Hero MotoCorp Limited (500182) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Hero MotoCorp Limited hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Arora from Nirmal Bang Equities. Thank you, and over to you, Mr. Arora.

Thank you, Margaret. Good morning, ladies and gentlemen. On behalf of Nirmal Bang Institutional Equities, I welcome all of you to the second quarter FY '22 earnings call of Hero MotoCorp. The management this morning will be represented by Mr. Niranjan Gupta, Chief Financial Officer; Mr. Naveen Chauhan, Head of Sales and After Sales; and Mr. Umang Khurana, Head of Investor Relations and Business Support. At the outset, I'd like to thank the management for giving us this opportunity to host them, and seasons greetings for Diwali and the New Year to all the participants and the management. I do hope everyone is keeping well and safe in these trying times. I request the management to commence the session with their opening comments, subsequent to which we could open up the floor to the participants for the Q&A. So thank you once again, and Umang, over to you.

Thank you, Rahul. Thanks for hosting us. I trust everyone's keeping safe, and a very happy Diwali to everyone as well. Welcome to the Q2 FY '22 Post Results Investor Call. Rahul just mentioned, we have our CFO and Head of Sales on the call. Thank you for sharing your Saturday with us. We'll begin with opening comments from Niranjan and then open the floor for Q&A. Over to you, Niranjan.

Thanks, Umang. Thanks, Rahul. Namaste to everyone, and thank you all for attending our earnings call and greetings of festive season to everyone. You would have seen our results announced yesterday evening. We delivered 14.4 lakhs of volume, INR 8,450 crores of revenue and net profits of INR 794 crores, with strong recovery in EBITDA margins from 9.4% in the previous quarter to 12.6% in the current quarter. Let me just talk about a few highlights amongst many which are there. And this time, let me start with global business. Delighted -- we are all delighted with the progress that global business is making, with annual run rate has crossed 300,000 comfortably versus the earlier run rate of 200,000, which was there for quite a few years. We still have a long way to go, but we are very confident that our revised GB strategy is working well, and it will be a key growth driver in future. Second, let me touch on the parts business, the parts, accessories, merchandise. We have clocked highest ever revenue of INR 1,141 crores, registering 40% growth on a year-on-year basis and accounting for more than 13% of revenue. We see the trajectory of growth in the parts, accessories, merchandise continue to be surging moving forward as well. Third, our premium segment in domestic market has done exceedingly well. It's moving in the right direction. Sequentially, if you look at it, the quarter 1 shares were 2.2%, moving to 4.1%. Currently, last couple of months, we are at 6% plus, and we are on target to cross 10% by March. And therefore, that's actually now giving the outcome of the portfolio strategy that we had. You've seen a couple of launches that we have done in the quarter, Xtreme 160R Stealth, XPulse 200 4 Valve, and you will continue to see more and more actions on the product side as we had already promised as part of our premium strategy. And the focus is not just on premium, it's on premiumization within segments as well. Accordingly, Glamour Xtec was launched with more than INR 4,500 price premium. It's already actually garnering more than 50% demand within Glamor segment. Similarly, in scooter, we launched Pleasure Xtec we launched connected Maestro Edge. So we'll continue to have the premiumization story as a key theme within the segments as well. Fourth, retail financing, as you know, is a key driver for the future and long-term category growth, and our focus in this area has yielded good results with actually finance penetration in the quarter moving to 55% versus 51% same quarter last year. And we'll continue to focus on this to take this higher and higher. Finally, cost management, as you would have seen in the commentary that we released yesterday, not just on variable costs but actually on fixed costs as well, has yielded handsome dividends with lead savings, giving us more than 300 basis points of savings, helping us offset a large part of the cost inflation as well as the overhead management and that has helped us sequentially improving margins, as we saw. Let me now turn my attention on the outlook and the economy and the sector as we see moving forward. Lots of positive indicators, lots and lots of positive indicators. You look at a robust GST collection, you look at good monsoon, therefore, the water levels, which will, of course, help the next crop cycle. The Consumer Confidence Index is moving up and the reopening of hospitality sector, because that sector actually augurs well for the lower income group, where lots of employment, organized and unorganized sector has in that sector, and therefore, that will boost confidence and income levels of the category that's very relevant for the 2-wheelers. Plus, of course, the recent tax cuts by central and state governments on petrol and diesel that augur well as it is providing the much-needed relief. And on the long-term GDP forecasting, you would have seen IMF has forecasted a robust GDP growth and Reserve Bank of India has forecasted also a strong growth for fiscal year '23 upwards of 8%. So overall, there are positive indicators for our economy moving forward. As far as 2-wheelers are concerned, we believe that the underlying demand story stays strong, considerable potential because of penetration and increased retail financing and backed by the positive economic indicator that I just talked about, the momentum should come back soon. Now finally, and last but not least, the topic that's receiving a lot of attention these days in media is EV and let me just talk about -- touch a bit on EV. We are on course. We are on course for launch of our product by March. Our product has been designed by R&D in Jaipur and the Tech Center Germany. Manufacturing, as you saw in our release, will be done at Chittoor, which is our plant in Andhra Pradesh. So we are on course and watch this space. Recently, of course, there have been lot of talk on who will win in EV, and we've had several acronyms that have been floating around. While I won't get into betting, but let me just talk about what we believe success in EV will require. It will require focus on customers, on cost and on collaboration and not necessarily on competition. Having said that, if you still want to pick a winner company, just Google the synonyms of the word winner, and you will have your answer. On that note, let me just open the floor for Q&A. Over to you, Umang.

