Good morning, ladies and gentlemen, and welcome to Hero MotoCorp Limited Q1 FY 2023 earnings conference call hosted by Equirus Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ashutosh Tiwari from Equirus Securities. Thank you, and over to you, sir.
Thanks, Michelle. Hi, good morning, everyone. On behalf of Equirus Securities, I welcome you all on the Q1 FY23 earnings call of Hero MotoCorp. I would like to thank the management for giving us the opportunity to host this call. Without further ado, I would like to hand over the call to Mr. Umang Khurana, who is the head of investor relations, to introduce management participant. Over to you, Umang.
Thanks, Ashutosh. Thanks for hosting us. It's a pleasure to connect with all of you. Thank you everyone for sharing your weekend with us. As usual, we'll keep the call for an hour. Today, we have on the call with us, the CFO, Niranjan Gupta, and also the Chief Growth Officer, Ranjivjit Singh, and Swadesh Srivastava, who is the Head of our Emerging Mobility Business Unit. Thank you everyone again for joining us. We'll begin with Niranjan's comments, the CFO's comments, and then start to take questions. Over to you, Niranjan.
Thanks, Umang. Welcome to our earnings call. Thanks for taking out time on Saturday. Our quarter one results, as published yesterday, show significant improvement sequentially on top line, tracking the positive momentum in the industry, coupled with gain in market share. We've been able to hold our EBITDA margins versus quarter four to the preceding quarter and improving the same on year-on-year basis by around 180 basis points. This shows our focus on both growth as well as profitability as what we have been speaking many times. Parts business, accessories, merchandise continues to do very well. We delivered INR 1,061 crores in the quarter at 12.6% of revenue.
While focusing on building a robust portfolio in premium segment, we've also been doing premiumization of our existing models, through XTEC variants, as you have seen through Splendor XTEC, Glamour XTEC, Passion XTEC and Destini XTEC. The demand for these variants is outstripping supplies as of now. As we ramp this up, it should help us in improving market share along with, of course, pricing realization and margins as well. Let me now talk a bit about macro and microeconomic factors and our outlook on industry. The global economy, as we all know, is facing headwinds of inflation and compulsion of central banks to raise interest rates to tame this, which obviously has an impact on growth. We do expect, however, the rate increase cycle to stabilize in a quarter or so.
Given all this context, while India is not delinked from global economy, however, it's relatively much better placed, whether we look at the currency, whether we look at the interest rates, whether we look at multiple other macro factors like the GST collection or the PMI index or the recently released IIP index. They're all indicators in positive direction. Coupled with, of course, in the short term, as you can see, the normal monsoon as we are talking about and crop cycle. Effectively, you know, when you combine all of these and also combine the consumer base of India with a low per capita consumption, it means that the underlying medium-term growth prospects are better than most of the countries.
The recent geopolitical issues, while they do pose headwinds on one hand, but they also could bring inflows into the country because there are very few countries which are investment destination, like India. There are enough positives for us to rely on. We remain positive about the prospects of the economy in general and auto industry in particular. With that, let me now hand it back for the Q&A.
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 their touchtone phone. 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles.
Michelle, go on.
Okay, sir. The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.
Hi. Thanks for the opportunity. First question is on the demand environment. Can you touch upon how demand is shaping up, I mean, especially in context of what we see in terms of the ground level retail trend and then we see in light of our wholesale trend. July was a particularly weak month. Are we still undergoing inventory destocking or what it is?
Right, Jinesh. As far as demand environment is concerned, you know, as we spoke about the entire industry along with us, and it's also good to look at it sequentially, given all the, you know, base effects of pandemic, et cetera, et cetera. The quarter one has been better than quarter four, as you have seen, the industry as well as us, in terms of the growth. As far as quarter two is concerned, the entire industry, as you know, now builds stock, moving forward.
Yeah, some of the stock buildups you could say is slower for us, like, has been in July than expected, because of some of the variants of the chip impacted supply issues. We are confident that over August, September, we will build for our festive season. Underlying, as far as demand is concerned, it is now through the onset of festive. Everybody is looking forward to the festive season to get an indicator. As of now, I would say that the momentum is right and in the right direction with all the consumption spending which is happening. Of course, a month here and there could always, you know, swing when you get more purchases in a quarter, and therefore a month becomes a little soft.
