Demand could take a hit as Hero MotoCorp raises prices

Rural markets contribute almost 50-55% of the total volumes of Hero MotoCorp. Photo: Bloomberg

2 min read . Updated: 24 Mar 2021, 11:00 PM IST Ujjval Jauhari

Sales numbers in Jan and Feb show that two-wheeler demand has been hit the most in the economy segment

Hero MotoCorp Ltd’s decision to raise dealership prices of its motorcycles and scooters does not come as a surprise. With input costs increasing, most automakers are resorting to 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 basis points (bps) in Q4, from Q2FY21 levels. So, margin pressures are likely to remain. But the bigger worry is the impact of higher prices on demand and volumes.

TRENDING STORIESSee All

Sales numbers in January and February show that two-wheeler demand has been hit the most in the economy segment, where Hero 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% year-on-year in the past six months vs 14% year-on-year increase in domestic motorcycle segment volumes during the same period," Kotak’s analysts said.

Higher petrol prices are leading to an increase in the cost of ownership for vehicle buyers as well. 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 ~ ₹90-91 per liter, the total cost of ownership will increase by 14% year-on-year," wrote Kotak’s analysts. To add to this is the recent rise in covid cases and related restrictions, which will impact demand as well.

Not surprisingly, the company’s stock is down over 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 ₹3,032 on Wednesday.

Costs of several raw materials used by the company have risen sharply. Domestic steel prices have surged by about 37% during October till mid-March. Aluminium prices on the London Metal Exchange too have jumped almost 27% since the start of the third quarter. Further, precious metals comprise 5-10% of total raw material costs, within which the price of rhodium has surged about 10x/3x in the past two/one years, point out analysts at JM Financial.