Hero Honda net profit surges 95%

The net profit for Hero Honda for the financial year's second quarter ending September 30, rose by 94.9 per cent to Rs 597.14 crore (Rs 5.97 billion) when compared against the same period last year.

A similar sharp surge came in the first quarter ending June, when net profit rose by 83 per cent to Rs 500.11 crore (Rs 5 billion).

Total sales for July to September rose by 26.8 per cent to Rs 4,040.1 crore (Rs 40.4 billion).

Analysts say while this is in line with expectations, net profit has surpassed estimates. "The net profit at Rs 597.14 crore (Rs 5.97 billion) has been aided by many factors, including the record sales of over a million units sold in the second quarter," says Vaishali Jajoo, Analyst at Angel Broking.

Earnings before interest and taxes on a year on year basis for the quarter rose by 78.7 per cent to Rs 693.8 crore (Rs 6.93 billion).

The company attributes the healthy earnings to a mix of softening raw material prices in the last quarter, in which prices dipped by around 450 basis points, depreciation, and the effective taxation rate at the Haridwar plant.

"Last year, our effective tax rate at the Haridwar plant was 28 per cent. For the last quarter ending September 2009, it stood at 22.31 per cent," says Ravi Sud, Chief Financial Officer of Hero Honda.

Sud expects prices of key commodities like steel and aluminium to harden. "We are already seeing pressure on steel prices. And as the economy rebounds, demand will set in which will further increase prices of metals.

However, our biggest concern is the expected rise in interest rates." Jajoo expects prices of steel and aluminium to increase between five and 10 per cent in the coming quarters.

The average realisation per vehicle for Hero Honda for the last quarter increased to Rs 37,100.

Anil Dua, senior vice president (sales & marketing), says the company's growth in the 150cc and above segments has increased by 40 per cent since the beginning of this year.

Analysts say Hero Honda could face stiff resistance in the 100cc executive segment in which brands like the Splendor and Passion are positioned. The company commands a market share of around 80 per cent here.

"Our long-term strategy for the segment is in place. We are customer-centric and our continued success in this segment is a testament. We will not resort to knee jerk reactions," says Dua.

The company's stock on the BSE dipped by nearly 3 per cent to close at Rs 1,612.90.