Hero MotoCorp Limited (500182) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hero MotoCorp Limited Q1 FY '22 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jinesh Gandhi from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.

Thank you, Faisel. Good afternoon, everyone. On behalf of Motilal Oswal Financial Services, I would like to welcome you all to 1Q FY '22 post-results conference call of Hero MotoCorp. I would like to thank the management for taking time out for this call. I will now hand over the call to Mr. Umang Khurana, Head IR and Business Support, to introduce the management. Over to you, Umang.

Thank you, Jinesh. Hello and welcome, everyone, to the post-results conference call for Hero MotoCorp on quarter 1 FY '22. I trust all of you are keeping well and hope that this continues to improve as we meet for the next quarter as well. For today, the plan is to begin with the CFO. We have Niranjan Gupta on the call; and our Head of Sales and After Sales, Naveen Chauhan. The CFO will begin with opening comments, and then we will take your questions. Can we now begin the call, please? First, Niranjan, over to you.

Thanks, Umang. Good afternoon, everyone. Welcome to Hero earnings call. You would have seen our results announced yesterday evening. We delivered 10.25 lakhs of volume, a 200 basis point market share gain in quarter 1 over full year '21, and a bottom line of INR 365 crores, significantly better than Q1 of last year. As all of us know, Q1 was a difficult quarter for not only the industry, but country as a whole, with wave 2 impacting across several sectors, every lives and across the board. Fortunately, as we speak now, it seems to be behind us. We at Hero, during the quarter, prioritized safety of our employees, of our customers, our communities, of all the stakeholders around us. We closed our manufacturing operations much earlier than others. We, of course, as you know, we restarted also on a very fast pace once things were clearer. Vaccination, there's a big drive that has gone on. More than 95% of our employees, direct, indirect, across the channel, everywhere, has got vaccinated with first dose, and they are well on their way on the second dose. That gives us huge confidence as we move forward on returning to normalcy, not only economic, but sector, 2-wheeler and our company as well. As we move forward, there are positive signs in the economy that have emerged very clearly. GST collections have come back on track. We see EV bills coming back on track. We see a very good monsoon, which is happening as we see. And that augurs well not only for the crop cycle right now, but actually the next crop cycle as well, as you know, because Indian economy depends a lot on irrigation and, therefore, water is our life. As we see ourselves, more than 90% of the outlets now are operating normally without any kind of micro-lockdown. And our retails have reached more than 80% of the pre-COVID level. There are more festives which are coming, [ flower ] festives throughout this month and part of the next month, followed, of course, by the big festive, as we know, with Naropa and Diwali period that happens -- that will happen in the month of October. Moving forward, as we said, looking at the shape of monsoon, looking at the shape of economic revival, we do expect positive trend, which has started already emerging, picking up through the festive and, thereafter, big buoyancy to return in H2 of this fiscal. That's about the medium, short term. As far as long term is concerned, the opportunities for 2-wheeler sector remain intact for the India, the economy, we remain very confident and for the 2-wheeler sector because the underlying factors of under-penetration, more women in education and employment, more financing opportunities and more organization, they all remain intact, and to top that up, more personal mobility as a factor that will slowly play out now. So on that note, let's open our floor for Q&A.

[Operator Instructions] The first question is from the line of Gunjan Prithyani from Bank of America.

Two questions. Firstly, on the demand side, can you give us a little bit more color on how is it evolving post the reopening? Particularly, when we look at the retail numbers, they are not encouraging -- the registration number, I mean. And the rural narrative doesn't seem to be that strong as it was last year, given the second wave has hit, has been quite disproportionate there. So what is it that you're picking from the dealers in terms of inquiries? We are starting to see some small festive, as you mentioned, which will start coming through in the next couple of weeks. So some feedback from on the ground, what you're hearing will help us.

Thanks, Gunjan. I hope you are settling down in your new role well. Let me just hand it over to Naveen to address your query on the demand shutdown.