Thank you, Niranjan, for opening comments. Let's now take questions, please.

[Operator Instructions] The first question is from the line of Satyam Thakur from Credit Suisse.

So firstly, Niranjan sir, could you share an update on the festive demand? In the final assessment, how will it end up being? And beyond festive as well, in the next month or so, there is lot of expectation and also that the wedding calendar seems quite full. So do you see signs of strength beyond this as well?

Okay. The question is around festive demand, how it has been and what's the outlook.

All right. Thank you. And first and foremost, good morning to everyone. Wish you all a very happy festival. Let me also wish you all good health as we move in the year ahead. Coming to the question, festive. Overall, it was subdued. However, the second half, we saw relative traction being better. Now if I were to attribute certain rationale and certain reasons there, we've seen that it has been a delayed monsoon this year. And normally, in the past also, I have mentioned that rural health led the growth in terms of over urban, this time that lagged. We've seen that the crop is still in the field, and it's going to mandis, in fact, in the markets like Punjab and Rajasthan where the crop has reached the mandis, we've seen better traction. And hence, going forward, as the rural comes back, we would see better traction.

Post festive also.

And post festive, if you look at right now, I think the urban remains at the same level. The rural is awaited.

Again a followup, what do you...

Sorry to interrupt, Mr. Thakur, your voice is breaking up, sir.

Your voice is not clear.

Mr. Thakur, you voice is breaking up. Can you please check?

Is this any better now? Or else, I'll join back in queue.

Satyam, we can't hear you very well. Do you want to dial back in, and we'll take your call on priority? Is that okay?

Yes, I'll do that. Thank you.

Yes. Thank you. Let's move on, Margaret, to the next speaker. We'll get -- the moment Satyam is in, let's take his question again.

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

Thanks, Niranjan, for the very detailed commentary, very helpful. Firstly, I wanted to check on electric vehicles. We have talked about the fact that we will be making -- launching the EV before March and also making our own battery pack. So I just wanted to check how many EV products are we looking at over the next 2 years? And as a strategy is Hero MotoCorp planning to make its own battery pack going ahead?

Kapil, as you saw, what we have said is that our product will get launched by the month of March. Obviously, we'll keep launching products every year as upgrades or variants. How many, I'll not be able to disclose as of now, but closer to the time, you will get to know. Equally, as you saw that we are -- in our manufacturing, we have talked about that we will provide an integrated ecosystem for battery pack manufacturing. Cells, of course, come from various providers. So that's the plan.

Okay. Great. And also, sir, in your commentary, you talked about several positives that we see for demand. Would you also -- are there any key risks that one should be watchful of in your view?

So, Kapil, the only key risk that we would say is if there is a wave 3 which happens. Even there, we do feel that the vaccination rates have really picked up in terms of the overall country, if you see, more and more vaccines have got approved. First doses, now probably the government is moving in the direction of booster doses. So it's actually mitigated most of the commentary around pandemic is now soft. So -- but yes, if you say the risk, then that would be one. Second, of course, we have given our commentary that inflation now, it looks like it will cool off because some of the commodities, as you would have seen, are stabilizing or coming off their highs. But if there was another wave of inflation, of course, that can act as a risk.

Okay. Good. And lastly, if you could just talk about how much price increases we have done and the outlook on commodity costs in terms of if we have passed on whatever increase was there up till now?

So as you would have seen, we took a price increase in April, in July, in September. This year, we probably have already taken close to around INR 3,000 price increase. As far as how much of it covers, you see that there's a combined of lease savings as well, which we have done and net material cost as a percentage of revenue has gone up by 110 basis points. So ideally, that's the one that we would like to recover more. But beyond that, everything else is factored in the margin. As you see sequentially, the margins have improved. Moving forward, as I said, and let me just reiterate, some of the commodities seem to be cooling off. Some of the raw materials, which lead to those commodities seem to be cooling off of, whether it's iron ore or coal. So sooner or later, we should see now commodity spectrum stabilizing. And therefore, then the prices give a chance to actually recover more than the forward inflation. And therefore, that should help recovery of industry margins moving forward.

The next question is from the line of Rohil Gandhi from PPFAS Mutual Fund.

My question was on the entry-level segment. So if I just see since implementation of BS VI and even now the commodity-led inflation, the realizations have gone up almost 25% or so. So some of it probably is led by the export mix and the premiumization mix in your portfolio as well. But I just wanted to understand how you're seeing the consumer demand and the purchasing power in the entry level?

Okay. Thank you, Rohil. Entry, we've seen in the first half and second quarter 2 also, not just entry, if we look at even moped, I think the de-growth levels are comparatively higher. Now as you said, there is -- this is the most price-sensitive consumer. And some of the macro factors like fuel prices and all, also had an impact on the mind frame. But while there is an issue and, in fact, if we have seen, the COVID wave has been far more sharper this year, impacting disposable income. But I think it's more about how do you make it easier for the consumer to acquire the asset and that will drive the growth. And we have seen the impact on the positive impact in terms of the way we've done on the finance part, and Niranjan shared, the increase in the finance -- retail finance penetration it's been far more in inventory segment. I think that's the way this segment would expand.

