As well has yielded handsome dividends with LEAP savings giving us more than 300 basis points of savings, helping us offset large part of the cost inflation as well as the overhead management, and that has helped us sequentially improving margins as we saw. Let me now turn my attention on the outlook and the economy and the sector as we see moving forward. Lots of positive indicators. Lots and lots of positive indicators. You look at a robust GST collection, you look at good monsoon, therefore the water levels, which will of course help the next crop cycle.
The consumer confidence index is moving up and the reopening of hospitality sector because that sector actually augurs well for the lower income group, where lots of employment, organized and unorganized sector, as in that sector, and therefore that will boost confidence and income levels of the category that's very relevant for the two- wheelers. Of course, the recent tax cuts by central and state governments on petrol and diesel, that augur well as it is providing the much needed relief. On the long-term GDP forecasting, you would have seen IMF has forecasted a robust GDP growth and Reserve Bank of India has forecasted also a strong growth for fiscal year 2023, upwards of 8%. Overall, the positive indicators for economy moving forward. As far as two-wheeler is concerned, we believe that the underlying demand story stays strong.
Considerable potential because of penetration and increased retail financing, and backed by the positive economic indicator that I just talked about, the momentum should come back soon. Now, finally, last but not least, the topic that's receiving a lot of attention these days in media is EV, and let me just touch a bit on EV. We are on course for launch of our products by March. Our product has been designed by R&D in Jaipur and the tech center, Germany. Manufacturing, as you saw in our release, will be done at Chittoor, which is our plant in Andhra Pradesh. So we are on course, and watch this space. Recently, of course, there have been a lot of talk on who will win in EV, and we've had several acronyms that have been floating around.
While I won't get into betting, but let me just talk about what we believe success in EV will require. It will require focus on customer, on cost, and on collaboration, and not necessarily on competition. Having said that, if you still want to pick a winner company, just Google the synonyms of the word winner and you will have your answer. On that note, let me just open the floor for Q&A. Over to you, Rahul.
Thank you, Niranjan, for opening comments. Let's now take questions, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on a touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. We would also request participants to limit a question to two at a time. Should you have a follow-up question, please rejoin the queue. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Satyam Thakur from Credit Suisse. Please go ahead.
Hi. Good morning, team. Thank you for taking my question. Firstly, sir, could you share an update on the festive demand in the final assessment, how will it end up being? Beyond festive as well in the next month or so, there is a lot of expectation in the market that the wedding calendar is quite full. Do you see signs of a trend beyond it as well?
Okay, the question is around festive demand, how it has been and what's the outlook moving forward. All right, thank you. First and foremost, good morning to everyone. Let me wish you all a very happy festive. Let me also wish you all good health as we move in the year ahead. Coming to the question, festive overall, it was subdued. However, the second half we saw there was a little traction being better. Now if I were to attribute certain rationale and certain reasons there, we've seen that it has been a delayed monsoon this year. Normally in past also I mentioned that rural has led the growth in terms of over urban. This time that lagged. We've seen that crop is still in the field and it's going to mandis.
In fact, in the markets like Punjab and Rajasthan, where the kharif has, the crop has reached the mandis, we've seen a better traction. Hence going forward, as the rural comes back, we would see better traction.
Post-festive also.
Post festive, if you look at right now, I think, the urban remains at the same level. The rural is weighted.
If I can follow up, you know, I mean, what do you think in your.
Sorry, Satyam Thakur, your voice is breaking up, sir. Mr. Thakur, your voice is breaking up. Can you please check?
Is it any better now? Or else I'll join back in queue.
Satyam.
Satyam, we can't hear you very well. Do you want to dial back in and we'll take your call on priority? Is that okay?
Yeah, I'll do that. Thank you.
Yeah.
Thank you.
Thank you. Let's move on, Madhuri, to the next speaker. We'll get the moment Satyam is in, let's take his question again.
Thank you, sir. The next question from the line of Kapil Singh from Nomura. Please go ahead.
Hi, sir. Good morning. Thanks, Niranjan, for the very detailed commentary. Very helpful. Firstly, I wanted to check on electric vehicles. You know, we've talked about the fact that you know, we will be making you know, launching the EV before March and also making our own battery pack. So I just wanted to check how many EV products are we looking at over the next two years? And as a strategy, is Hero MotoCorp going to make its own battery pack going ahead?
Hi, Kapil. As you saw, what we've said is that our product will get launched by the month of March. Obviously, we'll keep launching products every year as upgrades or variants. How many? I'll not be able to disclose as of now. Closer to the time, you will get to know. Equally, as you saw that we are, you know, in our manufacturing, we have talked about that we will provide an integrated ecosystem for battery pack manufacturing. Cells, of course, come from various providers, so that's the plan.
