Hero MotoCorp Limited (500182) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Hero MotoCorp Limited, hosted by Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Jain from DAM Capital. Thank you, and over to you, Mr. Jain.

Thank you, Aisha. Good morning, everyone. On behalf of DAM Capital, I would like to welcome you all to the 2Q FY '21 post-results conference call of Hero MotoCorp Limited. 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 and Business Support, for a brief introduction of the management team as well as opening comments, post which, we will start with the Q&A session. Thank you, and over to you, Umang.

Thank you, Chirag. Hello, and good day, everyone. Welcome to the festive season and cheers. I trust all of you are keeping healthy and safe. On the call with us today, we have our CFO, Niranjan Gupta; the Head of Sales and Aftersales, Naveen Chauhan. We'll begin with opening comments from Niranjan, and then we'll open the floor for questions. Over to you, Niranjan.

Thanks, Umang. Again, welcome, everyone, to this call. Good morning, good afternoon and good evening, depending on which part of the world you joining from. I hope you, your families and colleagues are staying healthy and doing well. This digital world, as we have seen, while socially distancing has, in a way, bridged all the divides even between day and night as some of us are discovering. So welcome to this new normal. We are all delighted to deliver this set of results to you, and I'm sure you are delighted as well. Volume growth of 8%, profit growth of 9%, profit before tax growth of 14%, EBITDA growth of 17% and revenue growth of 24%. To top it all, a market share gain of 300 basis points in a quarter. Perhaps, we couldn't have asked for more. But if you go by our own teams, they appear hungry to do even more. Our mantra has been let this crisis not go to waste. And true to this, the entire team and machinery has worked relentlessly. Coming to macros, the economic activity seems to be recovering gradually after the unlock, going by all the lead indicators such as GST collections, E-way bills, online retail, 2-wheeler sales. And recently, the 4-wheeler sector also has joined the bandwagon. IMF, World Bank and RBI have suggested significantly better FY '22, with India growth forecasted to be at 8.8% and global growth at 5.2%. That should bring smile on our faces. As we have seen, the rural economy has been doing well even during the crisis, and now semi-urban and urban seems to be catching up. The COVID-19 crisis though hasn't gone away. But good thing is that people and economies are learning to live with it. Keys to ensure that we don't let our guards down but embrace the new normal and new ways of working, achieving same or even better results than before. Our results reflect that it's possible to do so and gives us immense confidence moving forward. The sales momentum in 2-wheeler has been good. Hero was the first off the block to rapidly restart and has continued to strengthen since through this period. We believe strongly the momentum is clearly with us. Our supply chain, manufacturing, sales network, all have worked beyond capacity, creating several records along the way. Battling the constraints that the industry is facing, we've managed to record our highest ever production in a single day, and we have now produced more than 30,000 units per day for consecutively 10 days on a trough. This has been enabled through our scale, our powerful execution machinery and the team working with unified goal. It's been about staying positive all the way through this period, not COVID positive, but mentally positive attitude, which has helped us weather the storm and come out as winner. Let me now talk a bit about festive season. There has been a lot of numbers floating across. Let me say in short, the season has started well for us. Across segments and regions, we performed well, whether it's Splendor, Xtreme or Pleasure, not just in rural markets, but in urban areas, south, west, where we normally haven't been that strong earlier. Overall, for the first 10 days of festive, we have registered retail at 96% of last year's level. The inquiries and call trends moving forward are very encouraging. And we are confident of a good festive season as we clearly see now that semi-urban and urban also are catching up. And this wave is not going to end, the wave of growth. Let me now talk about the premium segment. I'm sure a lot of you are interested in hearing this out. As we have let out earlier and presented to you in the Hero World Event, our strategy is to create full portfolio of premium across segments and across engine capacity. Towards this, we already launched XPulse and Xtreme in 200 cc and 160 cc segment. Over the next few years, we will continue to fill this portfolio with more and more new models. The Harley-Davidson partnership, which we announced 2 days back, accelerates and enhances our premium segment strategy. There are 2 agreements to that, as you've seen. On the distribution agreement, we will sell and service Harley-Davidson motorcycles, parts, accessories, merchandise, riding gears, apparels through an existing network of Harley-Davidson dealers as well as select dealership of Hero network in India. The second part of licensing agreement, Hero MotoCorp will develop and sell a range of premium motorcycles under the Harley-Davidson brand name. The partnership is going to be mutually beneficial for both the companies and the rise together in premium segment will be definitely enriching both for us and you as well. So all in all, we stay positive on current festive, on the economic outlook in FY '22 and on continued expansion of our market leadership, winning in new segments. With that, Let me open up the floor for your questions. Looking forward to those. Over to you, Umang.

Aisha, let's open the floor for questions, please.

[Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas.

