Q1 2012 Earnings Call - Hero Honda Dt-21 Jul'11: Operator

Q1 2012 Earnings Call - Hero Honda
Operator
Dt-21 Jul11
Ladies and gentlemen, good day. And welcome to the Q1 FY12 Results Conference Call of Hero Honda hosted by Citi Investment Research. As a reminder for the duration of this conference, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Jamshed Dadabhoy. Thank you and over to you, sir.
Jamshed Dadabhoy
Good afternoon to all of you. On behalf of Citi Group, I welcome all of you to the 1Q FY12 post results conference call of Hero Honda Limited. I'd also like to take this opportunity to welcome Mr. Ravi Sud, Senior Vice President and CFO of Hero Honda. Good afternoon, sir.
Ravi Sud, Senior Vice President and Chief Finance Officer

Good afternoon.
Jamshed Dadabhoy
It's a privilege to have you with us, and over to you. Yeah. Thank you very much for this conference call. And what I would like to do is I'm sure maybe some of you would have got the numbers, we will just send them to the exchange about 6-7 minutes back. I'll just like to give you -- performance of the quarter. I think in terms of volume, our volumes in the quarter have been 1.53 million versus 1.234 million in the corresponding quarter. So, we have a growth of about 24%. Now this period ended sales has grown by about 18%. Now within this numbers, I think the total -- we are concern has growth by around 14%. Number two, in terms of turnover, our net sales during this quarter has been about 5,683 crores versus 4,296 crores in the corresponding quarter. So, there is an increase of about 32% in the net turnover. In terms of profit before tax, we have profit before tax of 669 crores versus 610 crores, and profit after tax, we are at 558 crores versus 491 crores of the corresponding quarter. So, there is an increase of about 13.48% in the profit after tax, and similarly in the earning per share. Now two things I would like to just also mention here. Number one, all of us know that during the last four quarters, the pressure on input cost has been extreme and according to us, I think that seems to a peak in the quarter one, which is just gone by. And we have partly seen some signs, not very significant, marginal signs of softening of commodity prices. And going forward, we except our EBITDA to improve from the current level which is or comparable basis as you know we changed our -- policy to recapitalize the payment to Honda in March 2011. And the EBITDA on quarter-to-quarter may not be very comparable, but however I mean if you look at the GAAP of corresponding quarter which are right about 14% and in the quarter ending March '11, -- has about 11.94 or 4% on a comparable basis, we are at about 11.12% for the quarter. So, I think overall -- are going forward, EBITDA margin now should start showing margin improvements in the quarters to come. And with this, I think I'll open for any questions.
Questions And Answers

Operator
Sure, sir. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Mahantesh Sabarad from Fortune Financial Services. Please go ahead.
Mahantesh Sabarad
Good afternoon, sir. This is Mahantesh. Just wanted to had a query on what is your absolute EBITA amount, sir?

You see as we said, EBITA is not comparable. So, I think -- this will not comparable to the...
Mahantesh Sabarad
We understand that, comparable to the quarter four sir, I'm asking. On quarter four, your amount was 830 crores.
Ravi Sud, Senior Vice President and Chief Finance Officer Mahantesh Sabarad
What is the corresponding numbers this quarter?

This quarter is 818, I mean if you are comparing it with -- 30, the numbers is near around 18.
Mahantesh Sabarad
Okay, sir. That's a very low margin achievement this quarter, what would you attribute that to, sir?

Sorry, I didn't get your question.
Mahantesh Sabarad
I think that's a very low EBITA margin for the quarter.

Yes.
Mahantesh Sabarad
What would you attribute the reasons for this?

As we said in the beginning before the quarter has started, I said it very clearly that last quarter we have seen tremendous amount of brochure on account of commodity price increases. And we didn't see any -- even in the quarter one. But however, end of quarter one and now because we are ordering almost one month through the first month of the quarter two. We have seen some softening. So, I think as I also shared you that -- as a percentage of our net sales having the highest ever in this quarter, because I think is basically the input prices which have...
Mahantesh Sabarad
Or is it that you have given out more discounts to your dealers, so that's why the material cost appears higher?
Ravi Sud, Senior Vice President and Chief Finance Officer Mahantesh Sabarad
Okay. And sir, one final question, you are going to a transition post this attrition with Honda, and you had earlier also indicated that there are certain expenditures that we have to incur. So are those expenses started come flowing in and what would you valued at to these expenses this quarter?

If you remember in the last three conference calls, what I've said is there would be two or three types of extraordinary expenditure which will come. Number one would be your rebranding cost.
Mahantesh Sabarad
Yeah.

