Q3 FY 2022 results conference call hosted by ICICI Securities. As a reminder, all participant lines will be in listen-only mode. There will be an opportunity for you to ask questions when the presentation concludes. Should you need assistance during the conference call, please signal your operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Basudeb Banerjee. Thank you, and over to you, sir.
Thanks, Tanvi. Thanks to Hero MotoCorp management for giving us the opportunity to host the Q3 FY 2022 post-result conference call. I'd like to hand over the call to Mr. Umang Khurana, Head of Investor Relations and Business Support, Hero MotoCorp. Over to you, Umang.
Thank you, Vasu. Thank you for hosting us. Lovely to see all of you. Lovely to speak to all of you again. I'm sure you're having a good day, keeping safe and healthy. To discuss the quarter and our performance, and future outlook, we have today for the Q3 FY 2022 call, Niranjan Gupta, Chief Financial Officer, and Naveen Chauhan, Head of Sales and Aftersales. We'll begin with an opening statement from Niranjan and then open it up for questions. We'll now pass this baton to Niranjan. Niranjan, over to you.
Thanks, Umang. Good morning, good afternoon, depending on where you're joining from, and welcome again to Hero MotoCorp's earnings call. As you would have seen, our financial results announced yesterday evening, we declared a revenue of INR 7,883 crore and EBITDA of INR 960 crore and INR 686 crore of profit after tax. In terms of our top-line performances, our domestic market share has grown sequentially by more than 100 basis points. Our global business has been consistently doing well over the last few quarters and is on track to close at around 300,000 units by the fiscal year 2022, which would almost be 50% higher than our historical run rates over the last four, five years.
Additionally, as you would have seen from our results consistently over the last seven to eight quarters, we've been focusing on non-two-wheeler product revenues as well. Therefore, our PAM business, which is the parts, accessories, and merchandise business, clocked a solid revenue of INR 1,186 crores in quarter three, registering a growth of 15% year-on-year basis. Consistently, we've been now clocking over INR 1,000 crores quarterly basis on our PAM business, and we expect that to continue to grow in future as our activities on this front are giving us handsome rewards. Coming to the outlook of the industry, fiscal year 2023. As we know, fiscal year 2022 was impacted across the industry by two pandemic waves. Also the second challenge, as we have said, of the commodity cost inflation.
As we move forward, let me talk about the demand side. We have seen the GST collections at their almost highest ever at INR 1.4 lakh crore. We are seeing now pandemic wave in Omicron actually ebbing out, phasing out, rapidly dropping. Also recognizing this, all the other sectors which were either stop-start or not opened fully are now opening, as you can see from various announcements by the state government, especially the opening of colleges, opening of the hospitality sector, the entertainment sector, all that augurs very well as far as the income and rural demand is concerned. We do expect a much broader economic recovery rather than a shallow recovery as we move forward to fiscal year 2023.
We've also seen the budget, which is rightly focusing on CapEx expenditure up by 35% over the actuals of the last year. That would trigger a cycle not only of employment and income, but also actually trigger a private CapEx cycle. I think combined, all of this should have a significant positive impact on economy in general and two-wheeler sector in particular. As far as cost and margin squeeze is concerned, we've seen a lot of commodities now peaking out. We've seen precious metals, we've seen steel peaking out. Obviously, as we move forward, we do expect the commodities to have peaked out and therefore the cost pressures to be far less.
We'll continue to take calls on judicious price increases along with the accelerated LEAP savings that we continue to do in order to manage the impact on customers as well as on margins. Overall, when we look at the outlook, the outlook for FY 2023, we expect strong rebound in the two-wheeler sector, and we do expect the cost pressures to ease off, as the industry as such. We continue to launch more and more products in the premium portfolio to boost our market share, and that will help us moving forward, apart from the premiumization and obviously the scale-up of global business that we continue to do. On the EV front, as we have announced earlier itself, we will be doing our launch in the month of March.
We continue to invest strongly behind our current investments like Ather and Gogoro. You've seen the announcements already. Apart from that, we are forging collaboration and partnerships with many players in the ecosystem. Therefore, we are addressing EV as more of an ecosystem rather than a product or a stream of revenue. With that, let me now hand it over back to you, Umang, and to the floor for questions. We'd be happy to elaborate, explain, and clarify and answer all your queries.
Thank you for that. We'll now take questions.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. We request participants to limit their questions to two per participant. Should you have more questions, you are requested to join the queue back. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Gunjan Prithyani from Bank of America. Please go ahead.
Yeah. Hi. Thanks for taking my questions. Two questions from my side. Firstly, on the investments that we've made in the associate companies, that is Ather and the Hero FinCorp. Could you just talk a little bit more on both of these? Firstly, on Ather, as to how do we see this association progressing over time? Does it go beyond the stake that we have in terms of, you know, alliances on the business front as well? And secondly, on the Hero FinCorp. Now, this is a pretty large capital infusion that we're doing when the industry is not growing. So, you know, maybe give us more color around what's the thought process behind this, or is there some asset quality risk that we're anticipating in the business?