My first question is around the Harley-Davidson partnership. Can you share some details around how the revenue sharing -- and partnership would work? And what do you exactly mean by premium motorcycles? Which one -- segments we would be developing and selling out of the brand name of Harley-Davidson?

Right. So Rakesh, as we explained, it's going to be premium range. Obviously, the exact details of which CC and the specified range, we will not be able to share at this stage. But clearly, it's going to enhance and accelerate our journey in the premium segment as they would be licensed bikes, which we will develop, which will carry the Harley badge name and therefore, be marketed. So it will travel across the different CCs.

And revenue-sharing partnership?

So this is licensed. So there isn't a revenue-sharing arrangement as we have said. There would be no... [Technical Difficulty] There will be economic incentives for both the parties and this, that's based on licensing.

Understood. Okay. My second question was more around the margin part. Last quarter, we had discussed that our target is going back to earlier 14%, 15% kind of margin pattern. Now in this quarter, our volume was higher than last year, and our overhead cost was so much more controlled than what it would have. And discounting also appears to be lower than last year. But we are still falling short of that range. So what essentially is pulling us back on the margins -- on further expanding the margin in line with what we have been targeting?

So Rakesh, the 14% to 15% has been always our long-term guidance. In the short term, we have maintained at the BS VI. The price increase was passed on absolute terms in terms of costs. And the recovery of margins will happen gradually, both through cost-saving programs, which the LEAP 2 we have launched and steadily taking pricing actions.

The next question is from the line of Nishit Jalan from Axis Capital.

Hello? Can you hear me?

Yes, Nishit.

Yes. Congratulations on good set of numbers. So my question is on festive period. You did highlight that we have started on a positive note. I just wanted to get some other more details in terms of, for example, in North India, where we are up against predominantly bigger players, do you think that the festive season started well over there as well? And during our final [ set ], what I found out was that Navratras, Dussehra period is still relatively smaller -- accounts are relatively smaller chunk of sales during festive period compared to Diwali. So some color on that would be useful.

Let me pass this on to my colleague, Naveen.

On festive, it has started well, as Niranjan said. There are -- and we know that there are markets which peak during Navratra period and there are markets which peak at the later period. And you rightly said North, Central are the markets, which actually generally go and peak in during Dhanteras period. Overall, across on a like-to-like basis, we are seeing positive sentiment. In fact, the positivity among our dealers is very, very strong. The indicators -- lead indicators per se, if I go to pick up, is kind of customer calling up, checking out with us on our products, the positivity that has been created. In fact, to the run-up to festive, the positivity that we have seen, all are leading to a positive side. So you're right. There are Hindi markets -- Hindi-speaking markets, particularly in North and Central, still go back in a big way in the times to come.

Sir, just a follow-up on this. If you can give some indications, for example, if we sell 100 vehicles during festive period, will Navratras and Dussehra period be 20% to 30% of that or it could be substantially higher for you on an overall basis? Not asking for region-specific but overall basis. Just wanted to get a sense how important is Diwali Dhanteras for you compared to Navratras.

There are 3 phases to this 32-day period if you will look at. One is Navratra and then you've got a period in between and then you've got last 6 to 7 days. The first 10 days normally account for 1/3 of the total sale that we plan for the festive, and it's going accordingly.

Okay. Okay. Okay. My second question is for Niranjan. Niranjan, you did mention about our profitability in terms of percentage margin. If we look at gross profit per vehicle in the last 2 quarters, if we adjust for one-offs in 4Q, we have seen that gross profit per vehicle has come down by about 5% to 6% over the last 2 quarters. This is despite the fact that we have taken price increases in April and also in July. So just wanted to understand, is there a specific reason for that? We are seeing specific cost pressures on any particular commodity? Or what's the reason for that?

No. Actually, this is not any particular commodity impact. What we have to see is holistic EBITDA margins. In the last quarter, we had -- our EBITDA margin was 3.7%. We had said our underlying quarter 1 was 12%. We've registered 13.7%. And all of us know that with the BS VI, where price pass-on is absolute compared to the cost pass-on, there is bound to be a margin recovery period, which is over a period of time to lead to and through price actions. So no unusual things there. We continue to track well on this with cost management and overall margin delivery. And finally, the objective also is to ensure that the overall bottom line grows, and you would have seen with a combination of volume and pricing and cost and margins, our EBITDA has grown in double digits.

The next question is from the line of Aditya Makharia from HDFC Securities.

Yes, sir, just on the festive season. Once again, we mentioned retail's at 96% of last year's levels. Now this is higher than what FADA has been saying because they've been saying retails are down between 10% to 15%. So could you throw some color? Have you gained substantial market share? And also, there was talk of some stress in the entry level or the 100cc segment. So maybe if you could just share your thoughts?

Yes. So let me make a comment and then hand it over to Naveen. So as I said in my opening speech, there are a lot of numbers floating around. And if the numbers of FADA or the others are to be believed, then mathematically, we would have gained market share. So let's wait for the full festive numbers to pan out. But let me hand over to Naveen to add some more color to it.