That has to happen once we change our brand and change the name of the company, that is expect to happen very shortly.
Mahantesh Sabarad
Right.

On the rebranding cost, would reflect overall maybe two or three quarters and we have said that in some part of the routine advertisement expenditure maybe from quarter, second quarter or third quarter onwards.
Mahantesh Sabarad
Right.

But one-time that cost had to come. And that cost we expect to come in quarter two and quarter three.
Mahantesh Sabarad
Correct. That is one-time cost because we're in the process of changing name of the company and I think very shortly, very very shortly. Maybe by end of this month, the name of the company will change.
Mahantesh Sabarad
Okay.

And the new brand name will also -- off very very shortly after that. So, I would expect that cost to come in quarter two and quarter three, number one. Number two, I've stated also that we'll have R&D cost. Okay. And if you look at our auto industry, the general trended, R&D expenditure varies between 1.2% to 2% of the net sales. But looking at the size of the royalty, because we have more than 22,-24,000 crore of turnover. We expect it to be around 1 to 1.2% in the current year. But again now part of that expenditure, at this point of time, I won't be able to tell you, how much of that would be capital, how much of that would be revenues.
Mahantesh Sabarad
Okay.

The second cost that we have stated will come. This will include a recruiting, recruitment of additional people in R&D, maybe working out some contract based on specialized firms, in India or abroad or maybe looking at some tie-ups for sourcing technology.
Mahantesh Sabarad
Okay. And sir, you said third type of cost as well.

Yeah. Third type of cost would be, this would be continued for probably the royalty which will continue till 2014, like 10 June, 2014. That is why -- royalty and within the shape of depreciation. So that which would be anything between 2.8 to 3% that will increase the EBIITDA and...
Mahantesh Sabarad
Right, sir. Thank you for answering my questions. I'm through, sir.
Operator
Thank you. The next question is from Vaishali Jajoo from Aeogon Religare. Please go ahead. Good afternoon, everyone. Few questions, first, if you can give me an outlook on how the volume growth you are seeing right now, and for full year, how are you seeing maybe?

You see in the last quarter, we have given some indication that offsetting 5.4 million in the FY11, we were looking at about 6 million volume. And if we look at the first quarter then we have already done 1.53 million, okay. So that why --I think our volume heading off about 6 million plus is on track. And we expect that we should be able to achieve that and during the year as the time goes on.
Vaishali Jajoo
There was I mean talk going on about a new plant coming in from Hero Honda, maybe somewhere in South or some other place. Any development on that, sir?

Yes, Vaishali, -- is an old story. We are still working on it and I think we expect to announce it very shortly. But as far as location is concerned, I may not be able to say much as of now.
Vaishali Jajoo
Any price hike you have taken any current calender year? And or how many tonnes of volumes it would be?

We put a price hike on 31st of June, as you know this is just a -- of the quarter which has just gone by. And why I'm saying that my margins should continue to slightly moving up. One is that your -- smaller price hike, it was anything between Rs. 500 to 700 to -- on step model. And we are seeing some softening in the prices of commodity, 5000 extra cost of rebranding, which will come in quarter two and quarter three and we except that our EBITDA should now start improving from here on.
Vaishali Jajoo
I just missed that sales and advertising expenditure of, how much it would be to the percentage of your total cost?

You see if you look at our total advertisement expenditure as a percentage of our net sales, additionally it has varying between 2.1% to 2.4% because in certain years, we have such a major events back in FY11, we have the World Cup, then we had a Commonwealth Games, the events which comes as a once in lifetime as they come once in four years or something. Generally, our advertisement is about 2%. And so if you take the advertisement expenditure at about 2% or 2.1%, we would like to go at some extra one-time costs in the current fiscal. Now, it's very, very difficult to asses as to how much
Vaishali Jajoo
But... then it will be slightly higher than your average of 2-2.1, right?

I am saying my routine advertisement cost will be in the range of 2 to 2.1%.
Vaishali Jajoo
Apart from that 100 crore extra for the rebranding?

Yes.
Vaishali Jajoo
Okay. Thank you, sir.
Operator
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants, please limit your questions to two per participant. The next question is from Kapil Singh from Nomura Securities. Please go ahead.
Kapil Singh
Good afternoon, sir.

Hi, Kapil.
Kapil Singh
Hi, sir. Sir, just wanted to check two things. One, you talked about some improvement in margins that you expect from hereon. Can you explain which factors will it be that will lead to improvement that according to you?

