Hero MotoCorp Limited (500182) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Hero MotoCorp Q3 FY '21 Earnings Conference Call, hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. We have with us today the senior management on the call. I will now hand the conference over to [ Mr. Amit Mishra ] from Antique Stock Broking. Thank you. And over to you, sir.

Thank you, Aisha. Good morning, everyone. Thanks for joining on this call. We thank Hero MotoCorp management for giving us the opportunity to host the call today. We have the senior management team from the company. I will now hand the conference over to Umang Khurana, Head, Investor Relations, Hero MotoCorp. Thank you. And over to you, Umang.

Thank you, [ Amit ]. Thank you, Aisha. Hello. And welcome, everyone, to the quarter 3 post-results earnings call. On the call with us today, we have our CFO, Niranjan Gupta; and our Head of Sales and Aftersales, Naveen Chauhan. We will begin with opening remarks from Niranjan and then open the floor for your questions. Over to you, Niranjan.

Thanks, Umang. Hi. Welcome to everyone on our earnings call today. Good morning, good afternoon and [ good evening ], depending on which part of the globe you are attending from. I hope all of you continue to stay safe and healthy. As you have seen, quarter 3 has been a historic quarter for us in many ways. Despite all odds, we delivered the highest daily production, highest monthly production, highest quarter 3 volume sales and highest-ever quarterly revenue. And we continue to have market share gains, market share gains not only in domestic, where we continue to expand our leadership based on strong portfolio, gaining by 190 basis points, but also in global business, gaining by 90 bps in the quarter. It has resulted in robust increase in revenue, EBITDA impacts, which you have seen, outlining our consistent principles of profitable growth. While we are propelled into a V-shape recovery, we continue to maintain all precautions across our operations with respect to COVID-19 and happy to report that we've reached a level of 0 active cases across Hero. The only thing which probably stands on a higher priority for us over profitable growth is health, safety and care for people and planet. You've already seen that Hero is the only 2-wheeler company in India to be included in Dow Jones' sustainability index for emerging markets. The outlook for global economy and Indian economy is strongly positive, as outlined by both IMS and today by RBI forecasting double-digit GDP growth for fiscal year '22 for India. The Union Budget and RBI policies are geared towards propelling underlying growth without giving into compulsions of short-term stimulus. We have stayed positive throughout the pandemic crisis and, our belief, getting translated into results and continue to stay optimistic about medium-term growth potential of both India as well as auto sector. We look now forward to your questions as well as inputs, and let me now open the floor for interaction.

[Operator Instructions] The first question is from the line of Binay Singh from Morgan Stanley.

Two questions from my side. Could you talk a little bit about your ASP expansion? What were the drivers for that in this quarter? We see ASPs up around 2.5% quarter-on-quarter. Within that, could you share your scaled number in the September quarter and December quarter? Secondly, one of your peers have talked about almost 300 basis points of pressure on the commodity side. How would you see those pressures? How much of it is already there in December quarter? And what kind of headwind are you expecting in the March quarter, and how are you looking to offset that? These 2 questions from my side.

Thanks, Binay, for asking that questions. On the selling price, it's a combination of 2, 3 things. One is the price increase that we took from 1st of October. The second is our mix is also improving more towards premium, which again is improving the underlying health of our portfolio. And the third is parts, which yourself have asked a question, where we grew by 29%, where last year was 800 crores. And we had in quarter 2 as well similar numbers of 800 crores. And this year, this quarter which is quarter 3, we've delivered 1,033 crores or 29% growth. Before I come to commodities, let me just ask our Head of Sales and Aftersales, Naveen, to talk a bit more about the parts because there's an underlying change that has happened in the way we sell parts. Naveen, would you like to add more color to the parts growth and what we are doing and the future potential?