Thanks, Gunjan, for the question. As far as Ather is concerned, as you've seen consistently every round, we've been participating in the capital raise. Over a period, we've been increasing our shareholding as well. Beyond that, you are absolutely right. Both the companies are exploring collaboration in the spaces where there can be synergy. We strongly believe that EV currently is more about partnerships and collaboration rather than competition, because it's a category that has to be built and then built under different streams of revenue and with optimization, of course. Whether it is, let's say, charging, whether it is maybe global business, whether it is a front end. There are multiple collaborations being explored between the two companies.
Already, there's a lot of learning, which will get cross-pollinated between the two companies, which will help both the companies and our EV investments moving forward as well. As far as FinCorp is concerned, you would have seen the announcement. They have closed a capital round of INR 2,000 crores, which is a capital raise. This will help them almost double their AUM from their current level of around INR 26,000 crores to almost close to around INR 50,000 crores. Their liquidity remains strong. Their gearing ratios are at around 4.5 against the allowed six, so it's providing them headroom. First two quarters, like most other NBFCs because of the pandemic and the others, they had the challenge like across the NBFC sector, as you would have seen on the GNPA.
Quarter three, they have turned back again, and they have delivered a profit of INR 130 crores for the quarter. We don't see underlying or continuing issues as far as the asset quality is concerned. Those are all one-offs, which is a GNPA, which is across the industry, which happened. This capital will actually help FinCorp grow because as we come out of pandemic and which we have, I do believe, it will be back to growth of NBFCs. India's credit to GDP ratio is very low, and therefore, it offers well for well-funded NBFCs, which have strong parentage and actually offers now a renewed opportunity to grow, given that the finance penetration in India is still very low. It actually builds them towards a much stronger business as smaller NBFCs start to consolidate in future.
Okay. Got it. Thank you. Second question is on the margin. You kind of touched on the mix improvement we are seeing, but if you could also give us some sense on what kind of price hikes that were taken during the quarter and if anything after that, and are we pretty much covered up for the commodity inflation now?
Gunjan, as you would have seen our EBITDA margin, which we declared for the quarter is 12.2%. Obviously, there is some bit of recovery yet to be made. In terms of price increase, what we did from around, you know, first of October, last week of September, close to around INR 1,000 ex-showroom price. From first January, we took close to around INR 500 ex-showroom price. We'll continue to calibrate that moving forward as we see these gradual price adjustments combined with commodity softening, that should help us actually in terms of margin recovery. That's how we expect it to be played out.
As you would have seen, we continue to take a balanced view between what price we have to pass on, blending it with the savings, of course, sourcing it in an effective manner. Obviously, we need to cater to growth as well.
All right. Thank you. I join you on the queue.
Thank you. The next question is from the line of Vimal Gohil from Union AMC. Please go ahead.
Yes, sir. Thank you for the opportunity. Sir, my question on gross margins has been answered. The second one what I had was on electric vehicles. What would be your distribution strategy? Are we setting up a new distribution channel, or will we leverage on our already strong existing distributor network.
Good question. First of all, let me take a bit of a broader view. There are certain inherent strengths that incumbent players like us have, which is whether you call it, manufacturing scale, logistic distribution scale, I touched upon in the last earnings call as well, whether sourcing scale, all of these actually help us in terms of, reducing the cost of acquisition of customer and reducing the investment which is required to achieve a certain scale in EV. Equally, on the distribution side, the reach that we have at the nooks and corners of the country, certainly it will be helpful.
What we are working out is a strategy where of course, there will be certain exclusive stores as well, but obviously in more ways than one, we will be looking to leverage our existing strengths as incumbent, including with manufacturing, sourcing, R&D, logistics or our network.
Sir, the existing stores are well-equipped to in order to service the customer in terms of you know because electric vehicles will require separate skill levels in terms of servicing etc. Do you think we are prepared for that particular angle? Or how should we think about that issue?
The servicing essentially is of the two elements. If you talk of the software part of it is mostly over the air, so it doesn't make a difference where you sell from. The other are physical parts which would be no different in terms of servicing, whether you do the servicing from X place or Y place or ICE or EV. Now, please, we also need to remember that there are different profiles of the customers. The customers at the city or the metros would expect a certain experience, certain environment. As you go to tier two, tier three, tier four, and you are trying to attract those customers, the environment need not be very different.
We are blending in all these learnings, which are there from our knowledge of the customer base as well as from what has been the EV players' experience, and blending that to suit the channel and the strategy and the modification that we will ultimately deploy. You will hear more about this when we do our launch.
Fair enough, sir. Sir, we are also baking in some dealer profitability because if the software is going to be taken care of over the air, then and servicing is a large portion of the dealer profitability. How are we taking care of that? That would be my one question. Lastly, if you could just highlight your CapEx for FY 2023, and what are the investments that you plan for Ather and Hero FinCorp? That's all.
