for the appreciation of the performance. As far as the sourcing is concerned, look, our overall import content would be less than 10% of our total material consumption. And then amongst that, of course, then you have China. And the China dependency is not just for us within that, but it is across the auto sector, not only locally, but actually globally. There are some things like magnet, et cetera, where China supplies 90% of the global requirement by virtue of the scale. So what is important is managing the supplies through a combination of either inventory building or asking the Chinese suppliers to set up shop either in India or in other countries, which is what we have been doing. So there are multiple strategies which are working: one is localization; second is inventorization, which is the warehousing and inventory; and third, is asking door supplies themselves to set up shops in some other countries other than China. So I think that's the derisking model that we are following. In the end, you have to trade-off between the cost and supply security. And therefore, we are judiciously doing that and managing it well.

And second, with regard to the way the recovery has happened in rural versus urban, any big change in mix as rural versus urban you have seen in first quarter for your sales? And do you expect to remain steepy for the rest of the year?

Okay. So if you see the mix that we have seen, right, in fact, in our sales for quarter 1, the entry overall, and I'm talking about the total numbers that we have sold, is around 30%. And Deluxe is around 70%. Now this is not way off from our mix that was there in FY '20 as well. So we would say, yes, in parts of those, there would be in certain geographies, certain local markets, the mix would move more towards HF Deluxe, more towards Splendor, less towards Passion. But overall, if you see on totality on national basis, if I were to look at the numbers, the mix between entry and dealers broadly remains the same.

The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Congrats on reasonable performance in tough times. My first question pertains to the ongoing verdict from the Supreme Court on the BS IV inventory. Does it mean that we'll have to take a hit on our books for the inventory outstanding as on 22nd March or so?

No, I don't think so. We'll have to study the order. The order pertains to unregistered vehicle. First of all, the unregistered vehicles itself were very low. So we don't hold any inventory of BS IV. As far as the dealer and the market is concerned, the unregistered vehicles were for -- to the tune of probably 25,000, 30,000. And it is -- pertaining to that, out of that, some portion which is in VAHAN, then what -- that's what Court seems to have allowed. But we will need to just study the order and then take appropriate action.

Okay. Okay. And secondly, with respect to this quarter, if I look at our -- sorry, our staff cost, that has reduced considerably. So is it that -- this is a normal run rate? Or we should revert back to that INR 430 crores, INR 450 crores of quarterly run rate, which you've seen earlier?

As I mentioned, Jinesh, earlier also that quarter 1 numbers and ratios should not be extrapolated simply because it's an unprecedented quarter. So let's move forward and when we see Q2 -- which is why we tried to give out that what would have been the EBITDA margin, yes, so which at least gives you some signal on what the starting base is for quarter 1. As we move forward to quarter 2, then you will get more sustainable numbers on all line cost items.

Got it. And lastly, CapEx, do we maintain our INR 600 crore figure? Or are we looking to invest considering improving outlook for the demand?

Currently, we are maintaining the same number that we spoke about.

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, just one question, actually a couple of questions. One is, in the month of July, you indicated that demand was 95% peak over. Is it fair to say that the way August is going that, that gap will narrow down further?

Yes. Yes, absolutely.

Okay. Second is you're saying that demand is outstripping supply, would your production ramp-up be or your supply chain -- or let me rephrase it, would you be confident that your supply chain can ramp up to the desired level so that you guys can reach the desired inventory which you want before festive because festive is a very key season for Hero in terms of sales. So how confident are you on that the supply chain is able to cope up with the way the demand is and you need to fill up inventory, how confident are you on that, sir?

We are very confident. As we said, every week, our production is higher than the previous week, if you look at sequentially. And yes, initial parts, demand was outstripping supply. Supply has caught up, and you will see moving forward that supply is then running ahead of demand, and then there's a buildup happening for festive. We have a detailed plan, which has been worked out, and the teams are working very hard and leveraging all the capability and scale that Hero as the company has.

Fantastic. And the last question, LEAP 2 plus the project mileage, which you talked about, is it fair to say that whenever -- I'm just thinking about the medium term, whenever Hero reaches the volumes of what FY '20 were, that the margins could be much better, if not same, because of these 2 projects. Is that fair to think about margin trajectory?