Sure, Niranjan. There is a fundamental shift that we've initiated around 1.5 years ago primarily on the distribution side. I mean you say that you learn from across industries. We've looked at what's being done in FMCG and other businesses, the kind of distribution that they do going very, very deep into the market. So I mean we've looked at what a kind of distance, time, frequency at which things are delivered to the customers, to the retailers, to the [ street Hero's technician ]. I think there is a sea change in the way we've done. We've gone very deep at every district levels. Our number of retailers that we cater to is almost up by 50%, if I look at our number of independent technicians that we directly deal in. There is -- [ MDP ] on wheels is a new concept wherein we are delivering parts to technicians on a 2-wheeler. So all in all, a huge push in terms of going very, very deep with range into the market. And add to that another portfolio in our parts business which is what's building up is the accessories business. It's the initiative, again, 1.5 years ago that we've kind of put on track. It's showing results, and our plans are very huge on that as well.

Thanks, Naveen. Let me just come to the commodity part of it. Now Binay, commodity escalation is nothing new. I mean we have seen commodity cycles operating in ups and downs. And because of our portfolio; our supply chain; our scale; our ability to dial up, dial down the costs, we've been able to navigate the space of commodity very well, as you will have seen, in the last few quarters or the last few years. And therefore, we are confident of navigating this. And as we have mentioned, we will continue to focus on balanced, judicious price increases. We have taken price increase up. Industry across have taken from 1st of January, but we continue to focus aggressively on cost savings. By the way, our LEAP-II savings program, which we have outlined 3 quarters back, if I remember, that we embarked on has started resulting in significant savings. This quarter, we've generated more than 100 basis points out of LEAP-II alone, which is more than twice what LEAP 1 was generating. And we see sustainability of these savings moving forward in the next few quarters because they are on the back of very robust projects which were outlined in combination across the supply chain.

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

I have 2 questions. The first one is the 125cc motorcycles, where we have seen some sharp gains by Bajaj through their new Pulsar, which is growing off a very small base, but what I notice is among the mainstream brands in the 125cc segments it's actually Glamour which has been down the most year-on-year, if I were to compare it even to Splendor and Shine, et cetera. In your assessment, what would you attribute this reason to? And what are some of the initiatives that you are taking to arrest the share loss in the 125cc bike segment?

Thanks, Karthik, for the question. Let me start. And then I -- obviously I'll hand it over to our expert, Naveen, on this. Let's just take a recap back. Overall domestic, we've gained market share of 190 basis points in the quarter. In the dealer segment as well, we have gained share, but sometimes if there is a shift that happens -- and between 125cc and the 110cc dealers, our margin profiles are not very different. So on portfolio perspective we've gained share across the segments as well as overall domestic, and we'll continue to do that. Having said that, yes, there are certain things on Glamour which we have noticed and there are actions, but let me just hand it over to Naveen for more expert comments.

Yes, sure. I think it's the same story, right? There is so much of shifts. In fact, just go a little back in Q4 of last year, when the BS VI was coming out. Whole corona impact kind of -- it actually shook the consumers, the income levels, the industry. And the combination of the two, price increases on account of BS VI and industry impacted by COVID, had a lot of shakeup in the industry. Customers moved from one brand to another. Within the brands, you've seen -- you see our Splendor portfolio. The contribution is going up significantly. Within brands we've seen -- and it's true about some of the competition also. You would -- brands that you're referring to. You will find there's a huge shift which is coming down. And if we look at the consumer profile as well in the 125cc segment. Earlier, it used to be someone who wanted to have a little bit more power, more of commuters. Those were the kind of customer segments that we were looking at. Now it's the premium guy who's kind of coming a little down and opting for the style segment in 125cc. We've got our new products, fresh products in BS VI regime with Passion Pro coming into the same segment, attracting those style segments, as Niranjan said. Overall in the BS portfolio we've done good. So we are getting that customer with Passion Pro. The Glamour, particularly the product that you talked about, it also came into [ a new avatar ]. Interestingly, we've been gaining market share across the country, except for some of the core markets which are AP, Telangana and [ East ]. We have noted that and there are steps. And in fact, one thing that we've done as an organization trait is the agility to respond to the market needs, and that's been a mantra. We've got the same mantra and come up with the right solutions there.