If I just add on top of what Naveen said, we've been proactively taking multiple actions. And Naveen, as we know, we launched HF 100, which was a bit of a stripped down version, just to enable people to come in at a lower price point as well. And like you rightly said, while the upfront price goes up, if you increase the financing penetration, then it's more on EMI basis so that the down payment that somebody needs to do, that doesn't get impacted big time, and which is what we are seeing. Also, on top of that, gradually, consumers also realize that the resale price also goes up. So while -- so you can take care of upfront price through finance penetration, and you can take care of the total price, which goes up through actually higher increase in resale value. I think that combination would work well as consumer confidence is moving up and people having more confidence not to conserve the money but actually to spend for the need that they have, which is of mobility.

Absolutely, absolutely. And in fact, just to give you a flavor on the innovation that was done in the retail finance scheme, you're looking at increasing penetration for the consumers who do not have banking habits with Suvidha being launched by HFCL. We've got bullet payment scheme for farmers at 4 monthly level. So I think this is what we're doing in terms of expanding and going out to the consumers who have the need but may not be able to pay upfront to acquire the asset.

The next question is from the line of Sonal Gupta from L&T Mutual Funds.

Sir, just a couple of questions, sir. One, could you sort of also give the number for the other operating income for this quarter?

Sorry, can you just repeat the question? I just missed it. Sorry.

Sorry. So I was asking for the other operating income number for this quarter.

Okay. Okay. Sonal, so first of all, congrats on your move. I hope you've settled down well. All right. The other operating revenue for quarter 2 was INR 223 crores. Last year, same quarter was INR 187 crores, and quarter 1 FY '22 was INR 110 crores.

So this is primarily linked to the -- I mean like the production at your facility? Or is there any other element here which is driving it?

So it's primarily linked to that. As you saw, if it's more linked to -- obviously, there's a fiscal incentive, state incentive part, which is there. And then there are other elements -- minor elements which are there, primarily linked to the production incentive and how much we sell in Rajasthan and how much we sell in Gujarat, et cetera, et cetera, and Andhra as well.

Got it. And just my second question was on what is the -- where are the inventory levels now, I mean, like post the festive period? I mean how do you see them? And what is the plan in terms of wholesale versus retail going forward?

So our current inventory after the festival is over is in the range of 5 to 6 weeks as it stands. And moving forward, I think that's the number that we would maintain our inventory.

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

My first question was on EV scooters. How is the company planning to approach high-speed, city speed and low-speed categories? The new product in March which is being launched, which category would it cater to? And slightly on a medium-term query, the company has a vision to dominate the space. Can you talk about market share aspirations? Also company had indicated 10 strategic alliances in future, if you can talk about areas where these alliances can materialize?

Thanks, Raghunandhan, for the question. Let me just address the market share part first. I think in a new category, the role of leader is category expansion and category building and not market share. So I think that's where our focus would be, and as we said, how do you build that is the customer cost and collaboration. From a customer point of view, it's very important at how fast you charge and which is where we'll have twin solutions which are coming, first, of course, is going to just on a charging basis, and the second, which will be on a swapping basis a little later during the year. And that addresses both types of consumers in terms of their charging solution. Plus, of course, the convenience, the range, anxiety, all of those we need to solve. The second element, of course, is the cost element because unless your unit costs are viable as such, there is always a limit to the cash burn that one can do. I do think that we, as Hero, are very well placed on that with our scale of supply chain, with our existing manufacturing locations, land, building, you have distribution locations, servicing locations. On logistics, you can ride. So there's a lot of economies that will operate on the back of our scale. And therefore, we are confident that we would be better placed on unit cost economics, which, in the medium term, will decide that who will fall out and who will remain in this game. And third is collaboration and which is where you've seen that we focused more on collaboration and less on competition, and that's where you see that to start with itself, we had invested in Ather. There's a lot of 2-way learning that happens. We have announced a JV with Gogoro. So a lot of collaboration on the design space as well, which is happening. And effectively, therefore, that's what we are playing for. In terms of -- then honestly, the high-speed, city speed, low speed, we probably don't look at the segmentation that way. Watch the space as the product comes out by the month of March, and I'm sure that we can take up those segment questions thereafter.

My second question was on, can you elaborate on the benefits, the area of benefits for these programs? And how do you see the full year targets?

All right. So Raghunandhan, we had announced, in fact, if you remember, when BS VI was launched at that time itself, we have talked about the LEAP-II savings program. And we have said that we are accelerating the program covering not just post-design, but right from conceiving the design to the end of line and then, of course, sourcing and covering also the other areas of variable costs. So all of those put together, year-on-year basis, if you see quarter 2 to quarter 2, we've got 320 basis points of LEAP savings, which is built into the results.

The next question is from the line of Satyam Thakur from Credit Suisse.