Okay, great. Also, sir, in your commentary, you talked about, you know, several positives that we see for demand. Are there any key risks that one should be watchful of, in your view?
Kapil, the only key risk that we would say is if there is a wave three, which happens. Even there, we do feel that the vaccination rates have really picked up. In terms of the overall country, if you see, more and more vaccines have got approved. First doses, now probably the government is moving in the direction of booster doses. It's actually mitigated most of the commentary around pandemic is now soft. But yeah, if you say the risk, then that would be one. Second, of course, we have given our commentary that inflation now is looks like it will cool off because some of the commodities that you would have seen are stabilizing or coming off their highs.
If there was another wave of inflation, of course, that can act as a risk.
Okay, great. Lastly, if you could just talk about how much price increases we have done and the outlook on commodity costs in terms of if we have passed on whatever increase was there up till now?
As you would have seen, you know, we took price increase in April, in July, in September. You know, this year we probably have already taken close to around INR 3,000 price increase. As far as how much of it covers, you see that there's a combined of LEAP savings as well, which we have done, and net material cost as a percentage of revenue has gone up by 110 basis points. Ideally, that's the one that we would like to recover more. But beyond that, everything else is factored in the margin. As you see sequentially, the margins have improved. Moving forward, as I said, and let me just reiterate, some of the commodities seem to be cooling off.
Some of the raw materials which lead to those commodities seem to be cooling off, whether it's iron ore or coal. Sooner or later, we should see the commodity spectrum stabilizing, and therefore, then the prices give a chance to actually recover more than the forward inflation. Therefore, that should help recovery of industry margins moving forward.
Thank you very much. Thanks.
Thank you. The next question is from the line of Rohil Gandhi from PPFAS Mutual Fund. Please go ahead.
Yeah. Hi, thank you for the opportunity and wish you all a very Happy Diwali and a Happy New Year. My question was on the entry-level segment. If I just see since implementation of BS-VI and even now the commodity-led inflation, the realizations have gone up almost 25% or so. Some of it probably is led by the export mix and the premiumization mix in your portfolio as well. I just wanted to understand how you're seeing the consumer demand and the purchasing power in the entry- level.
Okay. Thank you, Rohil. Entry, we've seen in the first half, in fact, in quarter two also, not just entry, if you look at even moped, I think the de-growth levels are comparatively higher. Now, as you said, there is this most price-sensitive consumer. You know, the macro factors like fuel prices and all also had an impact on the mind frame . While there is an issue and impact, as we've seen, the COVID wave has been far sharper this year, impacting disposable income. I think it's more about, you know, how do you make it easier for the consumer to acquire the asset that will drive the growth.
We have seen the positive impact in terms of the way we've done on the finance part and Naveen shared the increase in retail finance penetration. It's been far more in the entry segment. I think that's the way this segment would expand.
If I just add, on top of what Naveen said, we've been proactively taking multiple actions. Naveen, as we know, we launched HF 100, yeah, which was a bit of a stripped-down version just to enable people to come in at a lower price point as well. Like you rightly said, while the upfront price goes up, if you increase the financing penetration, then it's more on EMI basis.
That the down payment that somebody needs to do doesn't get impacted big time, and which is what we have seen. Also on top of that, you know, gradually consumers also realize that the resale price also goes up. You can take care of upfront price through finance penetration, and you can take care of the total price which goes up through actually higher increase in resale value. I think that combination would work well as consumer confidence is moving up and people are in more confidence not to conserve the money, but actually to spend for the need that they have, which is of mobility.
Absolutely. In fact, just to give you a flavor on the innovation that was done in the retail finance scheme, we're looking at increasing penetration for the consumers who do not have banking habits, with Suvidha being launched by Hero FinCorp. We've got bullet payment scheme for farmers at four-monthly level. I think this is what we are doing in terms of expanding and going out to the consumer who have the need but may not be able to pay upfront to acquire the asset.
Great. Thank you for such a detailed answer. That's all from my side. All the best.
Thank you. The next question is from the line of Sonal Gupta from L&T Mutual Fund. Please go ahead.
Yeah. Hi. Good morning, and thanks for taking my question. Just a couple of questions. One, could you sort of also give the number for the other operating income for this quarter?
Sorry, can you just repeat the question? I just missed it. Sorry.
Sorry. I was asking for the other operating income number for this quarter.
Oh, okay. Okay. First of all, congrats on your move. I hope you've settled down well.
Thank you.