Got it. That's great. My second question is could you share the share of financing this quarter for Hero? And within that, what percentage will be accounted for by FinCorp? And has the mix of your financials, by and large, changed either year-on-year or quarter-on-quarter?

So the finance penetration, and when you look at the actual final customer sales, is a percentage of close to around [ 50% ], although typically quarter 3 is because of festivals also somewhat elevated levels. But it's progressing in the right direction. And the FinCorp as a percentage is close to around 40%. We've been enrolling more financers into our [ bouquet of ] financing so that we can have more customized products in the pockets where different financers are strong.

Okay. So it looks like the share of FinCorp has actually come down at the margin.

Yes. You could also say that overall it's not come down on absolute but just the expansion of the penetration. So there are always 2 ways to look at this topic. And then every company has to optimize based on their own appetite for the customized products.

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

Two questions from my side. Firstly, on the financials, when I look at this consolidated P&L, there is a loss of about 100 crores that I see from the associates. Could you just give some color on what is this loss coming from? And if you can share a little bit more color on what's happening with the Hero FinCorp financials or asset quality, please.

Gunjan, yes, you rightly noticed. And that's because of 2 reasons. One is, as Ather has launched into more cities and into new products now post their capital raise, obviously, initial period, there will be a cash burn which will get a higher rate as they expand into more cities. And that's what reflected as part of that. The other part is, post the moratorium period getting over, obviously the entire NBFC and the financial sector are adjusting their provisioning and the NPAs. And therefore, you'll see the impact from FinCorp in the quarter. Their collections continue to be robust. They continue to pick up in terms of their continued collections that are coming in. And they are seeing buoyancy in the business growth moving forward from here on.

Is there any color further you can share on the numbers of FinCorp in terms of the gross NPA or earnings? If anything is handy. Because -- or the breakup of this loss. Because I'm just trying to understand. Is this something that we should be thinking from a modeling perspective, that there is going to be a similar drag when I look at F '22 as well?

Don't expect a similar drag at all, but Umang will offline connect with you and then he'll try to provide more color on this. This is a reset or readjustment which most of the NBFC companies have done in quarter 3 post the moratorium period getting [ lifted ].

Okay, got it. The second question I had was on the market, if you can share some color on how the retail demand has been, particularly post the festive. Because there has been a lot of concern in the market that 2-wheeler demand is still looking a bit softer. So if you can talk about it. And also you -- share your thoughts on this VAHAN trend. Because we continue to still see low-teen decline there. So both of this put together, it will be good to have your thoughts on how we are seeing the market.

So Gunjan, let me address the VAHAN thing, first, right? So it's consistently VAHAN is lower. And that's because of the coverage and obviously some of the data collections and the lead and lag impact but surely over a consistent period, if our sales are higher and higher and higher, somewhere those 2-wheelers are going. And I can assure you they are going to the customers and they are riding on it. So I think that's what I will say, as far as VAHAN is concerned. As far as demand is concerned, we've seen a good demand on the festive which has happened. And now the forecast, as far as the economic outlook is concerned, that is positive, double-digit growth by IMF. RBI today has talked about, if I remember, 10.5%. We are talking about crop which is again a growth over last year, rabi carb which is there. We are talking about the water reservoirs which are at a high level. GST collections are at an all-time high. So honestly speaking, all the indicators which would in effect boost demand overall and for rural and especially for auto are all in place, so there's no reason to doubt -- that demand will suffer moving forward. Of course, there can always be a couple of months here and there where somebody is off to a slow start, a [ marriage date ] which can shift from A quarter to B quarter. So those kind of things can happen, but underlying medium-term demand, if you see, we have no reason to doubt the robustness of the demand. And plus if you see the vaccine and the sentiment, people more going out, we see more sectors opening up. I mean, as of 1st February now, theaters have been allowed to operate at 100% capacity. Now one would queue that. What has that got to do with demand? But yes, more and more sector opens up. The consumer confidence moves up. And of course, on top of that, the Union Budget, which is focusing on significant increase in capital expenditure in crop projects, that will generate, hopefully, employment. And it's the right budget to generate, again propel, the medium-term growth. And RBI is keeping a soft interest rate regime, as we saw in the policy today. So all the macros are in place, including macros and micros, so there's no reason to doubt that -- if in a worst-affected period if the demand has been good and the results have been what you've seen, that in the period when the economy is recovering, it should be any different. If it should be any different, it should only be more positive trajectory.