See, as I said listen we are seeing softening of commodity prices, are not very significantly. I'm repeating that, and I'm repeating, not very significantly as of today. But going forward, if commodity prices come down sharply, I think I will say once again looking at the conditions today, it will not flat -- in the margin but I think we will see some improvement in margin. So, with the last four quarters, we are seeing margins coming down sequentially. I think my testament is going forward we'll have -- upward movement maybe slightly maybe 30, 40, 50, 70 basis points, I won't be able to comment that. But the downward trends would be a bit strong.
Kapil Singh
Sir, possibly that will be helped by the price increase also that you have recently taken?

That has keep it in mind, that's what I said, that even if we have to incur the one-time -- cost which is likely to come in quarter two and quarter three, I have a -- that we can provide -- which we have taken on 31st of June, I think it could do a volume of say 1.5 million, if we divide 6 million by 4. And then we will get something like 50, 60, 70 crores extra -on account of that.
Kapil Singh
Okay. The second question is related to volumes. What is the maximum production that we are geared for fiscal year '12 that I mean that we can do and...?

Okay. Let me... in the last quarter, so we have stated that the capacity is 6.15 million, okay. So, it's been 61.5 lakh, we will see the -but as in the past if you go back to the March '10 balance sheet, we have declared the capacity of 5.1 million that is, used and sold 5.4 million. So, as -- apart from the Greenfield projects, we are also looking at expanding capacities and debottlenecking where possible. As of now the -- is that with very, very minor investments if we do in divesting facilities, we should be close to about 6.4 to 6.5 million.
Kapil Singh
Okay. And sir, if you could also comment on the inventory levels that you have what... is it still lower than where you would like to be given that festival season is coming up?

Well, you see as far as our inventory levels, you're talking about the dealers inventory?
Kapil Singh
Yes, sir
Ravi Sud, Senior Vice President and Chief Finance Officer Kapil Singh
Right.

And I can assure you, as on 30th June, the inventory was -- below that 250,000.
Kapil Singh
Okay sir, okay. And sir, what is the production at Uttaranchal that we will do this year?

Well, this is the project which is very, very comfortable.
Kapil Singh
Okay, sir. Thanks a lot. That's all from my side.
Operator
Thank you. The next question is from Prashant Poddar from Invesco. Please go ahead.
Prashant Poddar
Sir, without just going on the numbers I mean, obviously, the marriage season was quite strong this time in India. How is the demand outlook, if you were to exclude this marriage related purchases, could you comment on that, please?

Okay. Let me give you two or three observations. Another one, the marriage season is something which comes every year, except there is few things here and there. But as you -- referring to overall, I think if you are doing and in the last three months of the quarter, every month we did more than 0.5 million.
Prashant Poddar
Yeah.

I mean, and I also stated at our inventory levels are below the amount which are effect for every year, so which means, there is a very, very strong full as far as customers are concerned. And coming to the second quarter, the month of July and August, are generally weak. You can check last 15 years, 20 years data because of the monsoon. So, there are paid levels, this two months are slightly lower than the other month. But it gives an opportunity for us to build up, festival season which will come in September and October.
Prashant Poddar
So, I mean let me rephrase this question. In urban markets where also you operate, would you have seen the demands softening a bit also or let's say in the rural areas as well?

I can tell you one thing that our rural sales in used to be about 38% and something int 2008-2009, there was 45% as of now.
Prashant Poddar
Okay. All right. Right. Just one more question on tax rate. The tax rate is quite low in this quarter as around 16, 17% so I mean why...

That's a very interesting question I must answer it --. If you look at the last four quarters of FY11, in the first three quarters, our tax rate was in the range of what we are... which we are showing in the current quarter. Only the fourth quarter of last year, our tax rate went up very high that was because of amortization and capitalization of the lump sum payment. So, to create a better tax liability. So, quarter four tax rate went up high. So overall tax rate for the year went up to close to 19%. But as we are still in the math and so we are... in this quarter, I think the tax rate is some below 17%. This is the tax rate which we expect to continue for the next few quarters also.
Prashant Poddar
Next few quarters as well.