Sure. So 2 things that come to my mind. In times like this, customer looks for trust and customer looks for value. By the very basic -- the sentiment that, that brand Hero evokes, which is about trust, we have seen customers coming to us. Splendor is in positive space in terms of retail number in the first 10 days. We have been able to deliver value. In fact, continuing on the brand of Splendor, we have seen even our own HF customers kind of reaching out and going on to Splendor. So we see positive and what Niranjan said in the beginning that there are a lot of numbers that are floating around. And hence, it was important for us to bring that point of where we stand at this point in time.

Right. And what will be the inventory right now with our dealerships? Will it be 40, 45 days?

So our inventory is as per our festive plan. So we obviously plan for a good festive. And the inventories are tracking according to that. Our aim is that at the end of the festive, we will -- we should be ending up at less than 4 weeks of inventory.

Despite our plants reaching out to the numbers, 30,000 a day for 10 days in a row.

The next question is from the line of Kapil Singh from Nomura.

Sir, if you remember [indiscernible]

Sorry to interrupt. Mr. Singh, I would request you to speak a little louder, please.

Okay. Can you hear me?

Yes, sir. You can go ahead.

Okay. Sir, when we talked about 3 specific areas, one was premium segment, one was exports, and one was scooters. Now we have seen some initial signs of market share gains in scooters as well as premium segment. But because there is some inventory filling by [ bigger ] players. It's not clear to us. So just wanted your sense on the retail side, are you seeing similar gains in market share in your opinion? And also, could you help us understand when we look at the premium segment, should we you look at the 150cc or there are products like Pulsar 125 which are also seen as premium by some of the analysts? So just your thoughts on this whole thing, that the bulk of customer who's buying Pulsar 125, is it a Splendor customer or is it a Pulsar customer in India?

Okay. So there are 3 parts to your question. I'll pick up the scooters first. So this is not just an inventory-building phenomena. We shared in the last call also, there are brands like Pleasure, which were earlier limited to certain geographies. We've been able to take it to more geographies, and we are seeing traction of Pleasure, especially in the Pleasure Plus format. And recently, we had launched Platinum, which has also got very, very positive reviews. Destini is growing significantly. In fact, in our BS VI format, we don't have Duet. But I'm sure you would have seen that back to [ 110Q ] won't be enough. So I mean, we've been able to pull the customer to Destini, which is filling up significantly in a nice way and the resultant is a gain in market share. On the retail front, I won't comment on what's happening in other places, but yes, we definitely see positive. On premium, very strong reviews, very strong responses in -- and especially in major urban markets like Mumbai if would talk about. We are on our way to doubling our market share. On the back of XPulse, Xtreme 160R and also Passion Pro in its new avatar. It's getting very good traction in markets like that. So the gain is across in particularly initial gains, significant gains in South and West. And East and the rest of the markets, our teams, our dealerships are being positive on this. The third piece is about the segment you've said. See, I would say the consumer defines the segment, right? And so you've got entry, which is the first timer, who's wanting to get into a motorized area for his mobility needs. So you've got entry price point. And then there are estimates who want to aspire for a better one where our Splendor and Passion Pro fits. So that's what is deluxe. And then there is another segment of customers who are looking for more power at 125cc. So we consider 125cc in our commuter and our premium started 150cc.

Okay. Okay. And my second question is on the cost side to Niranjan, sir. When you look at employee costs, other cost, et cetera, are these at normalized levels now in Q2? Just your thoughts on how these will evolve when we look at second half.

Yes. Broadly, you can assume that they are normalized level as Q2 was a full quarter, yes. Obviously, the line items may change because there would be some employee cost in quarter 2, which would be a little elevated levels as we started to get the labor back and therefore, those some costs are elevated. Equally, you see advertising, marketing costs in quarter 2 are a bit subdued, and there will be more in quarter 3. So the line items may shift a bit up and down. But overall, if you see, yes, you can assume that they are broadly at normalized levels.

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

My question -- first question pertains to the difference which we see in registration data of VAHAN versus your commentary. There has been consistent divergence, which has been there. Any sense on why such divergence, sir?

VAHAN data, in fact, last time also made this question. See, there is a lag in the VAHAN data, right? I mean, if I were to give you very clear-cut, I don't how you can see that if you refer to last year's festive. The festive was in the month of October, started on 28th of September and then it ended by the end of October. The peak in VAHAN, if you see, that came in the month of November and December, which clearly indicates that there is a lag. In fact, if you look at some of the markets where there is no lag with the same-day registration, you wouldn't see any difference in the data points. And more for us, wherein we are spread very, very deep into hinterlands through our vast network of 6,000-plus outlets, there may be a slight lag here and there. But at a long-term number, if you would add up, it will work out to be the same. Also, there are 3 states which are not on VAHAN, which contributes to close to 18% to 20% of our numbers.

