Hero MotoCorp Limited (500182) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Hero MotoCorp Q3 FY '22 Results Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Basudeb Banerjee. Thank you and over to you, sir.

Thanks, Tanvi. Thanks to Hero MotoCorp management for giving us the opportunity to host the 3Q FY '22 post results conference call. I would like to hand over the call to Mr. Umang Khurana, Head of Investor Relations and Business Support, Hero MotoCorp. Over to you, Umang.

Thank you, Basu. Thank you for hosting us. Lovely to see all of you. Lovely to speak to all of you again. I trust you're having a good day, keeping safe and healthy. To discuss the quarter and our performance and future outlook, we have today for the quarter 3 FY '22 call: Niranjan Gupta, Chief Financial Officer; and Naveen Chauhan, Head of Sales & After Sales. We'll begin with an opening statement from Niranjan and then open it up for questions. We'll now pass this baton on to Niranjan. Niranjan, over to you.

Thanks, Umang. Good morning, good afternoon depending on where you're joining from and welcome again to Hero MotoCorp's earnings call. As you would have seen our financial results announced yesterday evening, we declared a revenue of INR 7,883 crores, an EBITDA of INR 960 crores and INR 686 crores of profit after tax. In terms of our top line performances, our domestic market share has grown sequentially by more than 100 basis points. Our global business has been consistently doing well over the last few quarters and is on track to close at around 300,000 units by the fiscal year '22, which would almost be 50% higher than our historical run rates for the last 4, 5 years. Additionally, as you would have seen from our results consistently over the last 7, 8 quarters, we've been focusing on non-2-wheeler product revenues as well. And therefore our PAM business, which is parts, accessories, and merchandise business clocked a solid revenue of INR 1,186 crores in quarter 3 registering a growth of 15% year-on-year basis. And consistently, we've been now clocking over INR 1,000 crores on a quarterly basis on our PAM business and we expect that to continue to grow in future as our activities on this front are giving us handsome rewards. Coming to the outlook of the industry fiscal year '23. As you know, fiscal year '22 was impacted across the industry by 2 pandemic waves and also the second challenge, as we have said, of the commodity cost inflation. As we move forward, let me talk about the demand side, we have seen the GST collections at their almost highest ever at INR 1.4 lakh crores. We are seeing now pandemic wave Omicron actually heading out, phasing out, rapidly dropping. Also recognizing this, all the other sectors which were either stop-start or not open fully, are now opening as you can see from various announcements by the state government especially the opening of colleges, opening of the hospitality sector, the entertainment sector. All that augurs very well as far as the income and rural demand is concerned. So therefore, we do expect a much broader economic recovery rather than a shallow recovery as we move forward to fiscal year '23. We have also seen the budget, which is rightly focusing on CapEx expenditure up by 5% over the actuals of the last year, and that would trigger a cycle not only of employment and income, but also actually trigger a private CapEx cycle. So I think combined, all of this should have a significant positive impact on economy in general and 2-wheeler sector in particular. As far as cost and margin squeeze is concerned, we have seen a lot of commodities now peaking out. We've seen precious metals, we have seen steel peaking out. And obviously, as we move forward, we do expect the commodities to have peaked out and therefore, the cost pressures to be far less and we'll continue to take calls on judicious price increases along with the accelerated LEAP savings that we continue to do in order to manage the impact on customers as well as on margins. So overall when we look at the outlook for fiscal year '23, we expect strong rebound in the 2-wheeler sector and we do expect the cost pressures to ease off as industry as such. We are -- we continue to launch more and more products in the premium portfolio to boost our market share and that should help us moving forward apart from the premiumization and obviously the scale-up of global business that we continue to do. On the EV front, as we have announced earlier itself, we will be doing our launch in the month of March. We continue to invest strongly behind our current investments like Ather and Gogoro, you've seen the announcements already. Apart from that, we are forging collaboration and partnerships with many players in the ecosystem. And therefore, we are addressing EV as more as an ecosystem rather than a product or a stream of revenue. With that, let me now hand it over back to you, Umang, and to the floor for questions and we'll be happy to elaborate, explain and clarify and answer all your queries.

Thank you for that. We'll now take questions.

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

Two questions from my side. Firstly, on the investments that we've made in the associate companies that is Ather and Hero FinCorp. Could you just talk a little bit more on both of these? Firstly, on Ather as to how do we see this association progressing over time? Is it -- does it go beyond the stake that we have in terms of alliances on the business front as well? And secondly, on the Hero FinCorp, now this is a pretty large capital infusion that we are doing when the industry is not growing. So maybe give us more color around what's the thought process behind this or is there some asset quality risk that we are anticipating in the business?