Yeah.
Prashant Poddar
Sir, last question I mean let me -- this on, the high-end bikes that we have which is Karizma and Hunk, how is their performance? I mean without going to the numbers, I mean what's the response? And do you think they can scale up to become big brands for the company? My colleague Anil is here, he is Head of Marketing and Sales and Customer Service. So, I think let him answer this question. Anil?
Anil Dua, Senior Vice President-Sales, Marketing and Customer Care

Yeah, thanks. This is Anil here, Anil Dua. I think our premium bike has been special activity from Hero Honda not only over the last three years, but even this quarter. In this quarter, if you see we've refreshed Karizma as well as ZMR. And this is probably close on -refreshing Hunk and CBZ X-Treme that we have done towards the end of last year. So indeed while we've been growing as a percentage, our premium portfolio has been growing faster. And it's contribution in our portfolio has been going up. Because I think the strength that we've had over last few quarters which you're aware of, that is making our premium bikes a little harder than the rest of our portfolio. And therefore, there is a huge bankers demand for our premium bikes, which hopefully going forward as we always focused about in terms of the capacity that we have and how we'll be increasing that further going forward. I think premium, it's our -- for further growth as we go forward. So, we're very happy that the portfolio that we developed which is looking like a very complete, the most complete premium bike portfolio in the Indian market, and it's doing fortunate rest of our business and we'll continue to do so in the near future.
Prashant Poddar
All right sir. Thank you very much.

Okay.
Operator
Thank you. The next question is from.Kejal Mehta from Grizal Research. Please go ahead. I'm sorry the line has been disconnected. We'll move on to the next question. The next question is from Raghunandan from Avendus Capital. Please go ahead.
Analyst
Hello sir. Thanks for the opportunity. Sir, just a follow-up question, in fact I just wanted to confirm, you said the capacity would reached 6.4 to 6.5 million, that would be by end of F12, sir?

Yes.
Analyst
Okay. And basically, this new plant which you are coming up with assuming that you finalized the location in the next one or two months, usually am I correct in understanding that registration period would be close to one year?
You are right, I think anything between 10 to 12 months, I mean that's a fair assumption.
Analyst
Okay, sir. So basically, Mr. Anil mentioned that there were some production constraints for the premium motorcycle. So, when is that expected to ease?

The constraints were, this is Anil Dua here, Raghunandan. These constraints were there for growth per bikes. The point I made was that premium bikes do get set a little harder in terms of productivity 100CC bike who can churn out more bikes in the same time as compared to premium bikes. So, whenever there is a capacity constraint, there is a -- a little harder. So, I think the answer to that is the answer to overall capacity issue, as you move forward and as the capacity moves up from 6.15 to 6.4, 6.5 as investors would have said, I think that we will see easing up -- bikes including premium bikes.
Analyst
Okay. Thanks a lot, sir. Are you seeing any waiting period for any of your products?

See, when it comes to any specific color, it comes to very specific requirement, yes, some times there is a waiting period, but as our policy we try to see that we maintain sufficient inventory as investors would shared with you almost 250,000 bikes, these are inventory, maybe only -- but we're sufficient to see that we don't keep our customers waiting.
Analyst
Yes, sir. Thank you very much, sir.

Thank you.
Operator
Thank you. The next question is from Sai Anjali from Capital Market. Please go ahead.
Sai Anjali
Hi, thanks for taking my question. Actually, most have been answered. I kind of missed out on the capacity expansion part, will it be possible for you to repeat it again on that? Okay. One parts was that we have capacity of 6.15 million as on 31st March, 2011. Okay. Hello?
Sai Anjali
Yeah.

Yeah. Okay. And apart from the Greenfield project which will take anything between 10 to 12 months from the time we start. I think we are working in our existing location, very very minor type of investments are able to create additional capacity also debottleneck the capacity by also since some parts components we've been tested are outside. So, that we create the capacity within that market. So, we have first add by end of this fiscal March '12, we should have the capacity of something like 6.5 million.
Sai Anjali
Would it be possibly for you to see what kind of, how much is the investment that going into this?

You see, it's part of our overall capital expenditure, what I've stated in the last conference call was our CapEx in the current year will like to be in the range of 800 to 900 crores. And the majority of that should -- new brands which will improving for the dam, building and maybe some and maybe some equipment -- March 2012. Otherwise, I can share with you some figures, we increase the capacity of Haridwar plant by 150,000 units -- and the CapEx was about 112 crores. So that expenditure will not be very significant. So basically, the Greenfield projects which could be for the first year something like 750,000 capacity could be 500 to 550 crore depending on the location and the cost of land.
Sai Anjali
Okay. All right. And thanks sir on that. But also with the rural demand, I just want to know has there been any change in the pattern of the purchases so far, we always know that they do cash purchases, and comfortable so much with credit, but has there been a change in this, have you seen any changes in this?