Okay. Okay. Got it. And second question pertains to the Harley-Davidson alliance. So given that their 2 separate agreements, distribution and licensing. Considering the licensing agreement will kick in once we develop products maybe in a couple of years' time or a little later, in the first phase of distribution, what -- the products will be manufactured and supplied to us by Harley-Davidson, right?

Yes.

Okay. And the second, the licensing agreement. Where -- will it be joint development of products or it would be product developed by Hero, approved by Harley and sold by Hero under Harley brand?

So those are the detailing of how both partners will work together. But primarily, as we have said, that the bikes will be developed, manufactured and sold by Hero. But yes, the cooperation, the collaboration will keep expanding and keep extending.

Okay. Okay. Any thoughts of making any new products, which Harley has in its portfolio right now for India and for global markets?

Sorry, I didn't understand the question.

Primarily, any thoughts on making India as a hub for certain models of Harley-Davidson investment that will leverage on your vast vendor network and in turn get cost benefits?

Right now, that's not within the scope. But as I said, this is the start of the partnership. And the partnership is intended to continue to expand and extend in the course of time.

Got it. Got it. Just a clarification on staff cost. Was there any provisioning for the first quarter mentioned as reflected in the second quarter? Are we considering the change to be slightly in the high side?

No, it's just that, as I said, the only elevation is because of higher level of productions. And obviously, as you were getting the migrant labors all back and from social distancing measures, so some part of it is elevated, which would get normalized as we move forward and COVID-19 normalizes. But otherwise, it doesn't contain anything which is off the previous quarters.

Got it. And just a couple of data points. Wondering about the spread of revenues and operating other income and in the price increases during the quarter and in October.

Yes. So the parts revenue for the quarter is INR 801 crores, which reflects a 10.7% growth year-on-year basis. So that's also been a good story for us, where parts have been growing now well. As far as other operating revenue is concerned, that's INR 187 crores for the quarter. And the price increases, you have already seen in the market that we have taken from 1st of October.

[Operator Instructions] The next question is from the line of Mike Sell from Alquity.

I just have one question. You said that retail sales were at 96% of last year's levels. Could you give us some granularity between rural and semi-urban and urban? Given how strong these -- the monsoons have been in the harvest, are rural retail sales in significant positive territory, and that's being dragged down by urban? Or is it pretty consistent across areas?

So, Mike, let me hand this over to Naveen.

Yes. Mike, so rural continues to remain positive as we've seen since we restarted up during COVID times. There was a lag in urban and semi-urban, but they seem to be coming back. And yes, the difference in terms of the growth rates between rural and urban, which in the pre-COVID times is to remain between 4% to 6%, is somewhere around 8% or so at this point of time. Urban's coming back, and we are seeing traction in both markets at this point in time.

Yes. And overall -- you're right, Mike. Overall, the rural is positive growth, getting a little bit of offset by semi-urban and urban. But that also, we are seeing the growth is catching up as more data are coming back.

In fact, on the rural, just want to add. Mike, this is harvest time here in India, right? And the farmers are going to [ mandis ] to put their harvest and get money. So as we move into festive in the first week of November, we would see further positive data from our side.

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

I have 2 questions. The first one is specifically on the 125cc motorcycle segment, where we've seen some aggressive gains by Pulsar 125. I just want to know how that is -- how much of that is actually cannibalizing our brands and how much of this is actually marketing expansion and how you propose to counter that?

Okay. So see, we are going as per our plan in 125cc, and this is something that we've held very dearly to us in terms of the way we have invested in 125cc. The 2 of our brands, which is the Splendor and Glamour, they are in the new avatar. In fact, in festive, you would have seen that there's a great addition of Glamour, which is now out in the market. Essentially, in BS IV era, these brands were limited to certain geographies. In BS VI period, because of the kind of performance and the kind of work that we have done on these products, we are seeing positive numbers in new markets and not those core markets, for example, Glamour, it was East and AP/Telangana story. Today, it is the pan-India story. We see year-on-year, there is a gain in terms of its own contribution into our portfolio as well as market share gains. So that's it from my side on this.

Okay. So another way to interpret it would be that probably the new entrant is expanding the market rather than cannibalizing most of them?

Cannibalizing within their portfolio is something that I won't comment at this point of time.

Okay. Great. My second question, sir, is can I have the share of volumes which were financed this quarter? And what portion of that came from the Hero MotoCorp over others?

The financing has, Karthik, has been on the uptrend. The other financiers have started coming back. Clearly, that's a reflection of confidence in the 2-wheeler story. And also as all the NBFCs look towards a smaller ticket size and shorter tenures, so that is auguring well for 2-wheelers. We've seen actually financing penetration going up at 40% plus this quarter. And out of that, the Hero FinCorp share has gone up to 50% plus. We see the continued uptrend week after week. And hopefully, by the end of next quarter, the financing would have gone further higher as the more financing keeps coming back and also as semi-urban and urban also catches up on the growth bandwagon.