Thanks, Gunjan, for the question. As far as Ather is concerned, as you've seen consistently every round, we've been participating in the capital raise and over a period we've been increasing our shareholding as well. Beyond that, you're absolutely right. We are -- both the companies are exploring collaboration in the spaces where there can be synergy. We strongly believe that EV currently is more about partnerships and collaboration rather than competition because the category that has to be built and then built under different streams of revenue and with optimization of course. So whether it is let's say charging, whether it is maybe global business, whether it is the front end. So there are multiple collaborations being explored between the 2 companies. Already there's a lot of learning, which will get cross-pollinated between the 2 companies, which will help both the companies and our JV investments moving forward as well. As far as FinCorp is concerned, you would have seen the announcement, they have closed capital round of INR 2,000 crores, which is a capital raise. This will help them almost double their AUM from their current level of around INR 26,000 crores to almost close to around INR 50,000 crores. Their liquidity remains strong. Their gearing ratios are at around 4.5% against the allowed stake so it's providing them headroom. First 2 quarters like most other NBFCs because of the pandemic and the other, they had the challenge like across the NBFC sector as you would have seen, on the GNPAs. But quarter 3, they have turned back again and they have delivered a profit of INR 130 crores for the quarter. So we don't see underlying or continuing issues as far as the asset quality is concerned. Those are all one-offs, which is the GNPA, which is across the industry which happened. So this capital will actually help FinCorp grow because as we come out of pandemic and which we have, I do believe, it will be back to growth of NBFCs. India's credit to GDP ratio is very low and therefore, it augurs well for well-funded NBFCs, which have strong parentage and actually offers now a renewed opportunity to grow given that the finance penetration in India is still very low. So it actually builds them towards a much stronger business as smaller NBFCs start to consolidate in future.

Okay. And second question is on the margin. You kind of touched on the mix improvement we are seeing, but if you could also give us some sense on what kind of price hikes that were taken during the quarter and if anything after that? And are we pretty much covered for the commodity inflation now?

So Gunjan, as you would have seen, our EBITDA margin, which we declared for the quarter is 12.2%. Obviously, there is some bit of recovery yet to be made. In terms of price increase what we did, we did from around 1st of October, last week of September close to around INR 1,000 ex showroom price and from 1st January we took close to around INR 500 ex showroom price. So we'll continue to calibrate that. Moving forward as we see these gradual price adjustments combined with commodities softening, that should help us actually in terms of margin recovery. So that's how we expect it to be played out. But as you would have seen, we continue to take a balanced view between what price we have to pass on blending it with the savings, of course sourcing it in an effective manner and obviously we need to cater to growth as well.

The next question is from the line of Vimal Gohil from Union AMC.

Sir, my question on gross margins has been answered. The second one what I had was on electric vehicles. What would be your distribution strategy? Are we setting up a new distribution channel or will we leverage on our already strong existing distributor network?

Good question. So first of all, let me take a bit of a broader view. There are certain inherent strengths that incumbent players like us have, which is whether you call it manufacturing scale, logistics distribution scale I touched upon in the last earnings call as well, whether it's sourcing scale. All of these actually help us in terms of reducing the cost of acquisition of customer and reducing the investment, which is required to achieve a certain scale in EV. Equally on the distribution side, the reach that we have in the nooks and corner of the country certainly it will be helpful. So what we are working out is a strategy where of course there will be certain exclusive stores as well, but obviously in more ways than one, we will be looking to leverage our existing strengths as incumbent including manufacturing, sourcing, R&D, logistics or our network.

Sir, the existing stores are well equipped in order to service the customer in terms of -- because electric vehicles will require separate skill levels in terms of servicing, et cetera. So do you think we are prepared for that particular angle or how should we think about that issue?

The servicing essentially is of the 2 elements. If you talk of the software part of it, it is mostly over the air so it doesn't make a difference where you sell from. And the other are physical parts, which would be no different in terms of servicing, whether you do the servicing from X place or Y plate or ICE or EV. Now please we also need to remember that there are different profiles of the customers. So the customers in the city or the metros would expect a certain experience and environment. As you go to Tier 2, Tier 3, Tier 4 and you're trying to attract those customers, the environment need not be very different. So we are blending in all these learnings, which are there from our knowledge of the customer base as well as from what has been the EV players' experience. We're blending that to suit the channel and the strategy and the modification that we will ultimately deploy. You will hear more about this when we launch -- when we do our launch.

