Hero MotoCorp, the world’s largest two-wheeler maker, said a delay in the onset of rains this year hurt demand for motorcycles and scooters in India’s rural areas, but there have been signs of revival in recent days as the harvest process got underway.
The company, which makes among the world’s most cost-effective modes of getting around, gets a large part of its annual sales of 6 million two-wheelers from the rural and semi-urban markets in India. Partly for this reason, it has under-performed during the festival season this year, while doing extremely well last year.
The company also blamed the second COVID wave, commodity price increases as well as high fuel prices for muted demand during festival season this year.
The company sold ‘just’ 0.53 million two-wheelers in October this year, a third down from the 0.79 million it sold in the same month last year.
“Overall [festival sales] were subdued,” said head of sales Naveen Chauhan.
“But in the second half [of the festival season], we saw the relative traction being better,” he said, adding that ‘post festival’ sales have been as good as last year in urban markets, but remain subdued in rural.
He said the delay in the onset of the monsoon this year has pushed everything back.
“In the semi urban and rural segment, they wait for their produce to reach the mandis and to get the cash in hand. I’m positive about [a sales pickup] once the harvest happens,” he said. “The crop is still in the fields or on the way to the mandis.
“In markets like Punjab and Rajasthan, where the crop has reached the mandis, we’ve seen better traction. Hence, going forward, as the rural market comes back, you’ll see better traction,” he said.
COVID, PRICE INCREASE, FUEL COSTS
Three other factors also contributed to the depressed demand this year — the second wave of COVID-19 in April-May, an increase of around Rs 3,000 in the price of its motorcycles and the recent spurt in petrol prices.
The company raised vehicle prices three times since the financial year began in April — in the first month, in July and in September.
The latest increase was of around Rs 1,000 per bike, in late September, preceded by an increase of Rs 1,200 in July.
Unlike rivals like Bajaj Auto and TVS Motor Co, Hero gets an overwhelming part of its sales from the price-sensitive commuter segment, and this segment has been hurt the most by these factors, said CFO Niranjan Gupta.
This has also been reflected in the sharp increase in the share of customers going for various financing schemes in recent months, especially in the entry-level category.
“Fuel prices has had an impact on the minds of the customer. The impact of COVID on disposable income has been sharper this year.”
Among the key risks to recovery that the company faces are a third wave of the pandemic and further increase in the prices of commodities like steel and nickel.
However, from recent developments, said Guptal, it looks like raw material prices “will cool off”.
“Some of the commodities have stabilized, or are coming off their highs. But if there was another wave of inflation, it can act as a risk.”
Company officials also commented on the recent pick-up seen in Hero MotoCorp’s export sales.
After remaining at around 200,000 per year for 4-5 years, the company’s export figures have been boosted to the 300,000/year range this year.
Gupta said the company is now in the ‘Phase 2’ of its global business strategy, with the first phase being that of getting the foot in the door by offering whatever products were being already manufactured for India, and the second phase being focused on delivering more customized models that the export markets require.
Hero has been a laggard when it comes to exports. While rivals like Bajaj Auto and TVS Motor Co get around 40% of their sales from outside India — sometimes as high as 50% — for Hero it has been in the 15% range.
The company has, in recent months, announced a spate of new tie-ups in its overseas markets, and today sells in nearly 40 different countries. Gupta said out of these, 8-9 form priority global markets for the company, including Nigeria, Bangladesh, Sri Lanka, Columbia and Mexico.
“Things are happening, the products that are required are going in…There are 7-8 markets where we see market-share movement.”
He admitted that the company’s operating margins in many of these markets are below what they are in India.
“Going forward, as the scale picks up, and as we launch more premium products, the margins will recover. All put together, the export margins should be at least equal to, if not higher, than that of the domestic market,” he promised.