As far as dealer profitability is concerned, again, while I'll not get into granular details, but that's again another area where as incumbent we will be much better off. Because remember, EV is coming on top of our big base of ICE. It's not that every dealer will have to be exclusively profitable on EV. Of course, for the exclusive stores they will need to be. All those economics, all those viabilities, whatever it is for the industry, all I can say is that we'll be much better off vis-à-vis the industry dynamics. Eventually whoever comes into EV space will play for the long term and not profitability in the short term, any part of the eco chain.
Got it, sir.
What was your second question?
Sir, CapEx requirement and investment in Ather and
Oh.
Ather and Hero FinCorp. Yeah.
As you know, we don't give guidance on the CapEx requirement of FinCorp and Ather. All I can say is, FinCorp is now fully funded to almost doubling their AUM. We don't see any requirement coming up, probably even in the next couple of years. Obviously at some stage they will also have to plan for their listing and their IPO. As far as Ather is concerned, we continue to evaluate how the company will continue to evaluate the EV landscape and the EV path. Of course, the current round also they need to close the capital round. They haven't closed the capital round. After that only they'll be able to assess when the next requirement will be.
Sir, your own CapEx?
Our own CapEx, we will talk about it in our quarter four earnings call.
Fair enough, sir. Thank you so much, and all the very best.
Welcome.
Thank you. The next question is from the line of Binay Singh from Morgan Stanley. Please go ahead.
Hi, team. Thanks for the opportunity. Firstly, from Gogoro, is that tie-up with Gogoro exclusive or others will also be allowed to use their battery-swapping station?
Hi, Binay. The JV that will be formed, which will have the swapping network, that will have exclusivity in terms of the swapping tie-up with Gogoro. Now, whether that JV operates to serve only Hero product or later on together we both decide to expand it to others, that's something for the JV to take a call once the JV is formed. It can very well form a different stream of revenue as well, apart from just catering to Hero branded product. Those are things that once the JV comes into being will get decided.
Okay. I'll note it. The second thing, when we look at electric vehicle launch of your peers now, they've launched models for more than a year, yet we see limited city launch, volume still around 1,000 units or so, hampered either by production issues or supply chain issues. As you are looking into your electric launch, how are you looking at, you know, resolving these issues? Are you going for a similar limited city, sort of a slow ramp up, or planning to go for a pan-India launch?
At this stage, all I would say is wait for further announcement. When we do the launch, at that time, we will actually come out and actually share what our overall plan is. Eventually, I mean, it's not the start that matters. Honestly, it's not the start that matters. Eventually, as you know, as Hero MotoCorp, we would cover all segments, whether it is a premium, mid or mass segment on EV. Because our objective is to enable electrification for everyone and not just for exclusive set of people or exclusive set of geographies. That's the endeavors that we will have to actually straddle across the segments. And accordingly, obviously, straddle across the geographies as well. Now, what pace, what speed, what scale up? That's something that we will share closer to the time.
Thanks for that, Niranjan. Just lastly, one question on the consumer trend. You know, everybody has been waiting for replacement demand in the two-wheeler industry to come. Have you seen any change in consumer trend as in replacement as a percentage of share, rising also in the last few months? Anything on first time buyer versus replacement trend at the consumer level, if you could share? Thank you.
Yeah. Let me hand over this question to Naveen.
Yeah. Namaskar to everyone who's on the call. On the replacement buyer, we've seen that since the time the pandemic has hit in, that the consumer has actually not come back to the level that they were before pandemic. However, in the recent two months, I would say more in January, that we have seen the replacement buyers coming in. I think one of the proxy that we also look at for the replacement buyer not coming in is also the increase in the paid service load in our dealership workshop. That's a proxy that we take. In January, we've seen in some of the markets of UP, Haryana, Rajasthan, that there's a bit increase in terms of contribution of replacement buyer. Thank you.
Thanks for that, Naveen. Any percentage number? Like, what percentage would roughly replacement be?
It'll be around 20% or so. That's where it operated. It was far higher during pre-pandemic times.
Oh, okay. Great. Thanks so much.
Thank you. The next question is from the line of Amyn Pirani from JP Morgan. Please go ahead.
Yes. Hi. Thanks for the opportunity. First question was just a clarification. You mentioned in the release that you've invested INR 150 crore in Ather post-December. Is this part of the INR 420 crore full round that you have announced? If you can just help us understand.
Yeah, it's part of the funding round of INR 420 crore. You are absolutely right.
Okay, thank you. Secondly, you know, just on the core business, you know, we've discussed this for several quarters now as to how you and, you know, potentially the two-wheeler industry has actually managed to maintain pricing and even profitability during three years of downturn now. You know, just want to get a sense from you, is that, you know, given that financing share continues to be quite low, you know, how should we look at profitability going forward? Because we are hitting peak profitability in terms of EBITDA per vehicle at a time when the market is 30% lower. How should we think about this? Because this is not something that we have seen in the past.