And sir, we are also baking in some dealer profitability because the software going to be taken care of over the year, then behind servicing is a large portion of a dealer profitability. How are we taking care of that? That would be my one question. And lastly, if you can just highlight your CapEx for FY '23 and what are the investments that you plan for Ather and Hero FinCorp?

So as far as dealer profitability is concerned, again while I'll not get into granular details, but that's again another area where as incumbent we will be much better off because remember EV is coming on top of our big base of ICE. So it's not that every dealer will have to be exclusively profitable on EV. Of course for the exclusive stores, they will need to be. So all those economics, all those liabilities, whatever it is for the industry; all I can say is that we will be much better off vis-a-vis the industry dynamics. And eventually whoever comes into EV space will play for the long term and not profitability in the short term any part of the eco chain. What was your second question?

Sir, CapEx requirement and investment in Ather and Hero FinCorp?

Okay. So as you know, we don't give guidance on the CapEx requirement of FinCorp and Ather. All I can say is FinCorp is now fully funded to almost doubling their AUM so we don't see any requirement coming up probably even in the next couple of years. And obviously, at some stage, they will also have to plan for their listing and their IPO. As far as Ather is concerned, we'll continue to evaluate how -- the company will continue to evaluate the EV landscape and the EV path. Of course the current round also, they need to close the capital around. They haven't closed the capital round and after that only they'll be able to assess when the next requirement will be.

And sir, your own CapEx?

Our own CapEx, we will talk about it in our quarter 4 earnings call.

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

Sir, firstly, just on Gogoro. Is our tie-up with Gogoro exclusive or others will also be allowed to use their battery swapping stations?

The JV that will be formed, which will have the swapping network, that will have exclusivity in terms of the swapping tie-up with Gogoro. Now whether that JV operates to serve only Hero product or later on together we both decide to expand it to others, that's something for the JV to take a call once the JV is formed and it can very well form a different stream of revenue as well apart from just catering to Hero branded products. But those are things that once the JV comes into being will get decided.

Okay. And secondly, when we look at electric vehicle launch of your peers, they've launched models for more than a year yet we see limited city launch, volumes still around 1,000 units or so hampered either by production issues or supply chain issues. As you are looking into your electric launch, how are you looking at resolving these issues? Are you going for a similar limited city sort of a slower ramp-up or planning to go for a pan India launch?

So at this stage, all I would say is wait for further announcement. So when we do the launch, at that time we will actually come out and actually share what our overall plan is. Eventually, I mean it's not -- honestly, it's not the start that matters. But eventually, as you know as Hero MotoCorp, we would cover all segments whether it's a premium, mid or mass segment or EV because our objective is to enable electrification for everyone not just for exclusive set of people or exclusive set of geographies. So that's the endeavor that we will have to actually straddle across the segments and accordingly obviously straddle across the geographies as well. Now what pace, what speed, what scale-up? That's something that we will share closer to the time.

Just lastly, one question on the consumer trend. Everybody has been waiting for replacement demand in the 2-wheeler industry to come. Have you seen any change in consumer trend as in replacement as a percentage of share rising or so in the last few months? Anything on first-time buyer versus replacement trend at the consumer level if you could share?

So let me hand over this question to Naveen.

Namaskar to everyone who's on the call. On the replacement buyer, we've seen that since the time the pandemic has hit, the consumer has actually not come back to the level that they were before pandemic. However, in the recent 2 months I would say more in January, we have seen the replacement buyer coming in. And I think one of the proxy that we also look at for the replacement buyer not coming in is also the increase in the paid service in our dealership workshop. So that's the process that we take. And in January, we've seen in some of the markets of UP, Rajasthan, there's a bit increase in terms of contribution of replacement buyer.

Any percentage number like what percentage would roughly replacement be?

Okay. So it will be around 20% or so. That's where it operates. It was far higher during pre-pandemic times.

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

First question was just a clarification. You mentioned in the release that you've invested INR 150 crores in Ather post December. Is this part of the INR 420 crore full round that you have announced? If you can just help us understand.

Yes, it's part of the full round of INR 420 crores. You're absolutely right.

Okay. And secondly, just on the core business, we've discussed this for several quarters now as to how you and potentially the 2-wheeler industry has actually managed to maintain pricing and even profitability during 3 years of downturn now. So just want to get a sense from you is that -- given that financing share continues to be quite low, how should we look at profitability going forward? Because we are hitting peak profitability in terms of EBITDA per vehicle at a time when the market is 30% lower. So how should we think about this because this is not something that we have seen in the past?