All right. The other operating revenue for quarter two was INR 223 Crores. Last year same quarter was INR 187 Crores, and quarter one FY 2022 was INR 110 Crores.
This is primarily linked to the, I mean, like the, production at your facilities or is there any other element here which is driving it?
It's primarily linked to that. As you saw, you know, it's more linked to obviously the fiscal incentive, state incentive part which is there. Then there are other elements, minor elements which are there, primarily linked to the production incentive and how much we sell in Rajasthan and how much we sell in Gujarat, et cetera, and Andhra as well.
Got it. Just my second question was on where the inventory levels are now. I mean, like, post the festive period, I mean, how do you see them and what is the plan in terms of wholesale versus retail going forward?
Our current inventory after the festive was over is in the range of five-five weeks, as it stands. Moving forward, I think that's the number that we would maintain, our inventory.
Okay. Okay. Sure. Thank you so much. All the best.
Thank you.
Thank you. The next question is from the line of Raghunandhan N L from Emkay Global. Please go ahead.
Thank you, sir, for the opportunity. My first question was on EV scooters. How is the company planning to approach high- speed, city speed, and low-speed categories? The new product in March, which is being launched, which category would it cater to? Slightly on a medium-term query, the company has a vision to dominate the space. Can you talk about market share aspirations? Also, company had indicated 10 strategic alliances in future. If you can talk about areas where these alliances can materialize. Thank you.
Thanks, Raghunandhan for the question. Let me just address the market share part first. I think, you know, in a new category, the role of leader is category expansion and category building and not market share. I think that's where our focus would be. As we said, how do you build that is the customer cost and collaboration. From a customer point of view, it's very important that how fast you charge and which is where we have twin solutions which are coming. First, of course, just on a charging basis. And the second, which will be on a swapping basis a little later, during the year. That addresses both types of consumers in terms of their charging solution.
Plus, of course, the convenience, the range anxiety, all of those we need to solve. The second element, of course, is the cost element, because unless your unit costs are viable, as such, there is always a limit to the cash burn that one can do. I do think that we as Hero are very well placed on that, with our scale of supply chain, with our existing, manufacturing locations, land, building, you have distribution locations, servicing locations, you know, on logistics you can ride. There's a lot of economies that will operate, on the back of our scale, and therefore we are confident that we would be better placed on unit cost economics, which in the medium term will decide that who will fall out and who will remain in this game.
Third is collaboration, which is where you've seen that we focus more on collaboration than on competition. That's where you see that to start with itself, we have invested in Ather. There's a lot of two-way learning that happens. We've announced a JV with Gogoro. A lot of collaboration on the design space as well, which is happening, and effectively therefore that's what we are playing for. In terms of then, you know, honestly, the high- speed, city speed, low- speed, we probably don't look at the segmentation that way. Watch this space as the product comes out by the month of March. I'm sure then we can take up those segment questions thereafter.
Thank you, sir. My second question was on, can you elaborate on the benefits, the area of benefits for LEAP program and, how do you see the full year targets?
All right. Raghunandhan, we had announced, in fact, if you remember, when BS-VI, Umang was launched at that time itself, we had talked about the LEAP-II savings program. We have said that we are accelerating the program, covering not just post-design, but right from conceiving the design, to the end of line, and then of course sourcing and covering also the other areas of variable costs. All of those put together, year-on-year basis, if you see quarter two to quarter two, we've got 320 basis points of LEAP savings, which is built into the results.
Thank you, sir. Wish you all the best.
Thank you. The next question is from the line of Satyam Thakur from Credit Suisse. Please go ahead.
Yes. Thank you for bringing me back on. The other question I have is on your electric vehicle launch. Which obviously will be a scooter, the one that you're launching in March. The market also does not seem to have, you know, many motorcycles in the market right now. Based on what you gather from your channels, you know, what's your assessment in terms of the demand pull? Like, is your typical entry-level motorcycle customer also looking to transition to electric and even willing to go for electric scooter? Secondly, you know, are you also working on electric motorcycle as well? Is that form factor also part of your plans?
Satyam, good question. Thanks for this. Yes, the March launch that will be there will be scooter. That you are absolutely right. As far as motorcycle is concerned, let me talk a bit about that. If you really look at first of all, the fuel efficiency that motorcycle gives versus scooter, there is a big difference when you look at the mileage that the entry motorcycles give versus scooter. Second, you look at also the pricing, that's different. Third, if you look at the range and the power that's required in the motorcycle use, you know, what they use for and the distances that they need to cover. Effectively, if you have to cater to that consumer, your battery pack size and the battery pack capacity has to be far more.