Okay. So the 2 things you'd said, you wanted to check on the demand and then you said you also referred to registration data. On the registration data, which normally we refer to VAHAN, there is a lag in registration that we know. In some of the states, it's like instantaneous like Delhi and Rajasthan, but in some other states, it lags. So you get the real sale of the retail number after a certain period of time. Second, on the demand front, we all know the impact of COVID in Q1, which was very, very high. But if you look at some of the stories regarding the festivals, the small festivals that we've seen in the recent past, there has been a good uptick in our number. For example, Rath Yatra, which is celebrated in Gujarat mainly, we had 40-odd percent plus kind of uptick in our numbers, similarly on Eid and Guru Purnima. So there are these occasions which are coming in, which tells us that there is a -- you need a occasion to buy and make up the chain. But I think if I refer to the inquiry strength which are coming in, if we refer to the kind of customers who are visiting our website, the eShop, the virtual showrooms, there is a positivity. And we see -- while in Q2, they'll be positive, not very strong, but I see strong comeback in 32-days period. That's all then.

Okay. That's invigorating. The second question -- before I get to second question, if you can clarify, financing side is an issue that you're seeing in the market, given particularly how asset quality, which we know the DVD, NBFC is panning out? And maybe as a second...

So Gunjan, maybe...

Sure, go ahead, sir.

Go ahead. Go ahead, Gunjan. Complete your question.

Yes. And the second question I had was on the difference between the consol and the stand-alone. There's an associated loss of about INR 135 crores. So if you can clarify a bit on this, my guess is this would be on Hero FinCorp. But if you can give us a little bit more color on [indiscernible]. And I'll join back the queue.

Sure, Gunjan. Gunjan, the finance penetration that has been there in this quarter was 41%. As we know, the quarter is not fully representative given that different parts of India started opening at different points in time. So considering that, 41% penetration is pretty healthy. And FinCorp's share amount, that was 41%. As we move forward, we do expect in a normalized quarter, we'll move into 45%, 46% and maybe even closer to 50% as we move forward to the festive season. As far as your consolidation question on that is concerned, yes, indeed, it's the one-off, 1 quarter loss in the FinCorp. And as you know, across the NBFCs, because of this wave 2, in quarter 1, the GNPA has gone up and so have been FinCorp. So there are one-off provisions that they had to make. And moving forward, they expect the GNPA to settle down and come back to normalized levels by quarter 4, and therefore, a breakeven and the profit to restore in the second half of the year.

And just to add to what Niranjan just talked about in the finance penetration, you remember that in Q4 last year, there was no marry details, and all marriages were shifting into the Q1 of this year. Normally, marriages, these are more of cash purchases and, hence, that also has an impact on the overall retail finance valuation. As we move into Q2, I think that it should improve.

Sure. Can we get some more numbers on the Hero FinCorp? Because we don't have the annual numbers as well. Just a little bit on the operating trends, it will be useful for the broader audience as well.

Gunjan, Umang will come back to you offline.

[Operator Instructions] Gunjan, I'll come back to you offline.

The next question is from the line of Chirag Shah from Edelweiss.

First, a housekeeping question, just on the commodity inflation, how much of the impact is already there and what we should expect going ahead? If you can give some indication.

Chirag, thanks for the question. So on commodities, as you know, that generally what reflects in the index comes to industry with a quarter of lag. So as you see, the quarter was already impacted by commodities. You see the material cost percentage going up. We, of course, managed to offset a large part of that through LEAP savings of almost 150 basis points. And of course, we have taken price increase as well of almost INR 600 per vehicle from 1st of April. So on 1st of July, what we have done to offset what will come forward as a cost impact is to take a price increase of almost INR 1,200 per vehicle. And combined with then the LEAP savings, we do expect, moving forward, the recoveries and savings to actually neutralize the cost. Thereafter, actually, we expect the commodities to soften and, therefore, the margin recoveries to happen over the next 2, 3 quarters.

And also spare parts here, can you just say the spare parts revenue number? Is it lower versus the normal revenue in the quarter as a percentage-wise?