So let me just give some examples in terms of the pricing. So even as you see today, I mean one normally draws a very direct correlation between pricing and demand, but actually, it's not so. What we have seen is that demand is more impacted by other factors than essentially price as long as you're able to provide value to the customer. So for instance, if you see even in these times, let's take Glamour. When we have launched Glamour XTEC, which is almost at INR 4,000 to INR 5,000 per vehicle higher than the base Glamour, people are lapping that up and Glamour XTEC has become more than 30%, 35%, 40% of our overall Glamour. Now therefore even within those segments if we are providing the right features and value-add to the customers, the customers are taking the variant which is actually priced higher provided they see value in it. So I think it's that equation, which as long as you keep getting it right, then fundamentally one doesn't see pricing as a big issue and pricing pass on as a big issue. Obviously, it has to be calibrated based on the different segments. So moving forward as we see, look, the last 2, 3 years as you rightly said have been years of commodity challenge as well as on the underlying demand because of the pandemic one has seen multiple waves and of course there was the BS-VI transition as well. As we move forward, we see that a lot of these big shocks are behind us and obviously the commodities also can't keep going forever. Nothing keeps going up forever, nothing keeps going down forever. So when you look forward when you see actually these things coming nicely together as a sweet spot, which is people's income coming back, people wanting to spend more. And also it's about once you decide, it's not a consumption spend. It's a spend that you've decided you need to. And obviously, because of the consumer confidence, a lot of stock which was held back is likely to then come back. So we don't see actually this as an conundrum or an issue and I think we've been very sensible in not passing the entire cost, as you would have seen. Probably we would have taken price increase, which is close to maybe 50% of the cost increases that have happened and around 25% made up the LEAP savings and the balance 25% broadly absorbed in the margin, very, very broadly. That's the configuration that we have done. So we've been very, very sensible and mindful of the impact on customer as well. Let me just also ask Naveen to add on this front. Anything you want to add, Naveen, or..?

So I strongly agree with you. And in fact consumers, especially BS VI trends if you look at across the segment not just 1 or 2 or middle premium. We've seen this is happening even in the commuter Splendor wherein the premium variant was introduced and that gets lapped up. The consumer is primarily looking at value and also we've raised also at the point of the financing being low. I think that's also we've seen there is very innovative financing models appearing, OEMs working with the financers to evaluate and evolve those models and offer this to customer. And we have seen the result of that in terms of the finance penetration that has gone up in the last 1 year.

Just to add on financing point, Naveen. The other thing, as you would have seen in the budget also, the more and more financial inclusion happening, which is even post offices coming into the space. So I think as it happens more and more and gets more and more into interline and rural, the financing is a beauty of cushioning the onetime or immediate impact of the outflow the customer faces. So actually as it increases, this should augur well for the industry as such itself.

Just one last thing. What is the financing penetration right now and if you can share Hero FinCorp's share in that?

So quarter 3, our financing penetration was 58% and Hero FinCorp continues to be in the band of 35% to 40%. So it was 35% in quarter 3 FY '22.

Okay. And on a full company basis, it was 58%. So there has been a recovery here in the financing?

Yes. Across the segments, I mean this is an overall number, but the growth in retail financing has been seen across the segment across the geographies.

The next question is from the line of Pramod Kumar from UBS.

Just one clarification on the EV schedule. In March you go commercially live or it's going to be [indiscernible] followed by a launch at a later date? I just want to clarify that.

Pramod, thanks for the question. So you will get to know the entire details in the month of March itself. So we'll be announcing the entire plan of when the ordering will start, when the commercial dispatches will start, the sales will start. All of that will get announced in the month of March along with our launch.

Fair enough. And the first question is to Naveen on the market situation because we've heard staples companies to even tractor companies complaining about rural inflation on the agri side resulting from income and generally demand has been very weak and even our market share trends kind of suggest at around 31% in January that the rural segments are definitely suffering more. So what is the confidence of the data -- from which data are you getting the confidence that FY '23 is going to be a good year for the industry in terms of recovery outside of the base effect of course of the first quarter because most of the other companies are warning about how incomes have taken a knock for bulk of India and the disruption from the entire variants and there is being writedown and the prices being moved heavily, both vehicle prices and the fuel price. So what are the data points which are giving you that confidence on demand recovery?