On one hand, you have to cater to a lower price, but with a higher battery cap, pack capacity. Which is why higher, bigger range, because while scooter on daily average, actually would be far lower than the motorcycles, on an average basis what a commuter uses. Effectively when you see that, EV in motorcycles is way off in our view. There are some players globally who are trying, but they're more on the super premium end, where probably a customer can pay a premium, huge premium, for possessing that vehicle. But as far as the commuter and in general, right up to probably the mid CC segment is concerned, it's way off. The EV penetration, at least over the next few years, will be driven by scooters.
Thereafter, as battery technology develops, where you can pack, you know, more with less and cost reduced, maybe the other cell technologies, solid state batteries, only then. It has to be a different solution which actually works on the current, battery technology, which are either there or in the works. There we don't see actually motorcycles happening. As you know, in two-wheeler industry, motorcycles are still 70% and scooter is 30%.
Okay. Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.
Hi, sir. First clarification on festive season sales. The 32-day or 35-day festive season, as we classify, would it be down about 15%-20% or would it be more than that?
Jinesh, as I said, you know, as we progressed into the first and the second half, it improved. In fact, if I were to kind of, you know, share with you on Dhanteras, the day which is the biggest day, that's the day that we saw the consumers coming back to the showroom. There was good crowd in the showroom. You know, it is manifesting in different zones in a different way. Markets which are big, which is north, central and part of east, I think the growth rates were better off as compared to south, southern market. I mean, as I said, it was not as good as it was last year. Early double digits is where it was.
Okay. As you rightly pointed out, that entire timelines are being a bit delayed because of the delayed monsoon and considering the marriage season, which is around the corner, do you expect catch up to happen during the next maybe one-two1 months on this side?
Yes, of course. I think there was good marriages right up to middle of December. We've seen marriage buying happening to a certain extent during festive also. I think because that's largely in the semi-urban and the rural segment, they wait for their crop to reach mandis. Once they have the cash in hand, then they come and buy. So I am positive about once the harvest happens. It was delayed because of the late monsoons this year. I think the farmers are gonna save on, you know, the first and second irrigation that happens in the Rabi crop because moisture content in the soil is pretty good right now.
Also, Naveen, what may help probably is what we discussed yesterday, that this cooling off has hit the diesel prices by INR 10 per liter. Yeah. That could be significant in that cost equation as well for the farmer. Yeah.
Got it. Second question on the price hikes. You had mentioned about INR 3,000 price hike since April till now. What kind of price hikes were taken in this quarter? Just to understand the cost inflation of this quarter and the price hikes taken.
I think we took around INR 1000-INR 1200 in this quarter.
INR 1,000-INR 1,200. Okay, great. Lastly, on the export.
Sorry, Jinesh, just to clarify, that was the price increase that we took from around end September or beginning October, yeah.
Twenty-first.
Twenty-first of September. That was around.
Sorry.
That was around INR 1,000, and July was around INR 1,200. Yeah.
Okay, on the export side, I mean, that's good to see, we getting traction in that business. You had talked about approaching market differently than your earlier strategy. Can you update on?
Compromising on that is something that we've seen not preferred. Yeah.
Just a small follow-up. On the tech part of the electric scooters, Niranjan, if you can add there. Basically, you know, I want to understand who is controlling the operating system in an electric scooter. Basically, the consumer data that you guys will get, you know, once the scooters are connected and all, you know, they've got a lot of business models can be evolved by auto companies on that. I'm not sure whether you've started thinking about that, but who controls that operating system or the data that you're going to get?
I can answer that. Data will definitely be controlled by us. All the customer data will be controlled by us. You're absolutely right. Once you have that. In any case, you know, what works for us is also that we have 100 million customer base already, and which is by far the biggest customer base that any OEM can have. Because obviously people who ride scooter are not going to spring from a new planet. They are going to be a large percentage are going to be from this and from people who need mobility. There can be smaller percentages who take it just as a tech part and get added on. Therefore, that gives us the advantage. We already have the data, of course, with tech.
You get more live data, and you can actually capitalize on that, as many companies globally have been doing, on many other multiple sources of revenue streams.
Great. Thank you. Thank you, Niranjan.
Thank you. The next question is from the line of Ashish Jain from Macquarie. Please go ahead.
Hi, sir. Good morning. My first question is on the margins. You know, you spoke about 300 basis points savings from LEAP program. One, can you break that between, you know, raw material and other costs? Secondly, what is the headroom, you know, further headroom we see coming from LEAP?
