Higher petrol prices are leading to an increase in cost of ownership for vehicle buyers as well. As such, it is a double whammy, with both the purchase cost and running cost increasing simultaneously
Hero MotoCorp Ltd announcement on upward price revision in the ex-showroom prices of motorcycles and scooters does not come as a surprise. With input costs increasing, most auto makers are resorting to price hikes.
Analysts at Kotak Institutional Equities expect the raw material basket for Hero MotoCorp (adjusted for price hikes taken to date by the company) to go up by 200-250 bps in Q4, from 2QFY21 levels. So margin pressures are likely to remain. But the bigger worry is the impact of higher prices of demand and volumes.
Sales numbers in January and February show that two-wheeler demand has been hit the most in the economy segment, where Hero Motocorp has a roughly 65% market share and gets most of its revenue from. “In the price-sensitive domestic economy bike segment, wholesale volumes have declined by 6% yoy in the past six months versus 14% yoy increase in domestic motorcycle segment volumes during the same period," Kotak’s analysts said.
Higher petrol prices are leading to an increase in cost of ownership for vehicle buyers as well. As such, it is a double whammy, with both the purchase cost and running cost increasing simultaneously. “If we assume the current retail price of petrol at around ~Rs90-91 per liter, the total cost of ownership will increase by 14% year-on-year," write Kotak’s analysts. To add to this, there is the recent rise in covid cases and related restrictions, which will impact demand as well.
Not surprisingly, the company’s stock is down more than 15% since its February highs, and the recent price hikes have failed to move the needle for the company’s valuations. The stock closed 1.16% lower at ₹3032 on Wednesday.
Prices of a number of raw materials used by the company have risen sharply. Domestic steel prices have surged by up around 37% since the start of October till mid-March. Aluminium prices on the London metal exchange too have surged almost 27% since the start of the third quarter. Further, precious metals constitute 5-10% of total raw material cost, within which the price of rhodium has surged about.10x/3x in the past two/one years, point out analysts at JM Financial.
Given these pressures, the company had little choice but to raise prices. But, as pointed earlier, investors would need to keep an eye on the impact of the move on demand.
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