No, I can answer the question this way. As far as financing dependents of two wheelers is concerned is extremely low. We've got some profit to measures, so we finance about 60 to 65,000 bikes of our company on total of production finances. So, they've financed -- maybe a -- E&V -- as it is as far as rural demands, this is again cash. And as I said, in the last two, three years, we've shared a rural sales have increased from 38% to more than 45%. So which indicates that the rural demand is very, very strong, and it continues to be strong.
Sai Anjali
Yeah. Thank you for your time, sir. Thank you. The next question is from Chirag Shah from Emkay Global. Please go ahead.
Chirag Shah
Yeah. Good afternoon, everybody, and thanks for the opportunity. Sir, I have few... two basic housekeeping questions. First, on other income. Is there some lumpy booking of other in treasure income in this particular quarter, because it seems to be on the higher side of 88 crores?

Yes. You see generally, our principle is that we should be very, very consistent at the quarter-on-quarter in booking other income.
Chirag Shah
Yeah.

Okay. This quarter was a full year quarter, where you have the month of itself, we gave a -- and we're talking 100 crores of the taxes, about 1,700 crores. So with that, we have to do a divestment or something like 1,700 crore in the month of April, which actually we have not planned, okay. However, we have investors such a way that our maturities, or divestment come in the quarter where we have to put in. So that is one of the main reason, number one. That is one of the main reason. And secondly, if you look at last six to nine months, the yield on the investments, particularly on the instruments in which we have been pretty reflective. The investment liquid funds or liquid plus funds or institutional plan, we are getting total something like 8 to 8.5%, which is fixed maturity plans of say three months. We need to get about 9% -somehow. One year tax maturity plan went up
to as earlier 10%. So that is second reason.
Chirag Shah
So, is it that this kind of run rate can be maintained?

I won't say that. I don't think so. Because number one, after this, they maintained the interim dividend of something like 1,700 crores. The size of it's value add number by... has come down. Number two and I just said very -- the yield around some of the instrument are also started coming up. So this I think 88 crores is sort of one-off, according... I'm not very sure but I think this will be the highest other income this company would have booked in any quarter.
Chirag Shah
Yeah. Fair enough, that was a precise decision. Because historically, if we see you have a very linear other income spread equally across quarters. Yeah.
Chirag Shah
Yeah. The second was a question on Splendor and Passion. Post the emission non-change, is that still under recoveries in terms of cost, because if I look at it, this quarter you had maximum contribution in terms of volumes from Splendor and Passion together. If I look at over say, last five, six quarters.

Yeah.
Chirag Shah
And the pressure on profitability seems to be on, margin seems to be higher. So, is there still amount of under recovery vis-a-vis say last year similar quarter on Splendor, Passion because of emission now?

I would like to answer your question this way. I think I would say last year if you go back, we had two types of costs, as far as input cost increase, one was the initial cost now which was more or less across all models depending on the cost, okay, number one. Number two, second was the input cost increase with -- because of the commodity price increases last year, okay. Last year as we have stated in our March-April conference call, we were not able to recover fully. The total impact of input price increases. As far as emission norms are concerned, we aware of -- that we didn't passed it on to our costumers very, very consciously. So, as far as the share of Splendor and Passion is concerned, in the overall mix I think that you're right, these two brands are the strongest and the contribution to the overall portfolio is the maximum.
Chirag Shah
So, there is no major under recoveries of emission norms as of now. That is the right way of looking at it.

No, I think as far as emission norms costs were concerned, this was -- of last year.
Chirag Shah
Okay.

We didn't recovered it at all. Okay. Fair enough. Sorry, I missed it, you didn't. Okay. And sir last question, if I can also touch with is that you indicated Haridwar plant you increased capacity by 3,15,000 units, right?

3,00,000...
Chirag Shah
3,15,000 units increase in Haridwar capacity? Hello?

No, no. What I'd said is that --. I said first year this --.15 a year, right?
Chirag Shah
Yeah.

And by explaining capacity in the existing location and so by debottlenecking and by also we expect to go or we are --Haridwar export by region, I never say that again we have increase -- 350,000 -- at Haridwar --.
Chirag Shah
Haridwar is that the capacity write up 2.1 million units, right?

2.25.
Chirag Shah
2.25 million units. And just one thing, royalty charges same 177 crores, right?

Yeah. You see we have the amount, within the capitalization.
Chirag Shah
Yeah, fair enough, fair enough. And debottleneck is only thereof -- 42,000.
Chirag Shah
Yeah.

Which will -- 140. The only variation would be... could be -- ForEx gain or loss. That's it.
Chirag Shah
Okay.

Otherwise that amount is more or less constant.
Chirag Shah
And tax rate again other income is held before lower tax rate apart from product mix?

No, you are comparing with the previous year or...
Chirag Shah
Previous year as well as previous quarter.