Let me just give some example in terms of the pricing. Even as you see it today, I mean, one normally draws a very direct correlation between pricing and demand, but actually it's not so. What we have seen is that demand is more impacted by other factors than essentially price, as long as you are able to provide value to the customer. For instance, if you see even in these times, let's take Glamour. When we have launched Glamour XTEC, which is almost at INR 4,000- INR 5,000 per vehicle higher than the base Glamour, people are lapping that up, and Glamour XTEC has become more than 35%-40% of our overall Glamour.
Now, therefore, even within those segments, if we are providing the right features and value add to the customer, the customers are taking the variant which is actually priced higher, provided they see value in it. I think it's that equation, which as long as you keep getting it right, then fundamentally one doesn't see pricing as a big issue and pricing pass on as a big issue. Obviously, it has to be calibrated based on the different segments. Moving forward, as we see, look, the last two, three years, as you rightly said, has been years of commodity challenge as well as on the underlying demand because of the pandemic. One has seen multiple waves and of course there was a BS6 transition as well.
As we move forward, we see that a lot of these big shocks are behind us. Obviously the commodities also can't keep going forever, and nothing keeps going up forever. Nothing keeps going down forever. When you look forward, then you see actually these things coming nicely together as a sweet spot, which is people's income coming back, people wanting to spend more. Also it's about once you decide it's not a consumption spend. It's a spend that you've decided you need to. Obviously because of the consumer confidence and a lot of stock which was held back is likely to then come back. We don't see actually this as a conundrum or an issue. I think we've been very sensible in not passing the entire cost.
As you would have seen, probably we would have taken price increase, which is close to maybe 50% of the cost increases that have happened, and around a 25% made up through LEAP savings and the balance 25% broadly absorbed in the margin. Very, very broadly. That's the configuration that we have done. We've been very, very sensible and mindful of the impact on customer as well. Let me just also ask Naveen to add on this front. Anything you want to add, Naveen, or?
I firmly agree with you. In fact, the consumer especially in BS6 trend, if you look at across the segment, not just one or two or maybe premium. We've seen this is happening even in the commuter Splendor, wherein the premium variant is introduced and that gets snapped up as with consumers dramatically looking at value and we also raise the point of the financing being low. I think that's also we've seen there is very innovative financing models appearing, OEMs working with the financiers to evaluate and evolve those models and offer this to customer. We have seen the result of that in terms of the finance penetration that has gone up in the last one year.
In fact, just to add on financing point, Naveen, the other thing as you would have seen in the budget also, the more and more financial inclusion happening, which is even post offices coming into the space. I think as it happens more and more and gets more and more into hinterland and rural, the financing has a beauty of cushioning the one time or immediate impact of the outflow the customer faces. Actually as it increases, this should augur well for the industry as such itself.
Thanks a lot for the detailed explanation. Just one last thing. What is the financing penetration right now? If you can share Hero FinCorp's share in that.
Quarter three, our financing penetration was 58%, and Hero FinCorp continues to be in the band of 35%-40%. It was 35% in quarter three of FY 2022.
On a full company basis, it was 58%. There has been a recovery here in the financing.
Yeah. Across the segment, I mean, this is an overall number. Growth in retail financing has been seen across the segment, across the geographies.
Fair enough. Thanks a lot. I'll come back if required.
Thank you. The next question is from the line of Pramod Kumar from UBS. Please go ahead.
Yeah. Thanks a lot for the opportunity. Before the question, just a clarification on the EV schedule. March you go commercially live or it's gonna be unveiled followed by a launch at a later date? Just want to clarify that.
Hi, Pramod. Thanks for the question. You will get to know the entire details in the month of March itself. We'll be announcing the entire plan of, when the ordering will start, when the commercial dispatches will start, the sales will have. All of that will get announced in the month of March along with the launch.
Fair enough. The first question to Naveen on the market situation, because we've heard capable companies to even tractor companies complaining about rural inflation on the agri side, which is hurting farm income. Generally demand has been very weak and even our market share trends kind of suggest at around 31% in January as per one that the rural segments are definitely suffering more. What is the confidence from which data you're getting that confidence that FY 2022 is gonna be a good year for the industry in terms of recovery outside of the base effect, of course, of the first quarter?
Because the most of the other companies are warning about how incomes have taken a knock for bulk of India and the disruption from Delta variant and savings being wiped out and the prices being moved heavily, right? Both vehicle prices and the fuel price. What are the data points which are giving you that confidence on demand recovery?
All right. See, you're right, that if we look at, you know, what has happened over a period of time last year, especially the second wave, which was far more lethal than what was expected, and in fact it was far more deep in the country. It actually hit the rural sentiment far more deeper. Post that, you had delayed monsoon, right? Which also had a major impact on the rural crops. Sorry. Hence that continued, you know, till as late as December and part of January. What gives me confidence is the recent footfalls that I see in markets like UP, Bihar. Particularly Eastern UP and the Central UP part, that I see more and more footfalls are coming into my secondary network, which is more of the rural based.