So you're right that if we look at what has happened over a period of time last year, especially the second wave which was far more lethal than what was expected and in fact it was far more deep in the country and it actually hit the rural sentiment far more deeper. Post that you had delayed monsoon and which also had a major impact on the rural crops and that continued till as late as December and part of January. What gives me confidence is the recent footfall that I see in markets like UP, Bihar, particularly Eastern UP and the Central UP part that I see more and more footfalls are coming into my secondary network, which is more of the rural base. I also firmly believe that the bottoming out has actually happened. It's the only way forward. Also if you look at consumer confidence index, that's a little bit dip in the month of January because of the third wave. We are also seeing the signs are going up. Now while there has been an impact on the kharif crop, the rabi sowing has been pretty good and there is some focus that the government has in terms of investing in rural and getting that segment back and it's very, very critical for the country. In terms of the double-digit number that Niranjan shared in his opening comment, I think if you look at base effect of Q1 and then subsequent to that if we get on to the long-term averages, I think we'll get that kind of a number from an industry perspective.

Sorry, Niranjan. But given the cost inflation, the long-term averages do they really matter because long-term average on inflation is 1% or 2%, but the vehicle sales have shot up by 35%, 40%. Fuel prices are up 50%, income levels are down. So is it the industry being a bit more optimistic in terms of making the reduction? And also related to that, how are you reading the marriage season demand? Because last 2 years we didn't have a marriage season in the summer unfortunately, which is the second largest buying season because it's very critical that you have a good start to the year with the marriage season. So if you can make comments on that as well, sir.

Let me broadly supplement what Naveen said. First of all you what happens in a time of euphoria, we get too euphoric and at times when things are down, then we get too pessimistic. I think we shouldn't forget that the base impact has been severe and as we have come out, even today the consumer confidence index is the highest in the last 2 years sitting at 60. Second thing is when you look at in the last 2 years, it's only now with this wave 3 that some of the sectors which had not even opened up are now opening up. Colleges are opening up after a gap of 2 years. You can see the entire sector of the economy actually opening up. Now that provides confidence. Otherwise, people keep thinking in rural, which was rightly so after the wave 2, that maybe I need to save for XYZ, we don't know what else is coming. Now that confidence is returning back that maybe life is coming back to normal. So that's one part of the whole thing. Naveen did explain about the delayed monsoon, et cetera, et cetera, all that factors. And third, of course, you see the large expenditure in the union budget, the confidence of the overall ecosystem on the private industry which is coming back on the CapEx cycle. So I think all of this actually really augur well. And finally, industries are cyclical so after 3 years of negative growth, the whole cumulative pent-up that gets accumulated or has got deferred is bound to come back. So actually we are -- therefore, we are extremely positive about this. I mean we don't see a delta like impact again coming into play. I mean those are once in 100 years kind of event and therefore, we should not take those as underlying reflection of demand. Naveen, you also...

Also I think I mean this experience with Omicron, subsequent to that both the administration as well as people by and large also adopted to the change of life. The question was also about what's happening in the marriage market. We've seen there is a retail uptick in the core marriage markets in the month of February. And another factor that I also look at not just the retail growth that we are experiencing in the current month is also about these purchases are normally cash purchases. And hence the trend that we were observing in terms of retail finance penetration for the last 4, 5 months, we've seen that also dipping a little on account of the cash purchases that happened in marriage markets. So core marriage market, there is a positive dip.

And Naveen, where's the system inventory now in the dealers?

In terms of forward-looking that we look at our retail, we are at 7 to 8 weeks kind of inventory right now at a dealer.

The next question is from the line of [ Rajesh from ITI Limited ].

So if I look at, let's say, Hero Motor we are [indiscernible] as far as the EV channel is there because we are also an incumbent as well as we have taken a number, I would say, successful start-up entity. My question was if I look at -- of course, there may not be any clear answers at this stage. But if I look at next 3 to 5 years when we know that EV penetration would have happened and there'll be a certain substantial percentage of some segments will be EV. When we think will be -- or who has the right to win in this? Because why I'm asking is if we talk to start-ups, their distribution strategy is let's say targeting top 4 metros in the first 3 months, then go to next 10 cities. Likewise, you are following so that you capture more area. Products, everybody is announcing large capacities, but nobody has seen so far -- we haven't seen deliveries so we don't know what are the challenges. And these are the areas where we are -- third is of course brand. I mean there will be at least 40, 50 new lines who are coming up with electric scooters. Not all of them are as formidable or buyers may not be as confident on all of them. And these are the areas where all the incumbents are very, very at an advantageous point. So I just want to hear your thoughts because -- and incumbents are also spending a lot of capital as well as effort in the background, which may or may not be visible. So 3 years down the line, who you think would have the right to win? How many players would the market have or will it be a very, very dispersed and fragmented market with everybody there. So just wanted to hear your thoughts on how you look at it. You may have studied some other geographies where EVs have already penetrated. So what are your thoughts on this?