Previous quarter as I answered earlier.
Chirag Shah
Yeah. Yes, sir.

Out of that amortization of the 45 million you have -- are booked as far as the 114. Yeah.

One quarter but in terms of depreciation was 25%.
Chirag Shah
Yes.

The --.
Chirag Shah
Yeah.

Quarter four, but in terms of... look at a quarter, first three quarter of last year as you know the tax rate was 17, 17.5.
Chirag Shah
Yes. Yes, average 17.5%.

Yeah. The volume in the fourth quarter except for another accounting policy that the company has obtained. But in the current year as I said earlier once again I'm repeating. Our tax rate in the next quarter I think will below 17 and we expect it to in that range going forward for rest of the year.
Chirag Shah
Fair enough. Thank you, sir. I'll come back for more questions. Thanks a lot.

Yeah.
Operator Analyst
Hi, sir.

Hi, Pramod.
Analyst
Hi. I wanted to check on this raw material side, even though you have guided that it will come down, what has really happened that it has spiked up, is it more product mix related or have you given any pass compensation to the vendors? 75 is like almost -- for a company like you?

There is no pass compensation. We actually have free pass, checking our vendor interiors and they are not -- end of the quarter. We gave proper provision and that's what has happened. I don't think the commodity prices I think which we are, which remember I have said in my last conference call that in the first half, we don't expect that to come down but in the second half, you see some of this price. But I'm saying here H1, according to us seems to be the peak. And I think on the peak, now we are seeing very, very marginal lease permit. So, going forward I think we expect some of this to come. And apart from that would be, if you ask me today, it's not very significant. But as I said I think we will make these type of margins -- coming in the commodity prices, I think this will help us going forward.
Analyst
And sir, on the manufacturing other expenses compared to the fourth quarter where you had decent amount of promotion or the Commonwealth or World Cup promotions which were happening...

The Commonwealth are in the quarter three.
Analyst
Yeah, sorry, the World Cup.

Yeah. World Cup was in quarter four. Yes.
Analyst Ravi Sud, Senior Vice President and Chief Finance Officer
This quarter, we have 1 million cost of IPL which came in April. So, that is a very -- line item which has come -- once again in this quarter.
Analyst
Okay. That was only for the initial part of the quarter?

Yeah. I think as far the cost is concerned for the quarter, that substantial cost is getting --.
Analyst
Okay. But just as a more the medium-term trend considering that your volumes are hitting the new peak, do you feel these type of margins are more maintainable than to going back to your, those high margin days?

No. Look as of today, we have the 2.8, 2.9% of resent deficit.
Analyst
Okay.

And this will continue till 2014, I mean after June 30th, 2014, the 2.8, 2.9% will vanished, number one. Number two, as you know we just start the profits of our emission about 6.5. They are extraordinary cost. This will be one-time cost. So, I just want to reiterating those I mean more costs are yet to come. Similarly, R&D cost, very initially you got to spend more during the one year or two years, after that -- the cost will come down. But I'd like to answer your questions whether if you're talking about EBITDA margin of 17, 17.5%?
Analyst
Right.

I think in near future, I don't think that will happen because this 3% cost of depreciation will continue for the next three years. Okay. And sir, if Anil is around, I had a specific question. Any color on regional growth factors or in terms of urban growth versus the rural growth?
Anil can answer this

Yeah. I think if you look at the regions actually, the North region is the largest from industry point of view for -buyback. South is the third largest and East is the smallest. So actually East is showing very good growth, but that maybe difficult because its a smaller base. Essentially, the growth is coming in good double-digits from all the regions, to that as the geographies are concerned.
Analyst
Okay.

As far as rural versus urban is concerned, I think as I said we have had good growth in premium portfolio. As you know we also had very good growth in Pleasure which is mainly focused as a scooter for women. And we appreciate the good premium bikes as well as Pleasure scooters are predominantly selling in urban areas. And these portfolios versus scooter portfolio and the premium products portfolio has been actually outstripping the overall growth. So, there has been good growth in urban markets as well. However as it's been said that where -- over the years our rural contribution has also being going up, essentially because if you look at the penetration of two wheelers in rural areas, it's in the region of 10%. But if you look at penetration of two wheelers in urban areas, it's in the region of 25 to 30%. And therefore, rural has been growing faster than urban areas. As a result, if you look at over let's say last five years from a Pleasure below 40%, we are today are closer to 45% in terms of contribution of rural to our growth. Having said that what this means is that urban is still contributing 55% to our volumes and projects like premium bikes and scooter are driving that growth. So, you cannot be having an industry retail growth without growing in urban as well. Because over this quarter, we've clearly outpaced the overall industry growth and then our market share. And that's not possible unless 65% of the portfolio is also going very pretty well. And so, while over a long-term, our rural contribution has been going up I think our urban growth has also been pretty good. And therefore, I will say that our overall 24% growth that has been in this quarter is evenly distributed over urban and rural areas.
Analyst
And sir, your recently quarter in the press that you are having the export committee and you'll finalize your strategy. Would you like to give some color on that? How it will be planning of which markets?