I also firmly believe that, you know, the bottoming out has actually happened, right? It's only way forward. Also, if you look at consumer confidence index, that's with a little bit dip in the month of January because of third wave. We also seeing the signs are going up. Now, while there has been an impact on the kharif crop, the rabi sowing has been pretty good, and there is a lot of focus that the government has in terms of investing in rural and, you know, getting that segment back, and it's very, very critical for the country, you know.
In terms of the double-digit number that Niranjan shared in his opening comment, I think if you look at the base effect of Q1 and then subsequent to that if we get on to the long-term averages, I think we'll get that kind of a number from an industry perspective. Right.
Sorry, Niranjan. Given the cost inflation, the long-term averages, do they really matter? Because the long-term average on inflation is 1% or 2%, but the vehicle prices have shot up by 35%-40%. Fuel prices are up 50%. Income levels are down. Is it like, is the industry being a bit too optimistic in terms of making that assumption? Also related to that, how are you reading the marriage season demand? Because last two years we didn't have the marriage season in the summer, unfortunately, which is the second largest buying season. If you can make comments on that as well, sir.
Let me probably supplement what Naveen said. First of all, you know what happens in the times of euphoria, we get too euphoric, and the times when there are things are down, then we get too pessimistic. I think we shouldn't forget that, you know, the base impact has been severe, yeah. As we have come out, even today, the consumer confidence index is the highest in the last two years, sitting at 60. Second thing is, when you look at in the last two years, it's only now with this wave three that some of the sectors which have not even opened up are now opening up. Colleges are opening up after a gap of two years. You can see the entire sector of the economy actually opening up. Now, that provides confidence.
Otherwise, people keep thinking in rural, which was rightly so where after the wave two, that maybe I need to save for XYZ, we don't know what else is coming. Now, that confidence is returning back, that maybe life is coming back to normal. That's one part of the whole thing. Naveen will explain about the delayed monsoon, et cetera, et cetera, all that factors. Third, of course, you see the large expenditure in the union budget, the confidence of the overall ecosystem on the private industry, which is coming back on the CapEx cycle. I think all of this actually really augur well. Finally, you know, industries are cyclical, so after three years of negative growth, the whole cumulative pent-up that gets accumulated or has got deferred is bound to come back.
Actually, we are therefore extremely positive about this. I mean, we don't see a Delta-like impact again, coming into play. I mean, those are once in a 100-year kind of event, and therefore, we should not take those as underlying reflection of demand. Naveen, you want to-
I think, I mean, with the experience with Omicron, subsequent to that, you know, both the administration as well as people, by and large, also adapted to this change of life. The question was also about what's happening in the marriage market. We've seen there is a retail uptick in the core marriage markets in the month of February. Another factor that I also look at, not just the retail growth that we are experiencing in the current month, is also about these purchases are normally cash purchases. Hence, the trend that we were observing in terms of retail finance penetration for the last four, five months, we've seen that also dipping a little on account of the cash purchases that happened in marriage markets.
Core rural markets, there is a positive trend.
Great. Naveen, where's the system inventory now, dealer plus sub-dealer?
In terms of forward-looking that we look at on our retail, we are at seven to eight weeks kind of inventory right now at the dealer.
Thanks a lot. Thanks a lot, and wish you guys the best. Thank you.
Thank you very much.
Welcome.
Thank you. The next question is from the line of Rajesh from IIFL Limited. Please go ahead.
Hello.
Hello, Rajesh. Go ahead.
Yeah. Good afternoon, sir. So, you know, if I look at, let's say, Hero MotoCorp, we are, you know, in a sweet spot industry as far as the EV challenge is there because we are also an incumbent as well as, you know, we have large stake in one of the, I would say, successful startup entity. My question was, you know, if I look at, of course, there may not be any, let's say, clear answers at this stage. If I look at next three to five years, when we know that, you know, EV penetration would have happened and there'll be a certain substantial percentage of some segments will be EV. You know, whom do you think will be, you know, or who has the right to win in this?
Because why I'm asking is if we talk to startups, you know, their distribution strategies, let's say, target, you know, top four metros in first three months, then go to next 10 cities, you know, likewise, go on scaling so that you capture more area. Production, everybody is announcing large capacities, but nobody has seen so far, you know, they haven't seen deliveries, so we don't know what are the challenges. These are the areas where, you know, we are, third is, of course, brand. I mean, there'll be at least 40, 50 new guys who are coming up with electric scooters. Not all of them are as formidable or, you know, buyers may not be as confident on all of them.
These are the areas where, you know, we are, you know, all the incumbents are very at an advantageous point. Just want to hear your thoughts, you know, because incumbents are also spending a lot of capital as well as effort in the background, which may or may not be visible. Three years down the line, who you think would have, you know, the right to win? How many players could the market have? Or will it be a, you know, a very dispersed and fragmented market with, you know, everybody there? Just wanted to hear your thoughts on, you know, how you look at it. You may have studied some other geographies where, you know, EVs have already penetrated. What are your thoughts on this?