Lots of questions in one question, Rajesh, but let me attempt. So first of all, look as far as EV is concerned, in no country in the world it has reached the maturity stage and therefore, there are no inferences that can be drawn from that. Having said that, any industry that you look at, which goes through a lot of entry of new players because of the attractiveness of the segment or ease of entry or whatever is seen on the valuation side, eventually has to go through consolidation. We've seen in industry after industry and that's the truth globally. So yes, next 3 to 5 years you're absolutely right. Whether it's 20 players, 30 players, 40 players, 50 players; we don't know, but there'll be many players. They're already many, there may be more. But eventually after that, steam has to run out and consolidation has to happen. Now who will win if you ask me, I'll say we will win. If you ask anybody else, they'll also say they will win. So let me also talk about maybe the factors that will determine who will win. It's the understanding of the customer because the EV customer fortunately or unfortunately, whichever way we look at it, is also part of the planet Earth and that's what I keep saying they are not coming from some other planet. So I think the understanding of the customer whoever has the most, that is one very important. Focus on giving customers what they need and maybe giving what they may not have even imagined. Focus on the C, which is the customer is important. The second which will be important is cost competitiveness. Today that's not being stressed enough. Today cash burn is fancy. But moving forward cash burn has to give way to cash earn and that is where cost competitiveness is extremely important. So players who can establish long-term cost competitiveness whether it's [ RM ] cost or the CapEx cost or cost of operating or distribution, et cetera, et cetera, that will determine winning. And third is of course the long-term view of the entire business per se. So these are the key factors. There may be many others of course. Whether there are capabilities that can be acquired or there are investments that can be made, capital is no longer a barrier. So I think these are the factors that will determine who will win. But of course we as Hero Motocop, we have said it earlier. We invested in startup 5 years back when nobody was actually taking probably EV segment seriously and we've gone ahead, we've tied-up with Gogoro, which is our swapping network, understanding that different customers may require different solutions at the front end for charging. And equally obviously we will be coming out with our own product as well. So we continue to work very strongly on this as far as EV segment is concerned. Finally, I also want to just amplify what you actually rightly said. For us, we have a very low market share in scooters. So EV segment, EV penetration actually is a sweet spot for us because it helps us because we are very underindexed in scooters so it gives us a chance to actually build our penetration in that segment. Motorcycle, which is almost 70%, is not going to get electrified in a hurry and we all know the reasons for that. So for the first few years, it will be about scooter which actually works well from our own portfolio shape and where we are.

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

Two questions. Firstly, being one of the early movers towards swappable battery technology in terms of the efforts with Hero Gogoro, is the launch on track for the CY '22 time line? Any details you can share on JV investments?

At this point in time, I wouldn't be able to share any further versus what we have shared earlier. But as we move forward and closer to the time, we'll keep updating you with more and more. But the teams are working very fast on actually both the solutions, which is the charging solution as well as the swapping solution.

Understood. Sir, secondly, would you be able to share at what valuation you have invested INR 420 crores in Ather in recent round of funding or would that announcement happen once the funding round is finished?

Yes. So your second part actually answers that so I wouldn't be able to give any valuation at this stage. The round still has to be closed and obviously the company then, Ather, which is raising the capital, will make the appropriate disclosure as may be required.

One clarification. On the replacement share, which has now fallen to 20%. In the earlier years say FY '18, FY '19, was the replacement share closer to 45%, 50% to Naveen, sir?

No. So now what it is currently, it's as I said, around 40%. So you might look at the maybe plus/minus 2%. But I think it was as high as nearing 30% at one point of time.

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

A very interesting point you made on the scooter business. I had a similar question. So let me just also try and understand from a swapping perspective, do you think swapping would be a mainstream product or it would work in certain segments like delivery? What are your thoughts? Because it requires slightly more investment on a system basis because you need to invest in, let's say, 1.5 or whatever that number is -- number of batteries. So what are your thoughts around that? And are you also focused on increasing the ICE scooter market share because it's been struggling a bit in last few months. So just some thoughts around that.

Let me talk about the swapping first, Kapil. So Kapil, we'll have to see how the customers evolve, yes. Obviously, the B2B segment, which is a delivery business and all that, is clearly a commercial segment is obviously amenable to swapping. As far as personal vehicle segment is concerned, Taiwan has shown that even there segments of customers actually prefer that because they can't afford to wait for an hour at the charging station and in the queue and therefore, this 2-minute, 3-minute swapping works. Now how it evolves in India, how it evolves in different geographies? Honestly, we will have to put it in and then see because this is a new animal and it can behave differently in different geographies, in different classes of customers basis their job profile or business profile. So all of that we will be able to know only once the product is out as to what share it will occupy vis-a-vis the normal charge. As far as the ICE scooter is concerned, let me hand it over to Naveen to address that.