The team has been working on various fronts. We've seen approach over last six months, there are several interested parties around the globe who want to do business with us, and many proposals are being coming to us. So, we need to study these proposals, we need to visit these markets, we need to put a strategic model together to spell out exactly how we will be tapping. We use international opportunities that now --. I will say that the work is progressing very well. It's very exciting as you know our works being seen there, but it's right now in affirmative stage. We have identified quite a few -- target geographies as well as potential partners with whom we will be eventually working with. But the actual product into these markets is still some distance away because we have to have the overall differentiating. And more importantly, we have to tie-up the back-end for that. In terms of the capacities that -- as you know we spoke about the current year capacities are, it has to be stretched to meet the domestic demand. And if you open too many fronts, good for us, that can put pressure all-in-all. So, we are let me say going very fast on understanding that opportunity but actually getting into these markets, we are going to take some more time.
Analyst
And sir, especially considering the recent quarters where there have been lot of headwinds on the urban demand, and the landscaping which were on exports. Do you think it's much easier to get benefits on the rural markets, and if so what will be your immediate strategy there to continue to score an edge on the competition?

As you see when you say headwinds, I think you're referring to the fact that these markets are growing by the overall, the market is growing by almost in the region of 45%.
Analyst
Okay.

For last two years. And now it's lost... let's say 5 to 700 basis points there. But still it's growing by any number between 15 to 20% depending upon the time period that you look at, which is actually not small. It looks smaller compared to the previous two years, but it still fairly strong. And therefore, we are seeing good demand as Ravi was also pointing out, in both urban and rural areas. And while you say that therefore, will it be easy to get business in rural right now, then I think the lower handling should continue to be at front at the moment because if you have to get into rural, it does require as far as an investment which we've been making over the years. And we do have an advantage over most -- because today, we covered like 100,000 villages in the country. We service through our dedicated more than 1,000 bikes which would explore the -- the fact to the matter is that rural customers wait their time, the rural penetration are still Way below urban penetration as media reaches them, as connectivity reaches them, as roads reach them, as prosperity reaches them, over the next few years, certainly rural will see --, but at the moment, the urban opportunity looks as juicy as rural one.
Analyst
Sure. Thanks and all the best.

Okay. We'll have last two questions please?
Operator
Sure, sir. The next question is from Shreya Gaunekar from Morgan Stanley. Please go ahead.
Analyst
Hello, sir. This is Vinit from Morgan Stanley.

Yeah.
Analyst
Sir, just like in media, we have been reading and in fact some dealers also point that competition is giving some kind of a discount or attractive finance rates on the two wheeler side. Something that we have not seen for quite a few years, any comments from you on that?

Well, marketing rate is here availing here. Before we answer the question, will it be nicer to say, you see the demand is extremely good for the products. And -- as I said earlier is showing in the overall routine. And it's been 0.5 million static and you have a -- which is lesser norms of two weeks which means there is a huge pool for the...
Analyst
Right. Sir, actually I meant more from competition respective, I do understand Hero Honda is not getting any discount, but you're lead of the environment about other players and all?

See, as I said that industry growth has definitely come down. Our projection growth, Ravi and I have been speaking about that this year may not be beyond 15% growth for the industry. Now the industry is all growing by 25%, so some players might have been planning to build the capacities and their plan base is 25%. And if we now see that there is growth for 15 or even lower, then certainly, I think there is some pressures to utilize existing capacities and to meet 7 plus plans. So, that maybe the reason why you see this discount that -- getting in the market. But I do not think that's an indicative of lack of demand in the market, demand is there. But probably it's not there inline with the projections or
Analyst
Okay. And secondly, sir on the export side does the EPB like going away now. Does that make us rethink or change anything for us?