No, no, absolutely. The results have been great, but I was just trying to understand that you mentioned there was a positive growth in retails and festive that we came out with the release. Is that trend kind of held on post the festive also? That retails have been stable is broadly what I was trying to understand. Or has there been any moderation?

Short periods are too short to actually look at. January, for instance, first fortnight, it was not an auspicious period. All of us know that. So I think let the things pan out in February, March; and we'll see. Fundamental drivers, we don't see anything different. If at all, they are moving in the right direction.

Okay, got it. And just one question I can squeeze in on the margin side: You mentioned there are levers around costs and levers around price increases. So we are sticking with that range of about, I think, 14% to 15% EBITDA margin that we had shared. Is that something we can manage when I look at next -- F '22 with the levers that we have of costs and price increases?

Yes. So as you know, we refrain from giving a quarter or a particular year guidance, but yes, as far as medium-term range is concerned, the trend line that guides us from our decision making is 14% to -- not 15%. It's 14% to 16%, which is what we have reiterated always. And you've seen how fast we've come back to those levels after the initial drops. So that keeps guiding us on balancing between market share growth and margins so that we can deliver profitable growth.

The next question is from the line of Siddharth Vora Reliance Nippon Life Insurance.

So if -- I'm a bit, listening to your product demand trends which you've pointed out, a little bit confused looking at the volume numbers for December and January. Is it a case of production issues or you trying to reduce inventory levels for better price hikes in the current RM cost scenario? How should we look at it?

I think, Siddharth, I would only suggest that we should never look at -- in our viewpoint at least, we don't look at a few weeks and 1 month or plus or minus, right? So we should look at a quarter in totality. And Q3, you have seen in totality what the numbers are. There is no conscious action to change dispatch numbers or inventory numbers. As it plays out as the quarter picks up, again the same will pick up back again. As we said, what is more important is are the drivers intact. Are the drivers getting better on macro basis, yes or no? And there we see the drivers getting better on macro basis. Interim period, a few weeks, a month here and there, there'll always be those pluses and minuses that happen on a demand basis. That's not reflecting underlying medium- or long-term demand [ patterns ].

Sure. And there is no supply chain issues relating to semiconductor or anything, right?

So semiconductor is impacting globally the auto industry, but we've managed it well and it's in control, as far as we are concerned. Our products are less dependent on semiconductors. I think, though I'm not an expert on 4-wheelers, what I understand is 4-wheeler sector is more dependent on the semiconductors. The supplies are picking up, but through our storage, our stocks or the back end, we are managing it well, so we haven't faced any production losses, so far, on account of semiconductors.

Sure. Just one question: I was happy to see a lot of anniversary editions across the product range which we saw during the festive season. So it is -- just to catch-in in terms of the festive season premium demand, trying to improve the overall realization? Or you will see such models going on sales for the entire year. How do you look at it?

So let me start, and then I'll hand it over to Naveen, on this one. We will -- first of all, as we have outlined 2, 3 weeks back as well -- is we will continue to have new model launches as well as refreshes going forward every year. And this is not something new, but this is something that we've outlined even a couple of years back, and you've seen that. Alongside, within these new models you will see a focus on premium, which again we have outlined that we will continue to see over the next 3 to 5 years us actually spanning across the entire middle-weight segment and across the different classes like adventure, commuters, sports, et cetera, et cetera. So within that, that's what was outlined, that 10 or more than 10 models, including refreshes, will be there every year. As far as the current one is concerned, as you know, we crossed the historic milestone of 100 million cumulative production. That's a big milestone not just [ of historic quarters ], but it also indicates the huge customer base that we have and the potential this customer base has for revenue and for monetization moving forward. So on that occasions -- these are the occasions that we'll leverage to then launch the variants and editions, which then propel and rejuvenate the market. Naveen, would you like to add something, color...