So the other question I have is on your electric vehicle launch, so which obviously will be a scooter, the one that you are launching in March. And the market also does not seem to have many motorcycles in the market right now. But based on what you gather from your channels, what's your assessment in terms of the demand pull? Like is your typical entry-level motorcycle customer also looking to transition to electric and are even willing to go for electric scooter? And secondly, do you also have -- are you also working on electric motorcycle as well? Will that form factor -- is that also part of the plans?

Satyam, good question. Thanks for this. Yes, the March launch that will be there will be a scooter, so that you're absolutely right. As far as motorcycle is concerned, let me talk a bit about that. If you really look at, first of all, the fuel efficiency that motorcycle gives versus scooter, there is a big difference. So you look at the mileage that the entry motorcycles give versus scooter. Second, you look at also the pricing, that's different. Third, if you look at the range and the power that's required in the motorcycle use, what they use for and the distances that they need to cover, effectively, if you have to cater to that consumer, your battery pack size and the battery pack capacity has to be far more. So on one hand, you have to cater to a lower price, but with a higher battery-pack capacity and which is why -- and higher, bigger range because while scooter on daily average actually will be far lower than the motorcycles, on an average basis, what a commuter uses. So effectively, when you see that EV in motorcycles is way off in our view. There are some players globally who are trying, but they are more on the super premium end where probably a customer can a pay a premium -- huge premium for possessing that vehicle. But as far as the commuter and in general right up to probably the mid-CC segment is concerned, it's way off. The EV penetration, at least over the next few years, will be driven by scooters. And then thereafter, as battery technology develops, where you can pack more with less and costs reduce, maybe the other cell technologies, solid-state batteries, only then. So it has to be a different solution which actually works. On the current battery technology, which are either there or in the works, there, we don't see actually motorcycles happening. And as you know, in 2-wheeler industry, motorcycles are still 70% and scooter is 30%.

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

First, clarification on festive season sales. So the 32-day or 35-day festive season as we classify, would it be down about 15%, 20%? Or would it be more than that?

Jinesh, as I said, as we progress into the festive the second half, it improved. In fact, if I were to kind of share with you on Dhanteras, the day, which is the biggest day, that's the day that we saw the consumers coming back to the showroom. There was a good crowd in the showroom. And it is manifesting in different zones in a different way. Markets which are big, which is not central and part of East, I think the growth rates were better off as compared to Southern market. So I mean as I said, it was not as good as it was last year. So early double digit is where it was.

Okay. Okay. And as you rightly pointed out, that the entire farm time lines have been a bit delayed because of delayed monsoon, and considering the marriage season, which is around the corner, do you expect catch-up to happen during next maybe 1 to 2 months on that side?

Yes, of course. I think there is good marriages right up to middle of December. And we've seen marriage buying happening to a certain extent during festive also. But I think because that's largely in the semi-urban and rural segment, they wait for their crop to reach mandis. And once they have the cash in hand, then they come and buy. So I am positive about once the harvest happens, and it was delayed because of the delayed monsoon this year. I think they're also going to save -- farmers are going to save on the first and second irrigation that happens in the rabi crop because moisture content in the soil is pretty good right now.

Also, Naveen, what may help probably is what we discussed yesterday, that the cooling off at least the diesel prices by INR 10 per liter, that could be significant in that cost equation as well for the farmers.

Got it, sir. And second question on the price side. So you have mentioned about INR 3,000 price hikes since April till now. But what kind of price hikes you have taken in this quarter, just for us to understand the cost inflation on this quarter and the price hikes taken?

I think we took around INR 1,000 to INR 1,200 in this quarter.

INR 1,000 to INR 1,200, sir. Okay. Great. And lastly, on the export...

Sorry, Jinesh. Just to clarify, that was the price increase that we took from around end September or beginning October, yes. 21st of September, that was around INR 1,000 and July was around INR 1,200, yes.

Okay. Okay. And on the export side, I mean, it's good to see we're getting traction in that business. So you had talked about approaching market differently than your earlier strategy. Can you update on where we are with respect to market-wise product strategy? I mean in Africa, are new launches based on the market requirements, how they're doing and similarly in other markets?

Short question, Jinesh, but it will require long answer. But let me just try and summarize that overall, as I said, that we are comfortably at a run rate now of 300,000 annualized, which is 50% more than the run rate we were running for the last 4 to 5 years. There are areas like, let's say, Mexico, where we tied up and launched, obviously, that we expect to do very well. Bangladesh has started recovering from the pandemic and from the impact that it had. Nigeria, we have sent in the modified customized product. We talked about the taxi segment with elongated seat. Colombia is receiving good reviews on XPulse, on the premium segment. Plus, of course, Colombia is also turning around, where it was investing, now it's actually breakeven on EBITDA level. It will soon breakeven on bottom line as well, which will allow the company to invest more. So I think things are happening. The products that are required for each of these markets are going in. Sri Lanka is also one of the good markets for us. But Sri Lanka, there's been no sales. So the numbers don't include Sri Lanka at all, given that the country had put import restrictions. That's expected to be sorted out in the next 6 months or so. So that should help in FY '23 as well. So I think that strategy is working well. As I said, early days, but we are delighted, and we'll keep building on that. In terms of market share trajectory, the key markets we are focusing on, there is around 7 to 8 markets where we have positive market share movement. But I don't want to talk about the numbers because the base is still small. And as it starts going up, we'll be talking more about these numbers.