So ICE, the question got preceded with the scooters on EV and maybe the huge action that Hero is doing on EV is actually causing that to come as a subinventory. But just to give you a flavor on scooters. While we know that EV is going to grow, but then the ICE would still hold the significant share in the scooter segment for some time to come. There's a lot of actions on the product side, on the geography side, which are being in play. Pleasure, if you look at, there is a lot of action in terms of premiumization of the product. We launched XTEC. Within 2 months, the contribution of XTEC has gone more than 20%. And I think Pleasure is the only scooter in 110 category, which has gained market share on a YTD level. The change that has happened in this industry, which is kind of something that is happening for the last 3 years, is that 125 cc segment in the scooter segment is actually growing very rapidly. We are coming up with a very strong product value prop with Destini XTEC in 125 cc and that's going to be playing in the core value of that segment. So efforts are on. Pleasure, it was a limited geography product, it's going to go -- getting into the pan India basis and we are quite positive that with Pleasure there, Destini XTEC coming in, Maestro 125 playing and we have subsequent plans in terms of interesting products for the next year to come to gain market share to our desired levels.

Okay. The second question is on -- you mentioned that one of the important metrics for success in EVs will also be cost leadership. Now 2 important elements there are the battery cost as well as the distribution cost. So some of the players have taken this approach not only in India, but I mean globally also we have seen where they are into the direct distribution model and also some players are investing in battery. So to address those, how are you thinking about these 2 elements?

So as we said and you're absolutely right, cost leadership will define the long-term winners and that's extremely important. It's not just battery and distribution. Actually, there are all aspects of the cost lever which is there. So let me talk for instance swapping, which we just touched upon. In swapping and you talked about the 1.5 factor, et cetera, et cetera. Now this road to rack ratio, which is what it is called, actually that gets improved on the knowledge of your peak time, on replenishment, a lot of knowledge that happens and how do you improve that. Therefore, the density coverage that you want to have, at what distances you want to have the stations, which places. Now which is where again if you have an existing knowledge, it helps and which is where our partnership with Gogoro because Gogoro has got 4, 5, 6 years of that experience in improving the road to rack ratio in Taiwan. All of that comes handy and therefore that actually can benefit in terms of the cost leadership very, very clearly vis-a-vis a new player in swapping who would not have the existing knowledge of that. So the knowledge becomes an important part and parcel of how you achieve cost leadership apart from the physicality of what you do as a business model on battery and distribution. On battery of course, there are people who have tied up, there are people who are sourcing. But our view is that given there are so many players going to come in cell manufacturing, this will be a place where globally or locally given the PLI on advanced cell chemistry, there will be multiple players coming with big CapExes on that and therefore, the optionality of sourcing from the best source on quality and cost is probably a better way forward as we see it now. Of course one keeps evaluating this, but this is the upfront. On distribution, honestly direct to customer is potentially more because the startups do not have the existing distribution channel and therefore, setting that up would require long time and huge investments. And obviously for that, therefore, the direct-to-customer becomes the obvious model to go in fast. And therefore, eventually, if you look at it, I mean the cost leadership in a distributed model which is with network will always be cheaper than direct distribution or direct to customer given the number of customers that we are servicing and the sheer physicality of the equipment that you are talking about. So underlying economics of actually direct-to-customer will always be costlier inherently compared to our distributed network. But I think these things will evolve and one will have to see with scale how it pans out. So too early to take a call on that. But focus on cost leadership is extremely important like you said from a long-term winning point of view.

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

Sir, first some housekeeping questions. Spare parts revenues you indicated, what was the number for the quarter?

Sorry, I didn't get the question. Can you repeat it again?

Spare parts revenue.

Okay. Spare parts revenue for the quarter was INR 1,186 crores, as I said, which is 15% growth year-on-year basis. Last year quarter 3 was INR 1,033 crores. And if you're interested in just preceding quarter, which was the quarter 2, was INR 1,141 crores. So we've been consistently clocking more than INR 1,000 crores every quarter and as we said, there are big plans to actually take it forward. Naveen, why don't you spend couple of minutes talking about our PAM business and our plan?