Yes. So -- and in fact, our experience with these, the variants that we've created, the refreshes that we've created, it has gone wonderfully well for us. I mean in festive we had launched blaze and canvas model, which was kind of based on the crowdsourcing idea. It has done wonderfully well. It continues to do good. Pleasure platinum has been able to expand the Pleasure brand across the geographies. So the strategy that we have taken in terms of coming up with refreshes is working well, and we continue to kind of move ahead on that.

Yes. So these refreshes are available all [ from this. It's not that for the end of ] festive season for that 1 month and they are no longer available. [ Just to predict that ]...

See, if you're talking about 100 million, it's going to be limited editions, right? It's a [ limited-edition model ]. However, there are a few refreshes that we're talking about. They are there for -- on a sustainable basis; for example, the Splendor canvas addition, which will continue to be there. It is exciting the market. You will see more of it. Pleasure platinum will be there. It's a new variant. So that's what it is.

The next question is from the line of Raghunandhan N. L. from Emkay Global Financial Services.

Congratulations on strong numbers. First question is on student demand. Student demand as a category used to contribute 10%, 15% of volumes in normal years. This segment has been weak in recent quarters. How do you see the recovery panning out in this segment? Any thoughts there?

So Raghu, absolutely right. And we talked about not only macros but micro factors, and some of the factors will come alive. And something that I -- that we missed talking about is what you have picked up, which is the student demand. As the colleges and schools start opening up, as you have seen in certain states which have already been announced -- I think Maharashtra, Delhi and some other states have announced. As they start opening up, that part of demand also will come back. Naveen, would you like [ to add ]?

Yes. And we are seeing that in more urban centers opening up, more school and colleges opening up. This demand which used to come normally in the month of June, July, it's kind of manifesting now.

And it should gain momentum going forward. I mean just to get us a sense: How weak is this portion of business in the last quarter or year-to-date? And when do you see the normalization happening?

So this has started picking up. We know that, due to lockdown of colleges and all, which -- normally which used to come in the month of July and on, as I said, it was not there. The pent-up of that is going to come down. And as, state by state, colleges are opening up, this will manifest.

My second question was on premiumization is being seen in the industry, and Hero has done well so far in terms of market share. Assuming this premiumization persists over the next 2, 3 years, how would Hero look at sustaining market share? Can you give some color on new products ahead to get benefit of premiumization? Also by when can we expect details of joint product development with Harley?

So Raghu, absolutely right. Premium is a big focus area, and we outlined the strategy. Even in Hero World last year, we reiterated there. And you've seen. You've seen that the focus is on building a full portfolio of premiums. So we went with our models in 200cc to create that, again, a positioning which will take us into a higher level we've now gone into with 160R, which is right in the belly of the market. And you will see more and more actions. As we have said, we will cover the entire middle-weight segment, which we have outlined earlier, in the next 3 to 5 years. And you will see actions every year with some of the other premium models coming in. Our partnership with Harley. That again, in a sense, is icing on the cake because that allows us to get into a segment which would generally be difficult unless you've got that retro, that heritage brand image. And you know what I'm talking about. So that, again, product development has already started. We can't give you the timing as of now, but we are accelerating that plan so that we can get into that segment as well. So you will see a lot of actions, as far as premium is concerned, moving forward.

And on the top of it, I think the kind of portfolio that we have and it's going to be in the near future. It's doing well in urban markets wherein you kind of associate the premium products. We've been gaining good grounds. Interestingly, with 160R we've been able to expand the size of the pie in some of the rural markets as well. I think that's another story which is working fine and good for us.

On Harley, if you can also mention some details on this distribution venture. How will be -- the business model be? Or on the margin side, how does it work because now things have commenced?