Right. Lots of questions in one question, Rajesh, but let me attempt. First of all, look, as far as EV is concerned, in no country in the world it has reached the maturity stage, and therefore, there are no inferences that can be drawn from that. Having said that, any industry that you look at, right, which goes through a lot of entry of new players because of the attractiveness of the segment or ease of entry or whatever is seen on the valuation side, eventually has to go through consolidation. We've seen it industry after industry, and that's the truth globally. Yes, next three to five years, you are absolutely right. Whether it's 20 players, 30 players, 40 players, 50 players, we don't know, but there'll be many players. Yeah, there are already many. There may be more.
Eventually after that, steam has to run out and consolidation has to happen. Now, who will win? If you ask me, I'll say we will win. If you ask anybody else, they'll also say they will win. Let me also talk about maybe the factors that will determine who will win. It's the understanding of the customer because the EV customer, fortunately or unfortunately, whichever way you look at it, is also part of the planet Earth, and that's what I keep saying, that it's not coming from some other planet. I think it's the understanding of the customer, whoever has the most, that is one very important. Focus on giving customer what they need and maybe giving what they may not have even imagined.
Focus on the C, which is the customer, is important. The second which will be important is cost competitiveness. Today, that's not being stressed enough. Today cash burn is fancy. Moving forward, cash burn has to give way to cash earn, and that is where cost competitiveness is extremely important. Players who can establish long-term cost competitiveness, whether it is a BOM cost or the CapEx cost or cost of operating or distribution, et cetera, et cetera, that will determine winning. Third is, of course, the long-term view of the entire business per se. These are the factors, key factors. There may be many others of course, but there are capabilities that can be acquired. There are investments that can be made. Capital is no longer the barrier.
I think these are the factors that will determine who will win. Of course, we, as Hero MotoCorp, we have said it earlier, we invested in startup five years back when nobody was actually taking probably EV segment seriously. We've gone ahead with tie-up with Gogoro, which is on swapping network, understanding that different customers may require different solution at the front end for charging. Equally, obviously, we will be coming out with our own product as well. We'll continue to work very strongly on this as far as EV segment is concerned. Finally, I also want to you know just amplify what you actually rightly said. That for us, we are very low market share in scooters.
EV segment, EV penetration actually is a sweet spot for us because it helps us because we are very under-indexed in scooters. It gives us a chance to actually build our penetration in that segment. Motorcycle, which is almost 70%, is not going to get electrified in a hurry, and we all know the reasons for that. For the first few years, it will be about scooter, which actually works well from our own portfolio shape and where we are.
Thank you.
Thank you.
The next question is from the line of Raghunandhan NL from Emkay Global. Please go ahead.
Thank you, sir, for the opportunity. Two questions. Firstly, being one of the early movers towards swappable battery technology, you know, in terms of the efforts with Hero Gogoro, is the launch on track for the CY 2022 timeline? Any details you can share on JV investments?
Hi. At this point in time, I wouldn't be able to share any further versus what we have shared earlier. As we move forward and closer to the time, we'll keep updating you with more and more. The teams are working very fast on actually both the solutions, which is the charging solution as well as the swapping solution.
Understood. Sir, secondly, would you be able to share at what valuation you have invested INR 420 crore in Ather in recent round of funding, or would that announcement happen once the funding round is finished?
Yeah. Your second part actually answers that, so I won't be able to give any valuation at this stage. The round still has to be closed and obviously the company then, Ather, which is raising the capital, will make the appropriate disclosure as may be required.
One clarification. On the replacement share, which has now fallen to 20%, in the, you know, earlier years, say FY 2018, FY 2019, was the replacement share closer to 45%-50%? To Naveen, sir.
No. Now it is currently, as I said, around 40%, so you might look at maybe ±2%. I think it was as high as nearing 30% at one point of time.
Got it, sir. Thank you. Thank you very much.
Thank you. The next question is from the line of Kapil Singh from Nomura. Please go ahead.
Hi. Good afternoon, sir. A very interesting point you made on the scooter business. You know, I had a similar question. Let me just also try and understand. From a swapping perspective, do you think swapping would be a mainstream product or it would work in certain segments like delivery? What are your thoughts? Because, you know, it requires slightly more investment on a system basis, right? Because you need to invest in, let's say 1.5 or whatever that number is, number of batteries. What are your thoughts around that? Are you also focused on increasing the scooter market share? Because, you know, it's been struggling a bit in last few months. Just some thoughts around that.
Let me talk about the swapping first, Kapil. Kapil, we'll have to see how the customers evolve. Yeah. Obviously, the B2B segment, which is the delivery business and all that, is clearly a commercial segment, is obviously amenable to swapping. As far as the personal vehicle segment is concerned, Taiwan has shown that even there, segments of customers actually prefer that because they can't afford to wait for an hour at the charging station and in the queue, and therefore this two minute, three minute swapping works. Now, how it evolves in India, how it evolves in different geographies, honestly, we will have to put it in and then see.