Yes, Chirag. This quarter was lower. As you know, again, it's very difficult to read this quarter. And I'll keep repeating that different geographies in India opened at different points in time. So even mobility was restricted on the road, and therefore, you see lower parts. So the parts revenue for the quarter was INR 455 crores, which is 8% of revenue. What we did in quarter 4 of fiscal year '21 was INR 1,050 crores, which was 12% of revenue. Now moving forward, in a normalized quarter, as we see in like quarter 2 or quarter 3, we would expect it to go to 10% plus at least and, therefore, to return that. So it's more of the lockdowns and the openings and not so much of any underlying issue as far as the parts revenue is concerned.

And I think just to add to that, there are some fundamental changes that we've done in spare part business, which you've seen the result last year. Q1 was an aberration. I see strong numbers coming back from Q2 onwards.

So this is helpful. This explains part of the margin pressure, which is helpful. And one question on the demand outlook. While you expect a strong comeback, last year also, we have a reasonably good base. So for the balance part of the year, can we expect some growth or high single-digit growth for the year? Is it safe to assume that we can expect a growth in the balance part of the year?

So Chirag, look, early indications, like Naveen talked about in some of those single-day festivals, he talked about Rath Yatra, he talked about a couple of others, those single days are showing growth. It is showing that for festive days customers are coming back. The second bit is, last year, you saw a lot of pent-up, which came very fast in June and July. And this year, that hasn't happened because of the second lockdown and more impact, which has been wider. So therefore, the recovery has been a bit slower. Like I said, we have reached already 80% of our retail, and this keep inching up. Second half, surely, we should see a growth as compared to next year. At least that's what we are expecting and that's what we are building for, and that's what we are confident about. And -- yes, I look at fundamentals on basic demand drivers coming back, the vaccination improving. And this is second year, consecutive years of the kind of numbers that we're seeing. And hence, H2 should be a good half.

[Operator Instructions] The next question is from the line of Vimal G. from Union AMC.

Sorry, just one, I missed on the spare part revenues for this quarter. How much was it?

INR 455 crores for this quarter.

Got it. And for the last quarter, they were above INR 1,000 crores, right?

INR 1,050 crores was the quarter 4 FY '21.

Got it. Got it. Right. Sir, the next question was on your overall strategy on EVs. What are the launch plans over there? Do we sort of plan to launch our own brand of EVs this year, maybe next year? So that is the first part of the question. The second part is, are we looking to sort of leverage the technology that we have in our associate company, which is Ather? And how -- and obviously, we sort of formed a partnership with Gogoro as well. So what are the plans on EVs going ahead? Because they are fast catching up and there's a lot of buzz around EVs. Your comments on that would be helpful, sir. And lastly, just CapEx number expected for this year and, if possible, for next year as well.

I see, Vimal, that you are combining many questions into the one question. That's fine. I can answer that. On EV, firstly, our Hero product, we already announced, will be out by March of 2022, which means this fiscal -- end of this fiscal year. As far as Gogoro is concerned, as we have announced, the product will be on a swapping basis because we do believe that moving forward, for EV category to evolve rapidly, customers will need to have both as a fast-charging option, as in a swapping option because swapping, what it does, it kind of mimics your fueling, which the customer is used to. So you just give the battery, take another battery, it just takes less than a minute or maybe 1.5 minutes, same time that you spend in a fuel station. So that product, we are -- it will come in the pure planning as well as towards latter part of 2022. So that's why you will see a lot of action in the next calendar year on the EV front from our side. As far as Ather is concerned, we continue to be the largest shareholder in Ather. They have expanded to multiple cities now. And of course, like you said, there are multiple forms of further collaboration, and synergy is possible between the 2 companies, which the companies continue to explore. As far as CapEx is concerned, I'll not give a specific guidance for this or next year. But generally, our trajectory of CapEx has been around INR 750 crores to INR 1,000 crores per year. It keeps on changing a bit here and a bit there depending on what the plans are.

Right. And do we have an arrangement with Ather? Do we have the first right of refusal in terms of funding? And does Ather require funding as of now?

So I give this question a pass. Electrification, as you know, EV is a cash-burn story, and Ather keeps raising capital as and when required. And so far, we've been participating in all their capital rounds. So this is all I can say, Vimal, at this point in time.

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

Sir, a couple of questions again. One was on the demand side. I mean, last year, given we were pretty short of inventory and pent-up demand was pretty strong, but how is the inventory situation now? And related to that, what would be the comfortable level of inventory going into festive season?