The next question is from the line of [ Pratik ] from CLSA.

This is [ Hitesh ] from CLSA. My question is basically -- first question is on EV. So just wanted your sense on customer preference, how it will shape out for scooters, basically? Whether they will go for high-speed scooters or low-speed scooters? Because some of your competitors are talking about the low-speed scooters could still form 25%, 30% of the electric scooter market. What are your views on that? And secondly, related to that in the export markets, especially in Latin America, Sri Lanka, Bangladesh, just wanted to understand how the electric scooter journey there, electric transition there? Are the governments also giving incentives like India in those geographies to really propel electric demand?

Thank, [ Hitesh ], for the question. Good to see that you're calling this question in from your new house, CLSA. So Hitesh, just addressing this in terms of scooter. Look, whether a customer drives at a low speed or high speed, everyone prefers a certain speed to be in the scooter, right? I mean India is not a market where people would be happy with saying that my limit of my speed is only x, which is lower than the current scooters which are there. So I think the benchmark for -- in our view, benchmark for the customers would be that, am I getting a similar comfort on speed, on convenience, on range as I'm getting on my current scooter. I think that's the bare minimum that we need to address on the customer part of it. And of course, then the plus plus is the tech part of it. Currently, what's happening is probably tech is becoming the core and the rest is getting a bit ignored, which will come back as the customers then start picking up deliveries and start riding. So that's our view on that, that it needs to meet the bare minimum benchmark of the current scooter for the customers to migrate, and then the tech will be a plus plus. But the convenience of the customer cannot be compromised, whether on speed or on the range part of it. On the exports part of it, yes, some countries have started contemplating. You're absolutely right. So LatAm, Bangladesh, some of the countries have started talking. Of course, they're not progressed as much as rest of countries like India have progress in terms of putting out incentives. But I think discussions are in the works there. And therefore, any developments that we do on the scooters here and what we launch here, we are keeping that in mind the global requirements as well. And as and when the market is right, the policy framework is right, we would be then able to actually capitalize on that and export that to the market. Naveen, would you like to add on the scooter customer in general from your eyes' perspective when they migrate to EV, what is the bare minimum they would expect?

You said it right, Niranjan, consumer -- when the consumer enters into the mobility, they would need a bare minimum level of performance, right? So it's -- for those consumers, after the house, it's second most priced procession, and compromising on that is something that we've seen not deferred. Yes.

Just a small follow-up. On the tech part of the electric scooters, Niranjan, if you can add there, basically, I want to understand who is controlling the operating system in electric scooters? So basically, the consumer data that you guys will get once the scooters are connected and all, they've got a lot of business models can be evolved by auto companies on that. I'm not sure whether you started thinking about that. But who controls that operating system or the data that you're going to get?

I can answer the data will definitely be controlled by us. All the customer data will be controlled by us. And you're absolutely right, once you have that -- in any case, what works for us is also that we have 100 million customer base already, and which is by far the biggest customer base that any OEM can have. Because obviously, people who ride scooters are not going to spring from a new planet. There are going to be -- a large percentage are going to be from this and from people who need mobility. There can be smaller percentages who take it just as a tech part and get added on, and therefore, that gives us the advantage. So we already have the data, of course, with tech, then you get more live data and you can actually capitalize on that as many companies globally have been doing on many other multiple sources of revenue streams.

The next question is from the line of Ashish Jain from Macquarie.

Sir, my first question is on the margins. So you spoke about 300 bps savings from LEAP program. One, can you break that between raw material and other costs? And secondly, what is the headroom -- further headroom we see coming from LEAP?

It will be largely on account of materials. There is some part of other variables also which is included into this. Moving forward, look, our program continues on this one. What the number will be, difficult for me to give out. But all I can say is that -- and as you would have seen in the last few quarters, we've been working very aggressively on the LEAP-II savings. And therefore, we should continue to see good traction on this in coming quarters as well.

Okay. Sir, secondly, on the spares and all, if you can just elaborate, what are we doing different for spares to be now 12%, 13% of our revenues? And is there any target in mind? Or what is the potential you think this can go to in the next few quarters?

Yes. So I think in spare parts -- in fact, I wouldn't say spare parts, it's parts, accessories and adjacent producers have been taking off and it's been on the rise. Multiple things. I think one is the core principles of going very, very deep into the country and expanding our footprint at the last level of sales, that's paying off rich dividends. And then once you've got very, very deep and strong distribution, robust system in place and you bring in additional lines which are adjacent lines. So for example, oil has been adding good numbers to the business. We've got accessories launched, which is increasing. In fact, in October, we had the highest ever monthly retail on accessories. Going forward, I think our distribution footprint that we've created is still 30% more to kind of plan. That should continue to pave the way. And as I said, adjacent process, we are exploring more of them, both at our workshops as well as in the aftermarket.

Sir, lastly, if you can, what is the headwind from exports at this point on your EBITDA margins? Is export contributing positively to our margins today?