[Operator Instructions] The next question is from the line of Chirag Sureka from DSP Mutual Fund.

Sir, my question was on finance only. My question [indiscernible]

Sorry to interrupt. Chirag, your voice is breaking. We can't hear you.

So my question -- okay. Is this better?

Yes.

Okay. Sir, just answer my question partly. It was on finance only. Do you see that the low financing and retail customer financing, especially in urban India, is going to be challenged, given the fact that collection efficiencies have been poor for some of the financial and they are still cautious on this segment?

Not really, Chirag. Because if you look at it, what are the NBFCs doing? If you have to curtail the risk, then you will curtail out the bigger ticket size loans because that carries a bigger risk, and you will cut out on the longer tenures. So therefore, you cut out on the tenure risk and the size risk. If you take both these into account, then probably the best way to do it is to actually move that money into 2-wheelers. So we don't see a challenge as far as urban financing is concerned. It's just about semi-urban and urban coming back to growth, which is the trend that we are seeing. Rural has been the first one off the blocks. And then, of course, semi-urban, urban now catching up. So we really don't see a challenge as far as the urban financing is concerned once the growth comes back.

The next question is from the line of Ashwani Agarwalla from Baroda Mutual Fund.

Hello. Sir, we have seen a sharp decline in the labor cost for this quarter on an absolute basis -- an absolute number basis. So how far is this sustainable?

So this quarter, actually, the employee cost hasn't declined. They have actually gone up on a year-on-year basis by 9%. And as I explained, that is broadly the effect of obviously the annual impairment. And second, it's slightly elevated in this quarter as we have ramped up the production in very short time. So you take measures which actually increases the cost in a short-term period, which will get normalized as we move forward.

Sir, I'm talking about the per unit cost of labor on the production side. If you work out that number, that is...

Yes, yes. So labor is not variable. So largely, it remains -- large part of labor cost is a fixed cost. And therefore, per unit would not be the right way to look at. That will always depend on what the volumes are.

Okay. And you have made absolute EBITDA per vehicle of [ INR 7,500 ], which is -- which has not been there in the last 20 quarters. So is this sustainable, this number?

Well, we are doing well. That's all I can say, and we are expecting positive FY '22 as well. So the top line keeps coming. The bottom line will keep coming. And we have been doing very aggressive cost and cash management. Costs, you have seen the results of that are reflected in the P&L with our LEAP 2 programs, and you'll see more moving forward. And cash management also, I'm sure you would have noticed from our operating cash flows. They are one of the highest in this quarter. We've generated more than INR 3,000 crores of operating cash flow in quarter 2 on the back of the working capital efficiency and cash management.

And sir, going forward, we have seen hardening of metal prices and also of the precious metal prices. So how does it affect you in going in the next 2, 3 quarters?

So actually, look, the commodities, there are periods when commodities go up. There are periods when commodities come down, and we have -- all of us have seen these cycles. The important thing is weather through these cycles, that the company has the ability to navigate through, through a combination of, obviously, sourcing, cost savings and pricing. And I think we adequately demonstrated that through all these periods of ups and down. So honestly, that's not really -- I would not really be concerned about it, nor I would venture into forecasting the commodity prices. But what is important is how do we navigate through these, and we've sufficiently demonstrated. Also to see the commodity trend, for instance, crude actually shows range bound. It's still hovering around just $40. While yes, the steel and aluminum has gone up. So there will be ups and there will be some downs. Currencies have started appreciating back. So there will be these offsetting factors as well. And whatever the remaining, we have -- we are confident about our ability to navigate through these and maintain the margins as we have demonstrated in the past.

[Operator Instructions] The next question is from the line of Chirag Jain from IDFC Securities.

Chirag Jain from DAM Capital. Just a couple of questions. Number one, last year, during the festive season, we had a lot of offers and discounts. I mean, generally at an industry level, even though the financial impact was a bit limited, and -- so how do you see the competitive dynamics on the ground this festive season, especially in terms of discounting? That would be my first question. Second question would be, I mean, one of the, let's say, concerns that we hear from investors is obviously how the post-festive scenario may look like. Obviously, in the current festive, while rural has been strong and semi-urban and obviously, urban is catching up, how do you see, let's say, post-festive once, let's say, the pent-up demand is largely through? Any specific comments around that?