Because this is a new animal, and it can behave differently in different geographies, in different classes of customers, based on their job profile or business profile. All of that we will be able to know only once the product is out as to what share it will occupy vis-a-vis the normal charging. As far as the ICE scooter is concerned, let me hand it over to Naveen to address that.
I see that, you know, the question got preceded with the scooters and EV, and maybe a huge action that he was doing on EV is actually causing that to come subsequently. Just to give you a flavor on scooters, while we know the EV is gonna grow, but then the ICE would still hold the significant share in the scooter segment for some time to come. There's a lot of actions going on the product side, on the geographies, right, which are being put in place. Pleasure, if you look at, there is a lot of action in terms of premiumization of the product. We launched XTEC. Within two months, the contribution of XTEC has gone more than 20%.
I think Pleasure is the only scooter in 110 category which has gained market share on a YTV level. The change that has happened in this industry, which is kind of something which has happened for the last three years, is that 125 cc segment in the scooter segment is actually growing very rapidly. We are coming up with a very strong product value prop with Destini 125 XTEC in 125 cc, and that's going to be, you know, playing in the core value of that segment. So efforts are on. You know, Pleasure, if it was a limited geography product, it's going to go getting into the pan-India basis.
We are quite positive that with Pleasure there, Destini 125 XTEC coming in, Maestro Edge 125 playing, and we have subsequent plans in terms of interesting product for the next year to come to gain market share to our desired levels.
Okay. Thank you for that. The second question is, you know, sir, you mentioned that one of the important metrics for success in EVs will also be cost leadership. Now, two important elements there are the, you know, battery cost as well as the distribution cost. Some of the players have taken this approach not only in India, but I mean, globally also we have seen where they are into the direct distribution model. Also, you know, some players are, you know, investing in battery. To address those, how are you thinking about these two elements?
Right. As we said, and you're absolutely right, cost leadership will define the long-term winners, and that's extremely important. It's not just battery and distribution. Actually, there are all aspects of the cost lever which is there. Let me talk, for instance, swapping, which you just touched upon. In swapping and you talked about the 1.5 factor, et cetera. Now this retail to wholesale ratio, which is what it is called, actually that gets improved on the knowledge of your peak time, on replenishment. There's a lot of knowledge that happens on how do you improve that. Therefore, the density coverage that you want to have, at what distances you want to have the stations, which places.
Now, which is where, again, if you have an existing knowledge, it helps, and which is where our partnership with Gogoro, because Gogoro has got four, five, six years of that experience in improving the retail to wholesale ratio in Taiwan. All of that comes handy, and therefore, that actually can benefit in terms of the cost leadership very, very clearly vis-a-vis a new player in swapping who would not have the existing knowledge of that. The knowledge becomes an important part and parcel of how you achieve cost leadership, apart from the physicality of what you do as a business model on battery and distribution.
On battery, of course, there are people who have tied up, there are people who are sourcing, but our view is that given there are so many players going to come and set up manufacturing, this will be a place where globally or locally, given the PLI or advanced cell chemistry, there will be multiple players coming with big CapExes on that. Therefore, the optionality of sourcing from the best source on quality and cost is probably a better way forward as we see it now. Of course, one keeps evaluating these, but this is upfront, this is on distribution. Honestly, you know, the direct to customer is potentially more because these startups do not have the existing distribution channel. Therefore, setting that up would require a long time and huge investments.
Obviously for that, therefore the direct to customer becomes the obvious model to go in fast. Therefore, eventually if you look at it, I mean the cost leadership in a distributed model, which is with network, will always be cheaper than direct distribution or direct to customer, given the number of customers that you're servicing and the sheer physicality of the equipment that you are talking about. Underlying economics of actually direct to customer will always be costlier inherently compared to a distributed network. I think these things will evolve. One will have to see with scale how it pans out. Too early to take a call on that.
Focus on cost leadership is extremely important, like you said, from a long-term, winning point of view.
Thank you very much for the detailed answer.
Thank you. The next question is from the line of Chirag Shah from Edelweiss. Please go ahead.
Yeah, thanks for the opportunity. Firstly, some housekeeping questions, supply. Spare parts revenue, can you indicate what was the number for the quarter?
Sorry, I didn't get the question. Can you repeat it again?
Sir, spare parts revenue.
Spare parts revenue for the quarter was INR 1,186 crore, as I said, which is 15% growth year-on-year basis. Last year quarter three was INR 1,033 crore. If you're interested in just preceding quarter, which was the quarter two, was INR 1,141 crore. We've been consistently clocking more than INR 1,000 crore every quarter. As we said, there are big plans to actually take it forward. Naveen, why don't you spend a couple of minutes talking about our PAM business and our plans?
Sure, Niranjan. I think you've been helping me there. I think this is something that we've discussed in the last earnings calls also. The focus, if I put it broadly, is how do we enhance the non-product revenue bucket, spare parts being the major contributor to that space. Lot of work in terms of the core spare parts that we sell in dealerships and across. There's a lot of work at the dealerships in terms of, you know, growing. Focus is not just about growing revenue of spare part, but also about dealership profitability that can manage from the workshop, and also aftermarket with the deep distribution approach that we have taken.
