December quarter was tough for Hero MotoCorp

But unfavorable operating leverage due to weak volumes and just 2% sequential growth in value realization were sore points. Revenue fell 11.5% sequentially 8,031 crores.

Earnings growth for Hero MotoCorp was much lower compared to Bajaj Auto Ltd. and TVS Motor Company Ltd., which saw 6-7% growth in Q3. This was because contribution from the executive and premium segments contracted by 400bps, notes analyst at Prabhudas Lilladher.

Besides, rise in other expenses had an impact on Hero’s EBITDA (earnings before interest, tax, depreciation and amortization) margin. The measure increased modestly 10bps sequentially to 11.5% in Q3. Analysts at Kotak Institutional Equities say that despite a 13 per cent decline in volumes in the third quarter, a 3 per cent sequential increase in other expenses was probably due to higher marketing spend due to the launch of Vida V1. Vida V1 is Hero’s electric vehicle.

Investors would do well to closely track developments in the electric vehicle segment. Also, the uptick in rural demand is significant as Hero mainly caters to the entry level segment. In January, Hero’s two-wheeler volumes declined 9.5% sequentially to 356,690 units.

An increase in volumes will be a catalyst for the stock, which is down 11% from its 52-week high. 2,938.60 per share was seen in August. “We are concerned about the recovery in demand in the sub-125cc motorcycle segment given the consistent price hikes by original equipment manufacturers over the past few quarters,” said analysts at Kotak.