Okay. So I don't think this is -- this festive has been a period of discounting. The efforts have been more in terms of bringing cheer to the market by kind of giving a good feel to the customer, with decorating it right. Whatever offers are there, they are very, very strategically positioned in terms of looking at -- in one of the segment, which was down in the run-up, which was about a replacement buyer. So there has been effort in terms of getting those customers out and making a purchase in these festive times. So more around that. As far as the post-festive time is concerned, you rightly said that pent-up is over. And the fundamentals are playing at this point of time. Rural deployments continue to remain strong. Urban and semi-urban, there is a sign which is coming back. Unless until there is something around COVID, I see this positivity would continue as we move forward. So we are cautiously optimistic about the times ahead post festive.

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

First question is on -- I mean maybe you can highlight something more on LEAP 2 program? Because we have seen Q1 was a pretty low volume quarter and in Q2, we have bounced back to almost the highest level of production for us. So how have you been able to navigate cost? Any specific areas we've been able to deliver much better cost control?

Right, Ronak. As we announced, we have launched the LEAP 2 program, which covers right from design stage to on-stage production costs, straddling the entire chain. And internally, we have upped the target from LEAP 1, which the internal target was 50 basis points, to LEAP 2, which is 100 basis points. We are tracking well on that. Obviously, the results, you will see in coming quarters as it comes. And then we'll be able to give you more definite outcome of that. But we stay confident and in fact, this is one of the things that definitely will help us even if the commodities move up to navigate through the crisis and of course, also help us in moving back to our long-term guidance of the EBITDA margins.

Sure. Okay. And the second question was, I mean, I know you kind of check even -- or you claim to, I mean, here we are, raising your inventories and such in the marketplace, just given the assumption was [ very strict ] -- to be -- to start strong. But obviously, we have seen some decline in the first 10 days. So any specific reason you could ascribe for where the -- why the demand has not come back? Is it more to do with the replacement buyer itself? Any specific reason which you can ascribe to?

No, actually, we started strong. So I don't know why we think 96% of last year's festive is not strong. Remember, the last festive, last Navratras, the 10 period was the highest ever festive for us. So on that base, it's a very good number. And as we've said that over this period, we have seen now semi-urban and urban catching up. So it's not about the different categories of buyers, it's just that the different geographies are coming and joining the bandwagon a bit late. And as Naveen explained, this period is just 1/3 or 30% of the overall festive. And moving forward, with semi-urban and urban catching up, clearly, the next part of the festive, one would see even momentum continuing further.

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

I just want to understand, could you give us a sense of what was the retail growth for you in the second quarter?

As far as retail growth in second quarter, it's not relevant for retail, honestly. I mean there's start period, there's off period, there's run up to festive. So sufficient to say that as far as retail is concerned, it's still better than the pre-COVID level.

Okay. I mean like retail, you're saying was better than pre-COVID?

Yes.

Okay. And just because -- I mean, like -- I'm sorry if we belabored on this one, because it seems like a lot of investors have a lot of concerns around that. And we're seeing as somewhat your retail market share in the last few months dipping on that front. So just wanted to check if you had any comments around that? And the second thing was in terms of our analysis of looking at VAHAN data for 2-wheelers in particular across states, what we see is that -- I mean the numbers for UP seem to be extremely unique. I mean, down more than 35%, 37% for the second quarter and pretty weak overall for UP. So just wanted to get a sense what you see? I mean, has UP demand being that weak for the industry, if you could just give some thoughts on that?

Yes. Let me ask Naveen to add some more color to it.

Okay. So we've explained on VAHAN about the lag. And in the market that you talked about, UP, Bihar and there are markets wherein there is a temporary registration, there is a lag. So the numbers come with a lag. If you look at our overall market share, even on VAHAN, we gained 2% Q2 versus Q2 on VAHAN also, right? So that's a number which is there. In -- there was a short period and then you got the run up to the festive, which is again 15 days. These numbers normally get reflected later on. And I had given the reference of last year also, and that data can be checked. We all know that retail picks up in the festive. But if you see the data of last year, November and December, you will see the peaks arriving there on the registration numbers.

Okay. And just on financing. I mean, what we understand is that there is a reduction in, to some extent, in the loan to values. So I mean, are you seeing a decline in the, like, the industrial and mass market segment in terms of loan to value overall? Or I mean in the percentage of financing?

Not really. There's no trend as such. In fact, moving forward, we do expect financing to keep moving up.

And it's moving up. There are initial signs even in festive also, we see there is a positive movement in financing.

In fact, that should be, again, Naveen, a good driver for growth moving forward.

Yes, absolutely.

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

Sir, my first question is on the demand. I think you are really also trying to explain that in ways of the demand in industry. My question is more -- there is a good level of optimism initially post the lockdown on the 2-wheeler purchases path from a personal mobility perspective. From those initial levels of optimism, we have seen some prior reduction there in. So you did mention that the growth in differential between rural and semi-urban is around 8 percentage points at this point in time. Is it more of an impact that has now become more pronounced in the last couple of months that you are observing initially and that is leading to this sort of a growth in differential because of urban and rural? Or do you see that then normalizing [indiscernible]

I'm really sorry. There is a lot of noise. I'm not able to hear it clearly. I would request if the question can be repeated, please?

