The market was disappointed with the numbers of Hero but this is what one should have expected given the state of the sector. The company, for Q1FY14, posted a 11% (YoY) drop in net profit at Rs.548 crore. The company has blamed this on higher tax, which for the quarter jumped up 69% at Rs.201 crore. This higher tax outgo was on account of expiry of 5-year tax benefit for its Haridwar plant. There was also the effect of  10% surcharge introduced in Budget FY14. This increased the tax outgo of the company by 3%.  But that alone cannot be the reason. Demand itself was muted which is reflected in the net sales, which is down 1.30% at Rs 6,127 crore. EBIDTA slipped 2.3% from Rs.936 crore to Rs.915 crore. OPM remained status quo at 14.9% (YoY) but QoQ, there was a 100 bps rise and this can be attributed to the 10% decline in other expenditure. This was the sole gratifying aspect of the numbers as the market had expected OPM to decline.

Hero’s domestic sales fell 4% and exports too were down by 30%. Looking ahead, the going looks tough for the two-wheeler sector given the consistent hike in fuel prices and there now being talk of interest rate hike. Even if a rate hike does not happen, it is also not going to come down. Thus demand might remain muted. The second half holds more hope due to the festive season and farmers would have harvested, meaning more cash in their hands. The company has clarified today that during the festive season it does not plan to offer any discounts.