Not really concerned about that, Jinesh.
Sure. The chip shortage is primarily for the XTEC variant side and the premium.
Absolutely. As you know, we launched, you know, we now have four XTEC variants, you know, Glamour, Passion, Splendor and Destini as well. The good thing, by the way, is that while on one side we have the inflation story across the country and globally, but on the other side, what we are seeing is the moment you launch a premium variant and all these XTEC variants are at 7%-10% higher price, the demand for these variants is far more than what we anticipated, as a ratio. Clearly it means that the consumers are willing to spend, they need to have a reason to spend.
Got it. Second question pertains to the RM cost inflation seen in this quarter. On reported basis, there is a substantial QOQ impact, but I guess there is some inventory-related change impact which is there. Anyway, just for that, there was about 150 basis point QOQ increase in RM cost. Can you talk about what the actual commodity cost inflation, which we saw in this quarter, and the price increases taken in 1Q and 2Q so far? Thanks.
Yeah Jinesh , I'll talk about the cost inflation first, and you're right to pick that up. As you know, given our pipeline of supplies, the impact of any cost takes a quarter to manifest. Therefore, you know, if you look at it across the commodities at quarter four, you know, in terms of the market index, that saw a spike. Then thereafter, of course, and now we are seeing of late a bit of softening in aluminum, in steel. Now all of these will get reflected in quarters as we move forward.
Therefore, we do feel that the overall balance of the commodity basket seems to have peaked off, and therefore moving forward, stabilization or maybe even coming down, depending on when, you know, all the rate increase cycles have an impact, should be auguring well. As far as price increase is concerned, you know, we took from first April around INR 850 ex-showroom, and first July we have taken around INR 1,200 ex-showroom, which will of course get reflected in the Q2 and the coming quarters as you see. Of course, in the past last few quarters, maybe six, seven quarters, and you've been talking and we've also been saying, is that the price increases have lagged the cost inflation.
Rightly so, because you want to balance off both growth and profitability. Moving forward, as the commodity pool stabilizes, then we'll have options and the opportunity to move the prices ahead of the cost, and therefore as an industry, an opportunity to actually recover some of the lost margins.
Got it. Just to clarify, the RM cost, under recovery, post-July price increase will be broadly taken care given the current commodity prices or will still be under recovery?
There's still some under recovery which needs to be recovered. As you know, our margins are at 11.2%. Therefore, you know, at some stage, this needs to come back to around 14% at least. Therefore, there would be some recoveries to be made for sure. Yeah.
Got it. Thanks. I'll pull back in queue.
Thank you. A request to all the participants to limit your questions to two per participant. Should you have a follow-up question, please rejoin the queue. Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi, team. Good morning, and thank you for taking my question. My first question was around your employee headcount. Over the last nine years at BS6, production or volume has declined by about 20%, but our employee headcount has increased by close to 50%. Within that, a large part of it is temporary employees. More than 70% of our employees will be temporary employees. I wanted to understand why are we keeping such high number of employees, especially temporary employees?
A couple of things. I think number one is, you know, we in an industry, we don't move up or down the employee headcount with the volume. We've seen when you said, you know, the production or the volumes have come down over a number of years, a large part of that is manifestation of the pandemic. Yeah. If you look aside before pandemic, right, and leave aside the BS-VI, we were doing around 8 million of volumes, right? Pretty much there. You don't actually take up or take down the employees based on that. As we all know, pandemic was not just an economic crisis, more than that it was a humanitarian crisis.
We at Hero, we do believe in taking care of the employees and therefore having them with us. We did not fire anyone. We in fact ensured that even contractors and casuals, they also actually get their rightful pay. I think that the solution is to increase the top line, which is what we are focused on rather than adjusting the employee. We've been of course judicious as far as our employee headcounts are concerned. There are certain places that we are scaling it up, like growth priorities with global business, whether it is the EV space. There are spaces where the headcounts will go up and we will be judicious in all that.
I think the solution to all of this to get the right ratios is to increase the top line and which is what we'll be focusing on. Top line as well as the mix, and which is where we are focusing on building a premium portfolio and premiumization of our variants as well.