Yes. Only on account of these 2, your conclusion is right.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

Sir, my first question is on the state-wise or regional trends that we have seen in July and the initial trends in August. So which states for us are firing and which are laggard? So can you give some broad picture on that, say for regions, whichever way you want to put it, sir?

Okay. So if I give you the picture on the region-wise, we've got very, very strong recovery seen in the central zone, which is Rajasthan, MP, good double-digit in UP. Bihar, before the lockdown happened from the mid of July, it was growing at a good pace. Lockdown held up the pace at which it was going, but then after it opened up in the first week of August, it has picked up the same pace. Whole East is doing pretty good. Maharashtra and Gujarat, where the sentiments are relatively low, it is yet to pick up the traction. And South is moderate. So that's the assessment of pan-India state level.

That is very helpful. And in terms of customer profile, have the first-time buyers sharply gone up with LEAP for personal mobility, any numbers you can share on that, sir? I understand these are very initial days. But any -- based on their initial trends, if you can share any numbers there, that would be helpful?

Sure. So out of the 3 category of customers, first-time buyer, additional and replacement, the replacement has gone up -- gone down significantly and which is quite visible in terms of the quality of vehicle which is coming for exchange in terms of age. The additional has gone up significantly. And the reasons I quoted earlier also that primarily people going to work, where things have opened up in rural, in urban, their contribution has increased significantly. First-time buyers are also higher.

Okay. Okay. Okay. Understood. Understood. And from a cost perspective, you did highlight some of the initiatives we have taken. Are there any commodity headwinds we are seeing other than the noble metal, anything that can disrupt us in terms of -- from a cost perspective? And if so, are we positioned to pass on those cost pressures?

Right now, no. I would say, of course, the commodities have bounced back, but they're still not bounced back to the level or the highs that they were. For instance, crude, you see it coming to around $45, while the high was $60, if you see last year. Similarly, aluminum, probably coming to $1,650, where the high was around $1,800. So they've bounced back from the low. So right now, we do not see headwind. But as it moves on and global economy, the positive outlook happens, then obviously, the outlook on top line will also improve. And accordingly, the commodities will also bounce back. So I guess, those 2 factors will neutralize each other.

Correct. And even if that happens, we have enough headroom to take price hikes accordingly just to pass on these costs. Is that a fair assumption?

So I think that you -- that we have demonstrated in the past as well, our ability to not only cross price hike, but actually do a combination of cost optimization and price hike, which is how we have dealt with every bit of cost increase in the past.

The next question is from the line of Binay Singh from Morgan Stanley.

My first question is, could you give us any sense if you've done any research on what percentage of your sales goes to commercial segments, like food delivery, courier, stuff like that?

Actually, at this moment, it's not significant. But we keep tracking this. And at a certain point of time, we will then do a research and then get back. But it's not a significant part of the overall. It's largely confined to a few pockets as far as this segment is concerned.

Okay. And secondly, there is something that we touched upon in the Jaipur [indiscernible] and later on in your annual report also, that the company is looking into low -- sort of low emission mobility options in 2- and 3-wheeler category. So any sort of thoughts on that? When do we sort of hear more about Hero doing something on the 3-wheeler side? Is there any plan there?

So as you know, we have outlined our vision, which is future of mobility -- be the future of mobility. And we are not confining ourselves to just 2-wheeler in our vision. So we continue to work on the other adjacent areas. And as and when we are ready to share something, you will be one of the first ones to hear that.

Yes. And just lastly, one clarification. So you are expecting retail sales in August to grow on a Y-o-Y basis, right?

So we won't give a month guidance or a quarter guidance on the numbers. I think what is important is the trend, the positivity, the numbers that are coming out and, of course, gearing up for festive. So I think my message to everyone, including our team and everyone is stay positive and stay safe and stay healthy.

Ladies and gentlemen, due to time constraint, we'll take that as the last question. I would now like to hand the conference over to the management for closing comments.

Thank you, everyone, for seeing us, and happy to take your follow-on questions off-line. Have a good day, and see you soon again. Bye.

Have a good day, and have a nice weekend. Thank you.

Keep safe everyone. Bye.

Thank you. On behalf of Edelweiss Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.