We're also looking at what the adjacent revenue streams are which are available in non-product revenue when we're talking about, and how do we work on that. We worked on oil last year, and we've seen significant growth in the oil revenues and oil business. Also, it helps us continue to remain in touch with our consumers who are going aftermarket with the brand. Hence, I mean, that's one line. There is organic way of going deeper and then looking at other revenue streams and lines.
Sir, any more products? How should one look at the product that you're looking to use in the replacement market or after-sales market?
All right.
What are the options available for you or on which you are looking to expand over two, three years?
All right, I'll give you an example. As I said, you know, if I go back four years, we were 99% spare parts. We started working on accessories, then we introduced merchandise, which is still small baby, then oil business, and you've got batteries, tires. There are lots of lines for the consumers, which consumers normally get replaced in aftermarket. We have very strong connection with consumers. I think those are the revenue lines which are available. Also within the core spare parts, if I look at, you know, like you have product models, you also have product lines which may be brake lines or maybe, you know, cables, ABS parts. There are multiple lines, and we continue to monitor what our market share of these components in different geographies and in the overall level.
There is, when you bring about your approach, we've got 120,000 technicians, which are independent technicians which are connected with us. Month-on-month there are 60,000 technicians who interact and, you know, deal with us. We've seen our revenue through these technicians going three times in last five years. I mean, so it's +INR 100 crore basically. So that's the number which is so those are our growth levers that we use for a continual growth that you're seeing over a period of time and quarter-on-quarter we see that positive impact.
Very helpful. Just two more clarifications. In the inventory level, you mentioned seven to eight weeks. Did I hear it right or?
Yeah.
Okay.
That's from the forward-looking perspective in terms of the way we look at how the retail forecast that we have for the month of February and March.
This is more to do with delay in the festive or marriage season, and that's why the inventory number. Generally at this time inventory is slightly lower, right? It is because of, largely because of that?
Yeah, you are absolutely right. It's largely because of that. As industry-wide, we have seen that the festive was not as good as what one expected, and therefore that's the carryover. Otherwise, you are right, six weeks is the top up that one has as the inventory levels.
Sir, last is pre-COVID, what was the finance penetration? You mentioned 50% for the quarter, so have you crossed that number? It used to be lower, if I recollect.
Yeah, yeah. I don't think it was more than 40%-45%. Naveen?
Yeah, yeah. There's a significant shift in the retail finance penetration that we've seen in this year, and this is continuing, as I said, to now.
It's a combination of the two things. One, of course, like we've been mentioning a lot of work that we've been doing in terms of financing penetration. You see quarter after quarter, we've been talking about that. Our thrust on that, we see that under-penetrated. Second, of course, is as the COVID has impacted people they also then go, try to go for more financing solution because obviously like someone asked that how to counter inflation. Now, one of the ways to counter inflation is actually financing penetration, and therefore people themselves go for financing solutions. I think combination of both the factors have led to the financing penetration increasing.
Yeah. I think the industry, both OEMs, as I said, and the financiers have been innovative in terms of understanding the consumer needs.
This is the operator. We have lost the connection for the management line. Please hold while we reconnect them. Ladies and gentlemen, we have the management line connected again. Please go ahead.
Yeah. We just explained that there's a combination of the two factors that has led to the financing penetration. I'm sorry for the call drop. Beyond that point, as you can see on technology, you don't have control and technology becomes supreme over human beings. All right.
Yeah. Last clarification, sir. Sequentially, there is a significant improvement in gross profit margin, 130-odd basis points. Now, I presume this is more driven by mix, rather than commodity benefits coming in. Would we be right at this point?
I think it's a combination of, I would say mix as well as, when you see, the savings programs that we have been running. I wouldn't say commodity benefits. I think commodity benefits are yet to flow through, because while they're stabilized, it's not that they have dropped, to give that benefit. Yeah, it's a combination of mix and the savings that we're talking about.
Okay. Thank you very much, and all the best.
Thank you.
Thank you.
The next question is from the line of Nishit Jalan from Axis Capital. Please go ahead.
Hi, sir. I have just one question left. What would be the share of two-wheelers which are sold in schools, colleges, and all? In general, you may not have exact numbers. Any rough number would be helpful in a normal year, not the last two, three years. Secondly, would it be too different between motorcycles and scooters?
I mean, we do track in terms of the end usage of our products. We may not have a breakup at a scooter and a motorcycle level. I mean, I can share the data that we have. It's close to 8%-10% is what is getting sold to the students.
Okay, sir. Thank you so much.
All right. Thank you.
Thank you. In the interest of time, this was the last question. I would now like to hand the conference over to management for closing comments.
Thank you everyone for calling in. It's a pleasure. Please keep safe, and we look forward to speaking to all of you after in quarter four as well. Have a good day.
Thank you.
Thank you. Thank you for attending the call. Thank you.
Thank you very much.
On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.