Yeah. I think having a high temporary employee base should ideally would have given us the flexibility to maneuver the employee head count based on how the production and demand environment has been. That's really something which even before COVID impacted something which was visible, that we were running higher headcount despite the volume coming down around BS-IV, BS-VI transitions. At least I'll follow up on that later. My second-
Yeah, sure. Sure, Kumar.
Yes. This was on the Hero FinCorp business. Last fiscal year, Hero FinCorp credit cost was about 7% is what I estimate, calculate based on the numbers which you have disclosed. We have gone for another round of funding in the business, this quarter. That 7% credit cost for a business which has a yield of about 14%-15% doesn't look sustainable. While going for an investment in this round, have you set any target to lower these high credit costs or we are okay with these numbers?
There is a target for the funding round. There is a target for growth at the AUM level. As we all know, the finance penetration, the scope for growth of NBFCs is huge. As growth comes back, Hero FinCorp will have its opportunity to grow the asset base. That's where the amount will get invested in. As far as credit cost is concerned, I wouldn't say we are comfortable with that credit cost. I think Hero FinCorp team is working on bringing that down from let's say 7%-7.5% to probably 5%-5.5%.
That's the endeavor to bring down over the next four to six quarters, so that the ROA and the ROEs improve, moving forward over the next six quarters.
Thanks a lot for taking my question.
Thank you.
You're welcome.
The next question is from the line of Kapil Singh from Nomura Group. Please go ahead.
Good morning. My question is more on the sub-segments. If you could talk about the growth that we are expecting for scooters and exports because these segments have also, you know, seen some kind of decline for last few months. Similarly for the retail sales also, they have, you know, declined in last one or two months. Are there any factors which are impeding the recovery? Also EV, from which month should we expect that the sales will start?
Right, . Kapil, good morning. I see that the restriction of two questions means that in one question you've combined four, but we will answer each of these. Let me take up the exports first and then thereafter I'll pass on to Ranjivjit Singh to answer on the scooter and the retail sales. I'll pass on to Swadesh Srivastava for EV. As far as exports is concerned, we all know that a lot many countries globally are facing the impact of the inflation, currency, et cetera. Mostly because our sales are in emerging markets and these markets are facing, whether it's Bangladesh, Nepal, Sri Lanka, Nigeria, Colombia, I mean, all of those are facing now.
We expect that to be short term, so therefore, 2W exports is having a softer quarter. But we do expect in the second half to move up. I think more importantly for us is to continue building scale, building the right product and get to the right percentage of revenue in our portfolio from the global business. Let me at this stage hand it over to Ranjivjit Singh on to answer on the scooter market share and what we are doing to address that and also on the retail sales general trend. Ranjivjit Singh, if you are there, can you just address this?
Yes, sure. My pleasure to do so. Hi everyone, Ranjivjit Singh here. The scooters business was actually very interesting for us in quarter one. We launched Destini 125 XTEC. XTEC is really extra technology and with the LED headlamps and with Bluetooth connectivity, it's really become a hit favorite amongst people and consumers are loving it. There's a new campaign that's out there. We're getting a lot of good reviews. The product is, you know, doing extremely well in terms of all its variants. So the 125 cc segment, we really serve very well in the market and continues to become a even stronger play for us. Going forward, we're going to see some more action in the 110 cc as well.
Some groundbreaking innovation that I'm very personally excited about. We'll be bringing in some new stuff in this quarter in time for the festival season. I would say, you know, July is a time of transition. It's a time for rejuvenation of the, you know, portfolio. As we see July, August, September over the quarter, the whole portfolio is gonna get far more consolidated, and it will be. The results should be, you know, something that we will be happy to share in our next discussion.
Thanks, Ranjivjit. Let me hand it over to Swadesh, if you can just update on our EV.
Hello Kapil, good morning. We are actually quite excited to be getting very close to our launch. We had announced some time back that we'll be launching our EV product and the overall ecosystem in the festive season, which is gonna happen sometime soon. On that date, we'll also be going to be announcing the dates for dispatches across the three launch cities which we have in mind. It's just a matter of few weeks.
Thank you team for the very detailed answer. Thanks.
Thank you. The next question is from the line of Pramod Kumar from UBS Group. Please go ahead.