It will be largely on account of materials. There is some part of other variables also which is included into this. Moving forward, look, our program continues on this one. What the number will be is difficult for me to give out. All I can say is that as you would have seen in the last few quarters, we've been working very aggressively on the LEAP-II savings, and therefore we should continue to see good traction on this in coming quarters as well.
Okay. Secondly, on the spares and all, I mean, if you can just elaborate what are we doing different, you know, for spares to be now 12%-13% of our revenues? You know, is there any target in mind or what is the potential you think this can go to in the next few quarters?
Yeah. I think. In fact, I wouldn't say spare parts. It's parts, accessories and adjacent businesses. It's been taking off and it's been on the rise multiple times. I think one is the core principles of going very, very deep into the country, and you know, expanding our footprint at the last level of sales. That's paying off rich dividends. Then, you know, once you've got very, very deep and strong distribution robust system in place, you bring in additional lines which are adjacent lines. For example, oil has been adding good numbers to the business. We've got accessories launch, which is increasing. In fact, in October, we had the highest ever monthly retail on accessories.
Going forward, I think our distribution footprint that we've created, still 30% more to kind of plug, that should continue to pave the way. As I said, adjacent businesses, we are exploring more of them, both at our workshops as well as in aftermarket.
Sir, lastly, if you can, what is, you know, headwind from exports at this point on your EBITDA margins? Is export contributing positively to our margins today?
The export EBITDA margins are lower than domestic, because, as you know, as we are launching in, you know, Nigeria, into some of the other markets, it is lower than that. Moving forward, as the scale quickly picks up and as we also put more and more premium products into the export markets, the EBITDA margins will recover. Overall as it scales up fully, as you know, typically all put together, the export EBITDA margins at full scale should be at least equal to, if not higher than the domestic market.
Sir, at gross margins level, are they already comparable with the domestic business or even there's opportunity at gross margins also?
There is an opportunity at gross margin as well.
Okay. Great. Thank you so much, sir.
Thank you. The next question is from the line of Nitij Mangal from Jefferies. Please go ahead.
Hi. Good morning. Thanks for taking my question. So sir on the demand side, they're saying that two-wheelers are lagging passenger vehicles in the demand recovery for reasons which are probably somewhat unknown. In your assessment, when you see industry going back to, let's say FY 2019 levels, I mean, is that like one, two years away? Is it longer than that? Secondly, from a next one, two-year perspective, how would you rate the drivers for rural versus urban demand? Thanks.
All right. Thank you for that question. We are looking for the industry to go back and cross that FY 2019 level. It's the second consecutive year of, you know, regrowth in the industry. You know, being a sales guy, born optimistic, I would love to see that, you know, CAGR to come back and just see going back to that level. I mean, of late because of the COVID and other impact at the last level of sales, it did impact it. You know, fundamentals remain intact. The penetration levels are far lower than what it needs to be. There's a lot of employment and, you know, government actions which should, you know, push the demand ahead.
Going forward, I think Q4 it should be better off than what we have seen in the recent past. I mean, my belief is it will take a little time, a year or so to go back to that FY 2019 level.
Thanks. How do you see rural versus urban over the next one-two year?
Rural in past because of the penetration level has always led the growth as compared to the urban. Recent times, in fact last year also it was better. This year it has been subdued and, because, as I said, core fundamentals remain the same. You know, strong need for mobility far higher with, you know, lot of government actions, and hence that should, you know, that should come back sooner than later.
Thanks. One more question. Can you share anything on your plans with Harley-Davidson? When could you see a joint product launch? What kind of segments you could target? Thank you.
The progress is on track, which is what we can actually say at this point in time. We can't give a timeline, unfortunately. The progress is on track. The work on the product began as soon as we signed the agreement last year. If I remember right, it was around October, November last year. The work started then itself and it's progressing as per plan. Beyond that, we'll not be able to comment at this stage.
Sure. Thank you very much to all of us.
Thank you.
Thank you. The next question is from the line of Binay Singh from Morgan Stanley. Please go ahead.
Hi, team. Thanks for the opportunity. One of the reasons that you are seeing across two-wheelers we note for demand slowdown is also the sharp price hikes that have happened. As you pointed in your commentary, increasing finance penetration clearly helps that. Even if you look at finance penetration, it's largely remained in the, you know, 45%-55% range. Is there a plan to sort of take it aggressively up? Because that could be one big driver to help the consumer absorb this very steep price hike that we've seen. Like anything that you're doing where a year down the line we see a sort of a significant jump in finance penetration from current levels.