Is it better now?

Yes, much better. Yes.

Yes. Okay. So my question was, there is initially a very good level of optimism post lockdown on 2-wheeler purchases for personal mobility. From those levels of optimism, there seems to be some decrease there. And you did -- you also mentioned that the growth rate differential between rural and urban is at 8 percentage points at the sale. So this increase in optimism, is it more due to the income impact that has now become more pronounced in the last [indiscernible] between rural and urban that has -- for a typical 2-wheeler customer that has led to this kind of a differential between the rural and urban bucket? Or has it got to do with the replacement buyers slightly holding back than the first-time basis? So can you give some perspective on this then?

Yes. So we've seen in past also, different parts of the country, urban, semi-urban and rural, has got a different level of penetrations in terms of per household. And hence, the contribution of the replacement buyer is higher in urban as compared to rural. Rural is the first-time buyer, which kind of drives the demand. And hence, we've seen in the run-up also in the last few years, rural always led by 4% to 6% in terms of demand. Now immediately after we opened in the COVID times, we saw that this difference had gone up to even 9%, right? With semi-urban and urban coming back, this is coming back. And as I said, very strategically, we've been driving this replacement buyer to come out. In fact, you guys would have seen, we've run up -- we did a major campaign on 8th, 9th and 10th of October, wherein we've got 500,000 customers visiting our workshops. This was primarily aimed at driving the urban demand.

Understood, sir. And are you seeing more of income impact in our -- in a typical more of 2-wheeler buyer on the -- more on the semi-urban and urban areas now in the last couple of weeks than what you were witnessing before? Or is it more getting better and better? What is your sense and the aim from that perspective?

I think as more and more sectors are getting opened up as an economy, and we are seeing those, things are actually improving. In fact, early analysis also shows that some of the HF dealers buyers actually have upgraded to Splendor Plus. So I think that those are signs are good, and it should continue.

Okay. Understood, sir. And on the commodity prices, you had mentioned that we have enough leeway to manage that. But from a Q3 perspective, given that there is -- we are hearing investment could increase in the underlying bases in prices, how much do you see impacting us per se? And what is the average price mix that we have taken from the 1st October? And can we indicate this commodity price impact per se?

Yes. So as commodity is concerned, I think I did explain a little while earlier that honestly, commodities will continue, sometimes to go up and sometimes go down. And we, through our scale, through our sourcing, through our cost savings management and through our appropriate pricing, has been able to manage that in the past and the current as well. So we don't see a concern at this point in time. As far as such price increase is concerned, we did take some price increase on 1st of July, and we have followed that with a price increase on 1st of October as well, which is rare in the market. So those are all actions which we take judiciously with -- looking at our product positioning, looking at the markets, looking at the margin and looking at, of course, what the cost factors are.

Understood, sir. If I can please, one last question, sir, from a balance sheet perspective on the working capital side deal, we have very good working capital management, sir. But from a term-to-trade perspective, the trades appear a little more switched there in, so has there been any change in terms of rate on the payable side? Have these households reached this? Or is it more of a September ending and therefore, we are seeing a spike in that -- in the cases?

So I'm pretty glad that you have picked up our very good working capital management. Because eventually, cash is king and that helps lubricate the entire chain, which is also helping us ramp up much faster than others. As far as working cap is concerned, first, let me comment on the receivables side. If you compare our receivables vis-a-vis the same period last year, which is September in last year, you would see that the level of receivables are far lower than last year. That also reflects a good financial health of the dealers, which is again helping us get the growth and also the support that Hero as a company has been providing to the front end to all the dealers through this crisis. So that -- those policies, those philosophies have ordered well in terms of the cash flow, the collections that are coming from the dealers and, therefore, helping us manage the receivables at way better levels than even compared to last year. As far as payables is concerned, it is a reflection basically of higher production because we have 45 days credit terms. So when the production is ramping up sequentially, as you have seen from a level of INR 5 lakhs to INR 6 lakhs to INR 7 lakhs, then obviously, the payables with the same credit terms ramp up. So it's just a reflection of the higher production and no change in payment terms.

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

A couple of questions and one clarification. First of all, have you passed on the entire cost of BS VI [indiscernible]?

Sabyasachi, your voice is not very clear. Can you try again? Or maybe we can move to next caller.

Hello? Can you hear me?

Yes, slightly better. Yes.

So for my first clarification is have you passed on the entire cost of BS VI to the customer?

Yes. As we have outlined, the absolute costs have been passed on. The margin recovery on that will be a process, as we highlighted, to come back through our long-term margin range.

That is 14% to 16% that you said, right?

Yes.

Okay. Next is so what would be our current inventory position in the channel? Is it fair to assume it is 6 to 8 weeks?