The exports' EBITDA margins are lower than domestic, because as you know, as we are launching in Nigeria, into some of the other markets, it is lower than that. But moving forward, as the scale quickly picks up and as we also put more and more premium products into the export markets, the EBITDA margins will recover. Overall, as it scales up fully, as you know, typically, all put together, the export EBITDA margins at full scale should be at least equal to, if not higher than the domestic market.

But, sir, at gross margins level, are they already comparable with the domestic business? Or even there's opportunity at gross margins also?

There's an opportunity at gross margins as well.

The next question is from the line of Nitij Mangal from Jefferies.

Firstly, on the demand side, we're seeing that 2-wheelers are lagging passenger vehicles and the demand has probably fallen [indiscernible] picked up probably somewhat. But in your assessment, when do you see industry going back to, let's say, FY '19 levels? I mean is that like 1, 2 years away, is it longer than that? And secondly, from a next 1, 2 year perspective, how would you rate the drivers for rural versus urban demand?

All right. Thank you for that question. We're all looking for the industry to go back and cross that FY '19 level. And it's second consecutive years or year of de-growth in the industry. And being a sales guy, I'm born optimistic. I would love to see that CAGR to come back and industry going back to that level. I mean, of late, because of the COVID and other impact at the last level of sales, it's been impacted, but fundamentals remain intact. The penetration levels are far lower than what it needs to be. There's a lot of employment and government actions, which should push the demand ahead. Going forward, I think Q4, it should be better off than what we have seen in the recent past. And I mean my belief is it will take a little time, maybe a year or so, to go back to that FY '19 level.

And how do you see rural versus urban over the next 1 to 2 years?

Rural, in past, because of the penetration level, has always led the growth as compared to the urban. Recent times, in fact, last year also was better. This year, it has been subdued. And because of the -- as I said, core fundamentals remain the same, strong need for mobility is far higher with a lot of government actions and hence, that should come back sooner than later.

And one more question. Can you share anything on your plans for the Harley-Davidson? When could you see a joint product launch, what kind of segments you could target?

So the progress is on track, which is what we can actually say at this point in time. We can't give a time line, unfortunately. But the progress is on track. The work on the product began as soon as we signed the agreement last year. If I remember right, it was around October, November last year. So the work started then itself. And it's progressing as per plan. Beyond that, we'll not be able to comment at this stage.

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

So one of the reasons that across 2-wheelers we note for demand slowdown is also the sharp price hikes that have happened. And as you pointed in your commentary, increasing finance penetration clearly helps that. But even if you look at finance penetration, it largely remained in the 45% to 55% range. Is there a plan to sort of take it aggressively up because that could be one big driver to help the consumer absorb this very steep price hike that we've seen? Like anything that you're doing where a year down the line, we see a sort of a significant jump in finance penetration from current level?

Let me first say and then I'll ask Naveen to add what's the new thing happening there. No, we were never at 55%. Honestly, when I look at all the quarters, we were hovering around 40%. And probably the best that we've reached in quarter 2 was around 50%, 51% last year. 55% is a clear, clear departure from that perspective, that's a significant jump. And why do we believe that it will keep going up, Naveen?

Yes. And in fact, that another 1% or 2% added in the first half, it is normally because of the kind of consumer which comes in towards Dhanteras, it normally goes down but this year, we've seen the trend going the other way around. And a lot of financial innovation. I mentioned that earlier, a lot of financial innovation. I think that's the direction in which things would move to increase the finance penetration levels in two-wheeler industry. And as I said, the segment of consumers we've identified and looking at the right product for those consumer segments. HFCL has been very, very proactive in terms of responding to the needs which were emerging from various markets. And across the categories and across the geographies, we've seen the finance penetration going down. I think one more aspect that's waiting for this finance space to get disrupted is also, how do we get increased level of digital play in terms of having a higher level of competitiveness among the finances to bring down the cost of finance, which still remains at a slightly higher level. I think that's one space that we are looking at to work on further.

In fact, Naveen, just to add on your point, that's a big opportunity. And we already see players are looking at tech at digital from their end as well as from a consumer end because they are getting more digitally included in the entire payment tech and fintech system more and more. We do see that, that augurs well, both from the financial side as well as on the consumer side. And therefore, this space is actually likely to be a big growth driver for the category as such itself moving forward over next 3 to 5 years.

And could you also comment a little bit about Hero FinCorp's role? Like in this jump in financing that we've seen, what has been the share of capital? How has that played out?

Yes, so as far as FinCorp is concerned, they are roughly around anywhere between 35% to 40% as a share of financing. They continue to be at a solid level of that range, plus or minus a few basis point keeps happening depending on quarter-to-quarter. So they continue to be the lead players. But then there are other multiple players who've come in, which also helped expand the basket. But they're at a robust 35% to 40% share of financing.

And the second question, as we recall, last year, sales promotion spend had gone down quite sharply for you and for the industry after COVID. How would you compare the sales promotion spending now versus pre-COVID level? Has it normalized?

Yes. I mean let me just comment and maybe then I'll ask Naveen to supplement. If you look at, I think, this festive, whatever the promotion spends and all were done, it's at a normalized level. So if you go back to the pre-COVID levels, whatever those spend to revenues and per vehicle used to be, there's not a significant departure from that in this quarter.

Yes, it's just about where do you put that money, right? So as far as expense is concerned, it's consistent. It's just about which is the opportunity bucket that you see to put your money on.