Let me first say and then I'll ask Naveen to add what's the new thing happening there. No, we were never at 55%. Honestly, when I look at all the quarters, we were hovering around 40%, and probably the best that we've reached in quarter two is around 50%-51% last year. 55% is a clear departure from that perspective. This is a significant jump. Why do we believe that it will keep going up, Naveen?
Yeah. In fact, that another 1% or 2% added in the first half. It's normally because of the kind of consumer which comes in towards year-end. It normally goes down, but this year we've seen the trend going the other way around. Lot of financial innovations, I mentioned that earlier. Lot of financial innovation. I think that's the direction in which things would move to increase the finance penetration levels in the two-wheeler industry. As I said, you know, the segment of consumers we've identified and looking at the right product for those consumer segments. HDFC has been very, very proactive in terms of responding to the needs which were emerging from various markets. Across the categories and across the geographies, we've seen the finance penetration going up.
I think one more aspect that's waiting for this finance space to get disrupted is also, you know, how do we get increased level of digital play in terms of, you know, having a higher level of competitiveness among the financers to bring down the cost of finance, which still remains at slightly higher level. I think that's one space that we are looking at to work on further.
In fact, Naveen, just to add, on your point, that's a big opportunity.
Absolutely.
We already see players are looking at tech, at digital, from their end as well as from a consumer end because they are getting more digitally included in the entire payment tech and fintech system more and more. We do see that that augurs well, both from the financier side as well as from the consumer side. Therefore, this space is actually likely to be a big growth driver for the category as such itself, moving forward over next three-five years.
Could you also comment a little bit about Hero FinCorp's role, like, in this jump in financing that we've seen? What has been share of captive, how has that played out?
Sure. As far as FinCorp is concerned, they are roughly around anywhere between 35%-40% as a share of financing. They continue to be at a solid level of that range. You know, plus or minus few basis points keeps happening depending on quarter-to-quarter. They continue to be the lead players. There are other multiple players who've come in, which also help expand the basket. They're at a robust 35%-40% share of financing.
The second question, you know, as we recall, last year, sales promotion spend has gone down quite sharply for you and for the industry after COVID. How would you compare the sales promotion spending now versus pre-COVID level as it's normalized?
I mean, let me just comment and maybe then I'll ask Naveen to supplement. If you look at, I think, this festive, whatever the promotion spends and all were done, it is at a normalized level. If you go back to the pre-COVID levels, whatever those spends to revenues and the, and per vehicle used to be, there's not a significant departure from that in this quarter.
It's just about, yeah, it's just about where do you put that money?
Yeah.
Right? As far as expense is concerned, it's consistent. It's just about, you know, which is the opportunity bucket that you see to put your money on.
Lastly, if you would comment on Gogoro. Is that plan on track to launch the model in next calendar year? Will it be in the same facility? You know, it's been six months since the partnership. Any incremental details on what's happening there?
At this stage, we will not be able to provide any more incremental details, I'm afraid. As soon as we are able to, we will come back. Watch this space.
Great. Thanks, team. Thank you.
Thank you. We would request participants to limit their question to one at a time now. The next question is from the line of Gunjan Prithyani from Bank of America. Please go ahead.
Yeah. Hi. Thanks, team, for taking my questions. I had just two quick follow-ups. Firstly, on this whole demand thing, how much do you think it's, you know, it's the whole EV overhang because media has just created a lot of hype around it. Do you sense in your conversations with the dealers that, you know, some percentage of queries are coming only for EVs or you're seeing rising inquiries around that? Is there anything that you can share around that?
Gunjan, firstly, you know, as I talked about, you know, if you see 70% is motorcycles in two- wheelers and 30% is scooter. First of all, primarily whatever inquiries and questions and all that come around, they come around from the existing scooter base, yeah. And people who have the need for the scooters. Overall, you know, right now on the demand it is actually not impacting at all because overall EV probably, you know, if I'm not wrong, is less than 1% of the overall. There is a lot of, you know, yes, there's a lot of interest in media I would say, rightfully so. But from a demand perspective, it's not started impacting right now.
I mean, it'll still be a while before a sizable share starts putting on that. Naveen?
Yeah. I think you said it. I mean, it's more about more on that space. I think the positive that I take from whatever inquiries that are coming in that consumers trust the brand Hero, and it's the brand Hero that they would kind of come first to check what's new on EV front.
You don't think that people are in wait and watch? I mean, that's not a reason for, you know, generally the demand being low in two- wheelers versus some of the other categories?
No, Gunjan, because if you see, you know, within EV and motorcycle two versus scooter two total two-wheelers, I think if I'm right and you know, Naveen can supplement, the scooter as a percentage of two-wheeler probably in quarter two is more than what it was in quarter one.
Yeah.