The inventory position at this point in time is honestly not relevant and cannot be calculated in terms of number of weeks. What we are doing is it's nothing out of ordinary. In fact, what we are aiming at is less than 4 weeks post festive. We are -- the dealers continue to demand more at this point in time. And that is why we've been ramping up our production and dispatches. And as we highlighted, we -- for the last 10 days, we have been able to produce 30,000 per day for 10 consecutive days. And that's happening simply on dealers' own demand because whatever we are producing is getting dispatched immediately.

Sure. That's great to hear. Lastly, on your strategy on the Ather Energy is concerned, what is your long-term plan? And what is our current stake if you can highlight?

So let me talk more about our EV strategy rather than Ather strategy. As far as EV is concerned, as we highlighted, they are both, Ather, of course, we invested in 2016. We continue to have 30% -- plus stake. Our current stake is 34.6%. And plus, we continue to develop our own product as well. And Ather is more focused on the premium side of this one, not so much on the mass side. And obviously, Hero's development is going to straddle across both mass and premium.

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

Most of my questions have been answered. I just have something on other expenses. In the past, we've seen that the other expenses as a percentage of sales tends to be higher in Q2, Q3, Q4 versus Q2 as our retail sales play out in that quarter and sales promotion and sort of spending ends up being higher in Q3. So how do you see that playing out? Are we again see a similar trend where your average purchase or percent of sales rise sharply in Q3 versus Q2?

I think it's better to look at other expenses on the annual basis, full year basis. And if you look at on a full year basis, we don't see any reason why the percentage to sales should be any different as compared to last year. It will be consistent on an annual basis.

Okay. And -- okay. Noted. And secondly, you mentioned about this earlier also in the call. But we, in the past, also talked about the shift from sort of public transport to private ownership. Any anecdotal data that you have in terms of percentages or anything on that?

As far as your ownership, private ownership is concerned, there are trends, definitely, where you also see corporates, you also see -- even urban areas, as Naveen talked about, our growth in South and West and Mumbai. And one can clearly see people getting on to their private vehicles. And that seems to be a theme that could stay for a while. Naveen, you have anything to add?

I have seen in one of the works that we have done, one segment, which is office growth, is increasing its contribution in terms of our retail, which clearly indicates that there are people moving from public transport to private transport, right? So that's just one data that I wanted to refer to investors.

Will you have data of first-time buyers now versus pre-COVID? Because that will also sort of show that shifted away?

Yes. Yes. That's positive. And as I said, the replacement buyer had come down, which is ultimately resulting into additional buy and the first-time buyer going up.

Could you share the numbers like what was it pre-COVID to now?

Exact details, Umang will share with you separately.

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

Yes. My question was related to the previous question. So if I see the last 6 months, I think the demand for 2-wheelers and 4-wheelers has been driven by a combination of rural doing well, plus some pent-up demand and some -- the fact that there will be some needs-based panic buying, office growing, like you mentioned. So going forward, as the market normalizes as seen kind of now, where do -- which segments would do well? I guess rural just will continue to do well, but pent-up and need-based may taper down to some extent and replacement will come back. So if you can give some idea as to how you see the next 6 to 9 months panning out in terms of demand here?

I think just one thing to add, demand for Hero, one point is it's also about market share gains, right? So if you look at 3%, which turns out to be close to 191,000 units, so that's some also factors. So we are kind of positive. New products are placed very, very well in different markets. The very fact that in South and West, in top 10 towns, we have gained significant market share, right? So it is going to go in the first-time buyer. The replacement has been holding on. They will come back, so that's also a segment that we will see. We've got very nicely positioned Passion Pro for somebody who looks at a good option from 125 to 110. So that's with 22% torque up. It's a good product for them. So that's how I look at it as we move forward.

If I can just to add, Naveen, to your point. I mean the other thing is if you look at our market share gains, we have gained in dealers, we have gained in premium, we are gaining around, we have gained in West, we have gained in scooters. So really, it's not been a rural market share gain story for us. Rural is an economic story that they have been struggling along, the economy has been leading. But for us, it's actually spanning across geographies and hardening rates. This is across the premium dealers, the higher-price segments and the more urban places where we have gained market share. So we have reasons to believe and we are confident this is the main factor. I mean, it's also the BS VI products. Our BS VI products have been received extremely well in the market, and that is playing out in terms of our market share gains.

Yes. And especially in -- if you look at 110cc, 125cc, I think in our BS VI product, with the latest technology, we are delivering value to the customer for the price, which has gone up. So -- and that's why we see the traction in our brand structure now in our product and gaining market share.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I would now like to hand the conference over to the management for closing comments.

Thank you, everyone, for coming in. I wish you a very happy Diwali, and keep safe everyone until we meet again.

Absolutely. Happy Diwali to all of you. Happy festive and keep positive in cheer.

Happy Diwali. Stay safe, and have a safe Diwali. Thank you.

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