And lastly, if you would comment on Gogoro. Is that plan on track to launch the model in next calendar year? Will it be in the same facility? It's been 6 months since the partnership. Any incremental details on what's happening there?

At this stage, we will not be able to provide any more incremental details, I'm afraid. But as soon as we are able to, we will come back to watch this space.

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

I had just 2 quick follow-ups. Firstly, on this whole demand thing, how much do you think it's been whole EV overhang because media has just created a lot of hype around it? So do you sense, in your conversations with the dealers, that some percentage of queries are coming only for EVs? Or you're seeing rising inquiries around that? Is there anything that you can share around that?

So Gunjan, firstly, as I talked about, if you see 70% is motorcycles in 2-wheelers and 30% is scooter. So first of all, primarily whatever inquiries and questions and all that come around, they come around from the existing scooter base and people who have the need for the scooters. Overall, right now, on the demand is actually not impacting at all because overall EV probably, if I'm not wrong, is less than 1% of the overall. So there's a lot of -- yes, there's a lot of interest in media, I would say, rightfully so. But from a demand perspective, it's not much started impacting right now and it will still be a while before a sizeable share starts putting on that. Naveen, you want to add?

Yes, I think you said, Niranjan. It's more about -- more in that space. But I think the positive that I take from whatever inquiries that are coming in, that consumer trust the brand Hero and it's the brand Hero that they would kind of come first to check what's new on EV front.

So you don't think that people are in wait and watch? I mean that's not a reason for generally the demand being low in 2-wheelers versus some of the other categories?

No, Gunjan, because if you see within even motorcycle to versus scooter to total 2-wheelers, I think if I'm right, and Naveen can supplement, the scooter as a percentage of 2-wheeler probably in quarter 2 is more than what it was in quarter 1 , right?

Yes, it was.

And as you said, so if that was the case, people would have deferred their scooter and therefore scooter percentage to total would have gone down. So that's not the case there. But yes, they are interested because there's a lot of interest in this. They are interested, people are asking, so that is building up. But currently is it that people are deferring their current purchase to actually avail of an EV scooter, no, we don't think so.

Yes.

Okay. The second, very quick question, on the CapEx commitment for EVs, is there something that you would like to spell out? This is what we are looking to spend in this business for the next 3, 5 years?

So Gunjan, we've already, in fact, said the overall investments that we have talked about, our CEO has talked about that over next 5 to 7 years and this investment is not just CapEx. It's on CapEx, on brand building, on R&D towards this space, we've talked about 5 to 7 years, overall INR 10,000 crores we had talked about, I think, a year back. And we have said that almost 50% of that would be primarily into EV. So that's what we are looking at. Having said that, it's basically need-based. Obviously, we won't spend where it's not required. And if it is required, we may spend even more. So it's a question of spending based on the need and based on our product plan, based on what we are going to launch. And obviously, there'll will be no scarcity of that. One thing I can assure you that we, because of our ability, our scale, will be able to do that in a far more optimized manner. So if, let's say, a new player requires X to spend behind achieving a certain objective, we probably can do in X, Y, too. So that's the broad thing that I can tell you.

[Operator Instructions] The next question is from the line of Chirag Shah from Edelweiss.

Sir, just a clarification first. Other operating income for the quarter you mentioned was INR 222 crores, right?

INR 223 crores, Yes, Chirag, right.

Yes. Sir, I have a question on spare parts. Is this your normalized run rate, 12%, 15% of sales or there is scope to pick it up also?

So let me just give a short answer, and I'll ask Naveen to maybe supplement. Let's look at an absolute level, which is the INR 1,140 crores that we have done. We had done a couple of quarters of more than INR 1,000 crores also earlier, and we were confident that, that's the trajectory moving forward. So we hope and we expect to continue to build on these numbers as we move forward. There could be times here or there, a quarter here, a quarter there, which could go up or down. But that's an underlying trajectory to build on these numbers even further. As a percentage of revenue, of course, it all depends on the demand and the momentum of overall 2-wheeler also coming back. But at an absolute level, yes, we are quite comfortable and confident that growing, and Naveen already explained, and Naveen would love to just touch upon the underlying couple of drivers that he already talked about, which are actually leading to this growth and confidence in the growth.

Yes. I think we kind of started the story around 2 years back when [indiscernible]. So fundamentally, we are in place in terms of our robustness of distribution. And once you have that, it's just about looking at -- in fact, I would say what we do in vehicles in terms of looking at every single product as a product and we have a product manager is the same approach that we are doing in spare parts wherein there is a team which looks at different, various product groups and how the competition is and where we price in different markets. And that's the approach that we have taken in spare parts to go deeper. At every single counter, we are looking at how many SKUs would I sell and how many SKUs do I want to sell? What's the potential? I think the basic fundamentals have been worked upon in recent times, which is actually delivering the results that we have seen.