Right? As you said, so if that was the case, people would have deferred their scooter and therefore scooter percentage to total would have gone down. That's not the case there. Yeah, they are interested because there is a lot of interest in this. They are interested, people are asking. That is building up. Currently is it that people are deferring their current purchase to actually avail of an EV scooter? No, we don't think so.
Yeah.
Okay. Just second very quick question on the CapEx commitment for EVs. Is there something that you would like to spell out? You know, this is what we are looking to spend in this business for the next, you know, three, five years.
Gunjan, we've already in fact said, you know, the overall investments that we have talked about, our CEO has talked about over the next five to seven years. This investment is not just CapEx, you know. It's on CapEx, on brand building, on R&D towards this space. We've talked about five to seven years, you know, overall INR 10,000 Crore we had talked about, I think, a year back. We have said that almost 50% of that would be primarily into EV. That's what we are looking at. Having said that, it is basically need-based, yeah. Obviously we won't spend where it's not required, and if it is required, we may spend even more.
It's a question of, you know, spending based on the need and based on our product plan, based on what we are going to launch. Obviously, there are no scarcity of that. One thing I can assure you that we, because of our ability, our scale, we'll be able to do that in a far more optimized manner. So, if let's say a new player requires X to spend behind achieving a certain objective, we probably can do in X by two. So, that's the, you know, broad thing that I can tell you.
Thank you. I would request Mr. Prithyani to rejoin the queue for follow-up questions, and request participants to limit your question to one at a time. The next question is from the line of Chirag Shah from Edelweiss. Please go ahead.
Yeah, thanks for the opportunity. Sir, just a clarification first. Other operating income for the quarter you mentioned was INR 222 Crores, right?
INR 223 Crores. Yeah. Yeah, Chirag, right.
Okay. Yeah, thanks. Sir, I have a question on spare parts. Is this the normalized run rate, 12%-15% of sales or there is scope to pick it up also?
Let me just give a short answer, and I'll ask Naveen to maybe supplement. Let's look at an absolute level, which is the INR 1,140 Crores that we have done. We had done a couple of quarters of more than INR 1,000 Crores also earlier, and we are confident that that's the trajectory moving forward. We hope, and we expect to continue to build on these numbers as we move forward. There could be times here or there, you know, quarter here, quarter there, which could go up or down. As an underlying trajectory to build on these numbers even further. As a percentage revenue, of course it all depends on, you know, the demand and the momentum of overall two-wheeler also coming back.
At an absolute level, yes, we are quite comfortable and confident that growing and Naveen already explained, and Naveen would love to just touch upon the underlying couple of drivers that you already talked about, which are actually leading to this growth and confidence in that growth.
Yeah, I think, you know, we kind of started the story around two years back, when we went micros, like I said. So fundamentally, we are in place in terms of our robustness of distribution. Once you have that, you know, it's just about, you know, looking at. In fact, I would say what we do in vehicles in terms of looking at every single product as a product and have a product manager is the same approach that we are doing in spare parts, wherein there is a team which looks at different various product groups and how the competition is and where we are priced in different markets.
Okay.
That's the approach that we have taken in spare parts to go deeper. At every single counter we are looking at how many SKUs would I sell and how many SKUs do I want to sell? What's the potential? I think the basic fundamentals have been worked upon in recent times, which is actually delivering the result that we are seeing.
In fact, let me just add more on this, Chirag, what we are doing now is as we are launching more and more products in the premium segment, right at the design stage itself, we are looking at how many accessories we can add because there is a demand for that. Let's say you take Xpulse, and then people want those customized, people want those add-ons. While they may not want, let's say, on an HF, but as you move up the chain. As we are launching more and more premium product at design stage itself, we are saying X percentage should be accessories that being designed rather than later, to do that based on what is required and what the customer comes back.
As we move forward and we build our premium portfolio, actually that should augur well as well. Our accessories going up and of course the focus on merchandise. Overall put together, Chirag, I think the movement forward is that, how much more can we get as a percentage revenue from these aftersales services, all of those, and that therefore, basically builds a more robust, alternative or additional stream of revenue on top of the product revenue that we're talking about.
One perfect example, we launched this Canvas Splendor. It now contributes 30% of our retail, and it's a model that we have given to the consumer to customize with those stripes, that's becoming a decent revenue in spare parts.
Yeah, thank you for the elaborate answer. If I can just squeeze in one more question. On the export front, what is the change in approach that we adopted which is helping us to have a faster addition of distributors versus our historical track record? Over last two-three years, there is an improvement in pace of regions that you're entering and tying up with new distributors. Is there a change in approach and can this pace get further accelerated over next three-five years?