Niranjan, I think you've been helping me there. So I think this is something that we've discussed in the last earning calls also. The focus if I put it broadly is how do we enhance the nonproduct revenue bucket, spare parts being the major contributor to that space. Lot of work in terms of the core spare parts that we sell in dealerships and across, lot of work for the dealerships in terms of growing. And focus is not just about growing revenue of spare parts, but also about dealership profitability that emanates from the workshop and also aftermarket is the deep distribution approach that we have taken. We're also looking at what are the adjacent revenue teams which are available in nonproduct revenue we're talking about and how do we work on that. We've worked on oil last year and we've seen significant growth in the oil revenues and oil business and also it helps us continue to remain in touch with our consumers who are going in aftermarket with the brand. And hence, I mean that's one line. So there is organic way of going deeper and then looking at other revenue streams and lines.

Sir, any more products -- how should one look at the product that you're looking to use in the replacement market or after-sales market? What is the action available for you on which you are looking to expand over 2, 3 years?

So I'll give you an example. As I said, if I look at -- go back 4 years, we were -- 99% was spare parts. Started working on accessories, then we introduced merchandise which is still a small baby, then oil business and you've got batteries, tires. So there are lots of lines for the consumers, which consumers normally get replaced in aftermarket. And we having very strong connect with consumers, I think those are the revenue lines which are available. Also within the core spare parts if I look at like you have product models, you also have product lines which may be brake lines or maybe cables, ABS parts. So there are multiple lines and we continue to monitor what's our market share of these components in different geographies at an overall level. And there is -- when you bring about your approach, we've got 105,000 technicians, which are independent technicians, which are connected with us. And month-on-month there are 60,000 technicians who interact and deal with us. We've seen our revenue through these technicians growing 3x in last 5 years, I mean so it's plus INR 100 crores basically. So that's the number which is -- so those are our growth levers that we use for a continued growth that you're seeing over a period of time and quarter-on-quarter, we see that positive impact.

Just 2 more clarifications. You say inventory level you maintain 7 to 8 weeks. Did I hear it right or...?

Yes. And that's from the forward-looking perspective in terms of the way we look at how the retail forecast that we have for the month of Feb and March.

So this is more about the delay in the festive and marriage season and that's why the inventory number generally. At this time, inventory is slightly lower, right? So is this largely because of that?

Yes, you're absolutely right. It's largely because of that. As industry-wide, we have seen that the festive was not as good as what one expected and therefore, that's a carryover. Otherwise, you are right, 6 weeks is the top of that one has as the inventory levels.

And sir, last is pre-COVID, what was the finance penetration? You mentioned 58% for the quarter. So have you crossed that number? It used to be lower if I recollect.

Yes. I don't think it was more than 40% to 45%, Naveeen?

There is a significant shift in the retail finance penetration that we've seen in this year and this is continuing as I said.

It's a combination of the 2 things. One of course like we've been mentioning, a lot of work that we've been doing in terms of finance penetration and you see quarter after quarter we've been talking about that. Our trust on that, we see that underpenetrated. Second, of course, is that COVID has impacted, people also then try to go for more financing solution because obviously like someone asked that how to counter inflation. Now one of the ways to counter inflation is actually financing penetration. And therefore, people themselves go for financing solutions. So I think combination of both the factors have led to the financing penetration increasing.

And I think the industry, both OEMs as I said and the financers, have been innovate in terms of understanding the consumer need...

Ladies and gentlemen, we have the management line connected again.

Yes. So we just explained that there's a combination of the 2 factors that has led to the financing penetration. I'm sorry for the call drop. Beyond a point, as you can see, on technology you don't have control and technology becomes supreme over human beings.

So last clarification, sir. Sequentially, there is a significant improvement in gross profit margin 130 odd bps. Now I presume this is more driven by mix rather than commodity benefits coming in. Would be a right assessment?

I think it's a combination. It's a combination of, I would say, mix as well as when you see the savings programs that we have been running. So I wouldn't say commodity benefits. I think commodity benefits are yet to flow through because while they're stabilized, it's not that they have dropped to give that benefit. But yes, it's a combination of mix and the savings that we're talking about.

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

I have just one question left. What would be the share of 2-wheelers which are sold in schools, colleges and all in general? You may not have exact numbers, any rough number would be helpful in a normal year not the last 3 years. And secondly, would it be too different between motorcycles and scooters?

So I mean we do track in terms of the end usage of our products. So may not have a breakup at a scooter and a motorcycle level. But I mean I can share the data that we have. Close to 8% to 10% is what is getting sold to the students.

In the interest of time, this was the last question. I would now like to hand the conference over to management for closing comments.

Thank you, everyone, for coming in. It's a pleasure. Please keep safe and we look forward to speaking to all of you after our quarter 4 results. Have a good day.

Thank you. Thank you for attending the call.

Thank you very much.

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