In fact, let me just add more on this, Chirag, is that what we are doing now is as we are launching more and more products in the premium segment, right at the design stage itself, we are looking at how many accessories we can add. Because there is a demand for that. Let's say you take XPulse, and then people want those customized, people want those add-ons. While they may not want, let's say, on an HF but as you move up the chain. So as we are launching more and more premium products, at design stage itself, we are saying x percentage should be accessories that's being designed rather than later to do that based on what is required and what the customer comes back. So as it moves forward and we build our premium portfolio, actually, that should augur well as well, our accessories going up and of course, the focus on merchandise. Overall, put together, Chirag, think the movement forward is that how much more can we get as a percentage of revenue from these after-sale services, all of those and that therefore, basically builds a more robust alternative or additional stream of revenue on top of the product revenue that we're talking about.

One proper example, we launched this Canvas Splendor. It now contributes 30% of our retail. And it's a model that we have given to the consumer to customize with those stripes. That's becoming additional revenue in spareparts.

If I can just squeeze in one more question. On the export front, what is the change in approach that we adopted which is helping us to have a faster addition of distributors versus our historical track record? Over the last 2, 3 years, there is an improvement in pace of regions that you're entering and tying up with new distributors. So is there a change in approach? And can this pace be further accelerated over next 3 to 5 years?

Yes, Chirag, in fact, maybe we'll, at some stage, we may have a full-fledged focus on GB for all our investors and analysts. But if I were to give a short answer, Chirag, it's -- I would call it a Phase 2, and therefore, I revised this one where, as we talked about, in the Phase 1, the focus was on go and set your foot in as many markets as you can because you need to understand each of the markets. And please go with whatever products you have because you can't afford to delay. In the Phase 2, which is now -- which has already started and yielding results, is now about now give the market customized products that they require, and therefore, focus on that. So even when we are developing products, actually, it's not like we develop products for domestic and then we say, "Okay, this is going to GB market." In the cycle plan, the product design itself, there's a very clear path for each of the key countries that what is the next 5-year plan for this country that I want to have based on the customer needs, which is there. So that's a shift or a Phase 2 or an add-on, as you may call it. And the second one is that while we are on 40-plus countries, we clearly decided there are 9, 10, which will receive disproportionate focus. And the rest 30 we'll continue to manage. When they scale up to a certain extent, then, of course, they'll start receiving focus as well. So rather than equally dividing the resources and the focus across 40, it's about priority A, and then obviously, as you nurture them back, then they also move into that category. So I think that's the short answer, Chirag. So there is a lot of teeth, muscles, flesh behind this entire strategy. And as I said, we'll at some stage, maybe have a full-fledged session on global business itself.

So basically, we have the right distribution partner at least in this 8, 9 countries, right? That has been done already?

Chirag, most of them, a couple of them only we have changed, but we have the right distribution partners. I mean most of our distribution partners are selected after very, very rigorous scrutiny in terms of both their financial strength, their understanding of their country, their networking, their ability on policy advocacy and their experience in auto sector, so multiple parameters. So apart from a couple of them -- and as Hero,we do believe in stability of partners and not changing and chopping them every 2 years and 3 years. So they are stable partners, whether you look at Colombia, whether you look at Bangladesh, whether you look at Sri Lanka or Nepal, all of them are continuing. So yes, a couple of places wherever it's required, we have changed and we may change, but that depends on our need.

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

I had a question on the trade-off between profitability and volume growth, if there is any. Because if you look at 2-wheelers, since the time of BS VI transition, then COVID second wave, in general, 2-wheelers have been more disciplined in pricing. Growth has been sluggish compared to other categories. So do you think there has been a trade-off? And if not, do you think that growth is not dependent on pricing and it will come back based on other factors that we are look out right now?

So I mean, first of all, you heard my views on this subject earlier as well, that our business cannot be run based on that, okay, I'll either deliver volume or I will deliver profitability. We've got to deliver both because its volume growth combined multiplied by profitability is what generates the net shareholder income or the value accretion. So I'm a great fan of believing that both have to be addressed. At different times, you have to then maybe give a weightage to one of these factors more and at other times, you can swing to the other extreme, and which is what we have done. For instance, if the cost inflation has happened, have we -- have the industry and have we, as a leader of the industry, have we like taken a stand that we'll pass on the entire inflation to the market plus the margins that we want to? You know from the results that we have not. So there's already a call which has been taken that you pass on partial, please focus on your own savings program, accelerate them, you tighten your overheads management and therefore, cushion the impact on the customer. So that's the balanced strategy where you start balancing profitability and this as well. As the commodities start pulling off, then that gives you actually a headroom to actually then take judicious smaller doses of price increases, where the inflation will be far lower, and therefore, your recovery can be far higher. So I think it's a question of this lag and lead and it's not a question of either/or.

Okay, that's helpful. And just quickly on the EV, I don't know if you can answer this question right now. Most of the EVs which have been launched at least in the medium to premium end right now come with a closed source charging thing. Their own charging infra can only support their own scooters. I don't know if you have any thoughts around when you launch your scooter, will it be an open source or will it also be a closed source, if you can help us on that?

I think, Amyn, we'll reserve some of the information and news for our launch. Otherwise, at the launch time, we'll have only product, we would have disseminated all the information. So let's wait for that exciting time when Hero, the leader of 2-wheeler industry, comes out and launches its EV product in March.

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

Thank you. Thank you very much. And don't forget to Google synonyms of the word winner. Thank you.

Thank you very much.

Have a lovely weekend. Thank you again for joining us.