Well, it is still, this has happened many a times over last few years. So, it is their diligence and if not gone, then it is grown. But certainly, the EPB has been a good support, it's not any one company's issue, it's the industry issue. And I think -- has also been talking to all the players and checking its position that the EPB is required if it is to be faced out, it has to be done in a smooth manner, so that does not hurt the Indian players because Indian players are competing with even low cost fuel, the Chinese fuel all around the world. And therefore, it will either put pressure on margins of the players who are very heavy on exports, at the moment thankfully, it's only two portion of our businesses comes from exports but then any other for -- is much higher. And there maybe a -- adversely. This is going to be in future either from the margin point of view or from the competitiveness in the market point of view. So, if we have to go, I think it need to be smooth from business point of view and so that they can continue competing in those markets.
Analyst
No, sir, but our export focus will still remain right, all the exports strategy that we are planning so in a way, it doesn't depend upon the...

As Ravi said this is -- the global market for youth and it only will make us look in a way that means of sales and -- in these markets. I think there will be short-term in product -- on some of the biggest exporters, if he was go away overnight, it will either from the top-line or the bottom-line... will continue.
Analyst
And sir, lastly tax rate like this year you said it will be around 17%, our facility at Uttaranchal is almost completed five years, so how do you see it going ahead...?

During the first year and this year, we still got one more year, this year and I think beyond that I'll tell you the way we are sort of having the -- after the completion of five years [Technical Difficulty] 22 to 23 [Technical Difficulty] profit of the unit is -- in terms of tax.
Analyst
Okay. Thank you, sir. Thanks.
Operator Sahil Kedia
Sir, thank you. Most of my questions have been answered. Just I wanted to... if you could just share with us what are the pricing action that you have recently taken? Sorry, the line was not very clear?

We took a price increase effective 24.2.
Sahil Kedia
Okay.

And that was in the range of 500 to Rs.780 on various models.
Sahil Kedia
Okay.

And the effect are in fact will come in the current quarter and the quarters going forward.
Sahil Kedia
Okay. And sir what kind of launches can we expect this year from Hero Honda?

Yeah. Sahil, as I mentioned we have already launched a couple of CBZ we have launched. All these, there are actually four new launches this quarter. These are being... these are our new Glamour which is completely remodeled. In short, it's a refreshed, it's a remodeled Glamour and a remodeled Glamour-Fi plus a refreshed Karizma and a refreshed ZMR. These have happened in this quarter. It's been our policy over the last two years to have seven to eight new youths coming to the customers. These comprised a combination of the refreshes and remodeling as we've done in this quarter plus sometimes launching new variants of existing bikes and plus completely new models. Basically if you look at seven to eight in the last few years, you will see one new model, one or two variants in the balance have been refreshes or remodeled. And this year, I can tell you it will no different. It will be pretty much like the previous years only.
Sahil Kedia Ravi Sud, Senior Vice President and Chief Finance Officer
I think I was trying to transfer that to -- that. Potentially, we continue to sell in our existing 12 markets which are partially South Asia and Latin America, of this we have good -- there also. But as far as the new markets are concerned as we're saying -- we are working on a roadmap, on a footprint, on a strategy and that is going to be some months away.
Sahil Kedia
Okay, sir. And sir, last question could you just share with us the cash balances at the end of the quarter?

Well, our balance sheet is still not out. And it's printed upon the -- As on 31st, we had after payment of the dividend, we have close to 4,000.
Sahil Kedia
Sorry sir.

About 4,000 crores in the balance sheet.
Sahil Kedia
This is at the end of the first quarter

No, no, at the end of June.
Sahil Kedia
At the end of June, after payment of the dividends.

Interim dividends.
Sahil Kedia
All right, perfect. Thank you, sir. Okay.
Operator
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand over the floor back to Mr. Jamshed Dadabhoy for closing comments.
Jamshed Dadabhoy
All right. Thank you very much, sir. Thank you, Mr. Sud.

Thank you.
Jamshed Dadabhoy
Thank you, Mr. Dua for sharing your time with us and your comments and perspectives. Thank you, everyone. Bye-bye.

Thank you.
Operator
Thank you. On behalf of Citi Investment Research, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.

Q1 2012 Earnings Call - Hero Honda Dt-21 Jul'11: Operator

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Q1 2012 Earnings Call - Hero Honda Dt-21 Jul'11: Operator

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Q1 2012 Earnings Call - Hero Honda

Ravi Sud, Senior Vice President and Chief Finance Officer

Questions And Answers

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Okay, sir. Thanks a lot. That's all from my side.

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Anil Dua, Senior Vice President-Sales, Marketing and Customer Care

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Anil Dua, Senior Vice President-Sales, Marketing and Customer Care

Anil Dua, Senior Vice President-Sales, Marketing and Customer Care

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

to as earlier 10%. So that is second reason.

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer

Ravi Sud, Senior Vice President and Chief Finance Officer