Thanks, Ronak. So we've talked about the demand already. As you know, this is the time that we start building inventory. Yes, last year, we were kind of short because of the late start that happened post the lockdowns. And this year, that's not the issue. Even the semiconductor issue that's impacting the industry, as far as our portfolio is concerned, given the portfolio as well as our supply chains, that's not impacting us. So we are building well towards a good festive, and our inventories are building towards that. But there's no either an alarming level on the upside or there's no alarming level on the shortage side.

I got it. Got it. And my second question on electric vehicles, again, right? I mean Mr. Munjal highlighted that it would start with a pilot project. But assuming the product quality is as good as what we have in the market right now, how quickly can we expand to, let's say, top 20 cities, given assuming there'll be -- the penetration would be quicker in the top 20 cities first?

Right, Ronak. So firstly, let me just repeat the launch, the activity there is not a pilot, but actually a full launch that will happen by March of '22 on our product. As you know, I mean, Hero has got a huge distribution strength, and we've got 100 million cumulative customers. And people coming into EV are not going to be entirely new ones. A large set will actually come from the cumulative base of existing customers. And therefore, Hero stands at an advantageous position given the cumulative base of customers and the reach that it has to the nooks and corners of the country. Of course, the pace of scaling up and the rollout, the exact number of cities, we will not be giving out at this point in time, Ronak. So what's the space? I'm sure when we come to it, you will get excited.

Sure. My question was, I mean, given our reach, it should be much quicker than what the start-ups are doing over the last 2, 3 years. Is that a fair assumption?

Yes. I mean we would like to exceed all expectations. Let me say, at this point in time, only this much. Let's launch the product. And of course, then we can have further discussions, Ronak, on the future plans around the product. But we have all the fundamentals in place, which places us in a position. And therefore, it will be up to us, honestly, to how fast we want to scale up and take it up. A combination also will be the infrastructure readiness of the country through the OEMs and through the government. So we'll have to really calibrate it moving forward as we go forward, yes.

The next question is from the line of Kumar Rakesh from BNP Paribas.

My first question, again, is on the EV side. So can you please help us on what is the strategy -- the broader strategy we are working with? So currently, my understanding is that there are 3 pieces which we are working with. One is in-house product, which you talked about we'll be launching by March next calendar year. Another will be towards partnership with Ather. But broadly from the product and marketing stand -- market positioning standpoint, where these 3 products would be sitting? Do you know where Ather product is sitting, like the other 2 products would be today? And from the income perspective, how are we looking at the mix from the EV and the product portfolio from the EV side coming along?

So Kumar, this is -- actually, I would say, the question, it's a bit early to answer about the entire portfolio and the product and the pricing and where they will be placed. But let me just explain again. As far as the -- our own product that we'll be launching in the month of March that we have said, it's going to be based on fast-charging solutions side, while the Gogoro tie-up is on swapping battery solutions. So we have 2 different ways to actually, in a sense, energize or charge the product. And we are seeing different customers will prefer a different way. Taiwan has shown a big penetration that has happened only through swapping, while there are some other countries and geographies which have shown amenable to charging. And therefore, basically, those are 2 different solutions that are going to customers. As far as Ather is concerned, as you know, that we actually invested in Ather way back in 2016 in a start-up. And in EV, we believe that it's still early games where you need to actually play out multi-pronged strategies. And therefore, as it manifests later, there will be space for multiple brands in a category that is just evolving. Also just bear in mind that, in fact, all of the EV evolution, most of it in the first few years will be around scooter. And scooter EV penetration, EV evolution actually plays well to our portfolio given that we are very under-indexed as far as scooter market share is concerned. So therefore, that becomes incremental and additive. And therefore, more of the brands actually will -- they won't compete, but they actually will expand the EV category.

I've been waiting for that. My second question was, recently, Mr. Munjal was quoted in a news report that -- wherein he talked about that Hero will not shy away from cash burn and not shy away from turning net debt if that is needed to gain the leadership in the electrification. Can you just give the context in which those statements are made and how are we looking at changing our business strategy in the coming years during the transition to EV?