Yes. So as far as Harley is concerned, you saw the announcement. We now have a separate division which has been put into place in double quick time. As you know, that we just -- probably around 3 months back, October 27, 28, we signed the deal. And the full team have been put into place with a full business division. We've already signed on more than 10 dealers. 11 dealers were signed on. Dispatches have commenced. So really we are full throttle into this. And what this business would do is, apart from as a distribution business, more importantly, the association of Hero with Harley augurs very well, as far as the premium brand imagery is concerned. And I know that you and some of our other friends on the call had been asking me in the past that, "You can have products, but where will you get the imagery from?" Of course, there are 2 ways. Organically, you build a brand. You can still build. Or inorganically, you tie up and collaborate in some form or the other. So that way, the association augurs very well, to lend that image to Hero as a premium association. And of course, with the product portfolio that I just talked about, the combination of these 2 gives us huge confidence on the premium portfolio moving forward on a medium term.

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

This is Shyam Sundar from Sundaram. And a very good operational performance. You also indicated the LEAP savings that are flowing through. Many congratulations on the execution, sir. Sir, my question is related to the RM cost inflation. We have spoken about it. I just still want a little bit more clarity on that, sir. So until now, on a blended basis you will have taken somewhere close to a 2% to 3% blended price increase. And does this price increase offset the RM inflation in Q4 as well? That is my first question, sir.

Shyam Sundar, on as far as the cost inflation is concerned, let me again reiterate. So this is not something new that we are seeing. We've seen many quarters where the cost spikes up and then it comes down, and yes, industry is facing that, again as far as the Q3 and Q4 is concerned. We've managed Q3 very well by accelerating the LEAP-II savings, as I said. The saving program has sustainability of delivering those numbers over the next few quarters, and that gives us confidence. So I think a combination of the price increase that we have taken and the savings program that we have in the pipeline. We should be able to manage the margins and overall deliveries, but yes, we need to keep navigating this space because, rather than looking at a month, 2 months or a quarter, we need to look at it more in terms of a few quarters put together and which is where we keep saying that our overall range for the medium term of margin is 14% to 16%. And that keeps us guiding. When we go below 14%, it tells us that we need to do something more and we move towards closer to the 16%. Then probably there is the potential for growth or fueling growth more. So I think that helps us, the trend line helps us in terms of navigating.

That's very helpful. Sir, my next question is on the demand outlook, sir. If you can provide some geography-wise outlook between North, West, South and East. The reason I'm asking is we do hear some disruptions because of the farmer protests in North, et cetera. How are you seeing the underlying demand in terms of the various geographies? If you can give some perspective, that will be very helpful, sir.

So let me just talk a bit, and then I'll ask Naveen to add. I think the underlying demand, anyway, like you mentioned, underlying word, in my view, in our view, shouldn't be looked at from temporary agitations or disruptions. Because then it's not underlying. It's a temporary shift as because of disruption that happens. And as I said, because of macro, micro, there's no -- there's no logical reason to believe that the demand moving forward over the next few quarters should be any different than what we have witnessed, if at all positive. There, of course, will be a few weeks and a few months here and there when the occasions shift, [ the managed day ] shifts, that some agitation happens, that you could see some kind of things that come -- or bumps that come along your way. But inherently what we look at is the underlying demand, and we don't see an issue on the underlying demand on a medium term more forward. But Naveen, [indiscernible].

Sure, Niranjan. I think you've said it right. The fundamentals remain the same. Macro factors, the rural factors, they are all working positively. Month-on-month, there may be few occasions in some of the markets. Like, for example, there's [ still someone in South ]. You would see [ them and ] doing good, right. So -- and more and more, you will see the migraine workers coming back. You will see those markets in that month, in that period, in that quarter would add to the demand. So at a fundamental level, things are well in place. These chapters of some festivals on the market and markets opening up, schools opening up and, as we've seen, that gradual state to state. So that's how it will be. Dynamism is going to be the name of the game, and we've been [indiscernible].

Understood, sir, understood. One last question, if I may squeeze in. On the export market, while it is still a very small part of our overall volumes, festive has seen a good ramp-up on the export side. So where are we headed? Any aspirations that you can share specifically on the export side from a 2-year perspective? Do we want to be, let's say, 10% of [ our ] volumes? How would -- where would we want to see ourselves heading on the export side, sir?