Yes, Chirag. In fact, maybe you know, we'll at some stage we may have a you know, a full-fledged focus on GB for all our investors and analysts. But if I were to give a short answer, Chirag, it's I would call it a phase two and therefore I revised this one where you know, as we talked about in the phase one, the focus was on go and set your foot in as many markets as you can because you need to understand each of the markets, and please go with whatever products you have because you can't afford to delay.
In the phase two, which is now, you know, which has already started and yielding results, is now about giving the market customized products that they require, and therefore focus on that. Even when we are developing products. Actually, it's not like we develop products for domestic and then we say, "Okay, this will go into global market." In the cycle planning, the product design itself, there's a very clear path for each of the key countries that what is the next five-year plan for this country that I want to have based on the customer needs which is there. That's a shift or a phase two or an add-on, as you may call it.
The second one is that while we are on 40+ countries, we clearly decided there are nine, 10 which will receive disproportionate focus, and the rest 30 we continue to manage. When they scale up to a certain extent, then of course they'll start receiving focus as well. Rather than equally dividing the resources and the focus across 40, it allows priority A and then obviously as you nurture them back, then they also move into that category. Sorry, that's a short answer, Chirag. There is a lot of teeth, muscles, flesh behind this entire strategy. As I said, you know, we'll at some stage maybe have a full-fledged session on global business itself.
Basically we have the right distribution partner, you know, at least, in these eight, nine countries, right?
That has been done already.
Chirag, most of them. Couple of them only we have changed, but we have the right distribution partners. I mean, most of our distribution partners are selected after very, very rigorous scrutiny in terms of both their financial strength, their understanding of the country, their networking, their ability on policy advocacy and their experience in auto sector. Multiple parameters. Apart from the couple of them, and you know, as Hero, we do believe in stability of partners and not changing and chopping them every two years and three years. They are stable partners, whether you look at Colombia, whether you look at Bangladesh, whether you look at Sri Lanka or Nepal, all of them are continuing. Yeah, a couple of places wherever it is required, we have changed and we may change.
That depends on need.
Thank you. The next question is from the line of Amyn Pirani from J.P. Morgan. Please go ahead.
Yes. Hi. Good morning. Thanks for the opportunity. I had a question on the trade-off between profitability and volume growth, if there is any. Because if you look at two-wheelers, since the time of BS-VI transition, then COVID, second wave, in general, two-wheelers have been more disciplined in pricing. Growth has been sluggish compared to other categories. Do you think there has been a trade-off? And if not, do you think that growth is not dependent on pricing and it will come, you know, back based on other factors that we are missing out right now?
I mean, first of all, you heard my views on this subject earlier as well.
Yes. Yes. Yes.
You know, a business cannot be run based on that, "Okay, I'll either deliver volume or I will deliver profitability." We've got to deliver both because it's volume growth combined multiplied by profitability is what generates the net shareholder income or the value accretion. I'm a great fan of believing that both have to be addressed. At different times, you have to then maybe give a weightage to one of these factors more, and at other times you can swing to the other extreme. Which is what we have done.
For instance, if the cost inflation has happened, has the industry and have we as a leader of the industry taken a stand that we pass on the entire inflation to the market plus the margins that we want to? You know from the results that we have not. There's already a call which has been taken that you pass on partial. Please focus on your own savings program, accelerate them. You tighten your overheads management and therefore cushion the impact on the customer. That's a balanced strategy, where you start balancing profitability and this as well. As the commodities start cooling off, then that gives you actually a headroom to actually then take judicious smaller dosages of price increases where the inflation will be far lower and therefore your recovery can be far higher.
Sorry, it's a question of just lag and lead, and it's not a question of either/or.
That's helpful. Just quickly on the EV, I don't know if you can answer this question right now. Most of the EVs which have been launched, at least in the medium to premium end right now, come with a closed-source charging thing. You know, if their own charging infra can only support their own scooters. I don't know if you have any thoughts around when you launch your scooter, will it be an open source or will it also be a closed source? If you can help us on that.
I think, I mean, we reserve some of the information that we use for our launch. Otherwise at the launch time we'll have only product, we would have disseminated all information. Let's wait for that exciting time when Hero, the leader of two-wheeler industry, comes out and launches its EV product in March.
Sure. Looking forward to that too.
Thank you. Ladies and gentlemen, your time is through. That was the last question for today. I now hand the conference over to the management for closing comments.
Thank you. Thank you very much. Don't forget to Google synonyms of the word winner. Thank you.
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Thank you. On behalf of Nirmal Bang Institutional Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.