So fundamentally, it's not a big change in the business strategy. It is about a category that may require -- and we all know that EV category will not be profitable from day 1. So it will require some bit of investments or, in other words, you can call it cash burn. And it's in that context of the statement has been made that we will do it appropriately. And the other thing is that, as far as we are concerned, vis-à-vis other players, it places us in a much better position on optimization of these numbers. So we will be able to get more out of our investment simply because of our scale of buying, our scale of manufacturing, our scale -- existing scale of reach, which a new player will have to replicate and, therefore, will have to have far more cash burn than what Hero will need to have. So -- and we are talking about it's only for the EV category. It's not about the cash burn at the Hero level. There is a cash cow and a cash-generating machine that we have, which is our traditional ICE business. And in our portfolio, 90% is motorcycle. So even if there's some cannibalization that's happening, that will be happening at the market level, not to us with the portfolio. So first of all, for us, we see EV to be incremental to our top line. And second, we generate enough and more cash than our traditional business. The cash burn was more for the EV category as such and not for the Hero as an enterprise level.

Okay, got that. I think only -- I think the reason I asked that question is that we are sitting with almost $1.5 billion of net cash position. And the willingness to go to net debt position indicates a significant amount of cash burn appetite than what we are showing. So I just wanted to understand from that context that is that aggression to lead in EV is so high that we are willing to give away that level of cash burn?

I think that's more a question of that, look, how do you play out on returns and your capital structuring. So it's about if there are opportunities in the M&A space or investment space which actually can generate supernormal and fantastic returns, then fine, then clearing the balance sheet for a debt actually is not a problem at all. So it's not about debt through cash burn. We'll throw our debt to any of the big acquisitions if that makes sense, if that makes value-adding sense. And this we have been saying in the past as well that it's not about shying away from those opportunities. It's about that we always keep looking at those opportunities. But we always see whether an opportunity makes a strategic fit and whether it will give returns to us.

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

Sir, I just wanted to check on your premiumization strategy... [Technical Difficulty]

What happened? We can't hear you.

Mr. Makharia, we are not able to hear your audio, sir. Mr. Makharia, you are not audible, sir. I request that you please rejoin the question queue.

Yes.

Mr. Makharia, are you there?

Yes. Can I -- can you hear me now?

Yes, yes, we can hear you.

Yes, we can hear you now, Aditya.

Yes. Yes, so just on the premiumization strategy, how is the market share of the Xtreme today? When does it hit up, in your view? And on Harley, how are we progressing?

So Aditya, thanks for the question. I'll ask Naveen to answer the first part, and then I'll take up the second part regarding Harley.

So I think the word used, premiumization, I think this is the right word to be using because we are -- I think the whole portfolio, right, it's like you've got aspiration class sitting across the segment and how do you cater to the needs of that aspiration class across these segments. So from the technical point of view, it's about 100cc and above. But what we are looking at is how do you premiumize each in every segment. So if you look at ride from Splendor, there is a canvas edition which came out. In scooters, we've got platinum series which came out. And these -- all these variants, which are at the higher end of the segment in terms of pricing and features, are increasingly contributing more and more to our total sales in that segment. And it's going well with the Xtec launch that we recently had with Glamour, given distraction. Now coming specifically to the premium portfolio, which is 150cc and above, I've been saying about XPulse that is creating waves. And we've got very huge traction. We will be adding to the capacities in terms of what we can produce shortly, and that should help us gain our numbers. But I think our overall strategy in the premium category is building our portfolio and gain volumes.

And let me take up the Harley question. As we have said before, there are 2 legs to the Harley tie-up strategy. One, of course, that we are the exclusive distributors for Harley bikes in India. We have 12 dealers around 30 touch points, and that's going well. The second part of the strategy is to launch a bike in that retro segment, which, as you know, is almost 1/3 of the overall premium segment. It is a profit pool. I dare say that, that segment probably has around 60%, 70% of the profit pool of the premium segment. So that's the second leg of the strategy to launch bikes in that segment. And clearly, Harley is an iconic brand. And the work is going on in full swing on that. So that's the second part of the strategy.

Right. Just last question. Any market share targets on the premium side we can share?