Yeah. Thanks a lot for the opportunity. My first question is on the margin front, Niranjan, as in with commodity prices easing now and the expected volume recovery, what's the way you're looking at it, is it fair to assume that we should see the margin levels improving meaningfully from the current levels? Because the recent quarter margin is definitely not something Hero historically has delivered. I would see that as a one-off. How should one look at the margin trajectory for the remainder of the fiscal and also for next fiscal?
Right, Pramod. Good morning. Absolutely, Pramod, as I said, mentioned earlier as well, as the positive impact of the commodity basket cooling off happens, it ensures that moving forward we have more opportunities for pricing to go ahead of the cost, rather than what it has been for the last four to six quarters. Second thing is as the volume picks up and market share picks up, then obviously we should have the operating leverage. I think a combination of both these factors should. There's no reason to actually doubt that the margin should improve or should not improve. I think the combination of both these factors should help our margins to improve.
How fast and how rapid we are able to accelerate or should we deploy part of that back into growth, et cetera, et cetera, that's something that we continue to take calls from quarter to quarter. Yeah, trajectory-wise, I think, all factors augur well for improvement of margin from here on.
Thanks. Thanks, Niranjan, for that. The second question is on the demand side, because we've had a great marriage season at the industry level, especially for you.
Yeah.
However, demand has cooled off. There are seasonal cycles wherein the cool off is tougher. Now the worry is that majority of the UP, Bihar and uphill chunk of Maharashtra are seeing deficient to very large deficient rainfall, and we are probably approaching the end of the monsoon in the next couple of weeks. Could there be any implication on the festive season demand, because these are pretty large markets, pretty large commuter markets especially. How are you as a company tackling that? Especially to Ranjivjit, in terms of how do you look at the inventory in this flush because those are significant markets for you and significant season markets for the entire industry.
Will there be somewhat of a moderation on your inventory approach going through the season, because rainfall does affect sentiment? We have seen some of it this year in tractors already. If you can just help us understand that part.
Let me start and I'll hand it over to Ranjiv. Ranjiv, just give me probably a couple of minutes. I'll just start off. First, Pramod, you know, as you yourself rightly said, is that marriage season was a good season. Now, what that indicates is that the moment you have an event or a season or you know a general reason to actually buy, then people are coming and buying. Of course, the current cool off is a seasonal cool off that always happens. Moving forward, we have no reasons to believe for festive to be not to be strong. Yes, there could be. There is some deficient rainfall.
Honestly speaking, the income line in rural India, you know, is augmented by the crop cycle, the crop productions if you look at it, the income, even the pattern of the consumption spending that's happening, the indicators are positive. Even if you look at the consumer confidence, I mean, that's the highest post-pandemic right now, as you know. All the indicators are, you know, giving us strong reasons to believe that there's no reason to prune down on our plans of festive or inventory buildup. Ranjiv, can you just add on this? Over to you.
Yeah. In fact, I was going to say that, you know, this time the Q1 was much anticipated by the industry and more so by the consumers of Hero who were. There was pent-up demand. The marriage dates were fabulous in terms of April and May concentration. That really got us to a great start. Obviously, as the marriage dates start whittling down, the demand changes. But that's not new. We are all experiencing this industry. We know the consumer buying cycle. July is when the onset of the monsoons happen. There will be a change in that. We have to prepare for the festive season. There are some areas which have deficient rainfall. There are some which have a lot more rainfall than expected.
It's really a balance. I think, you know, the dealers understand that from anticipation of the festival season. It's very clear that, you know, it's looking like a double-digit growth for us.
There is unemployment reduction in rural area. We think that rural will pick up even better for this festival season. Urban has already, you know, picked up much better as we saw in Q1. That will sustain. There is a change in the buying season, of course, between Q1 and Q2. There's a preparation for that. As far as the inventory is concerned, the inventory typically is something that we, like Ranjan already mentioned, that our retailers were ahead of our dispatches, and therefore there's an opportunity for us to make sure that there is enough inventory for the festival season, because at that time, you know, we just have to have the right mix, the right models, the right numbers so that we can satisfy the consumer demand.
Absolutely, you know, we're good on the festival season.
Just a clarification here. What would be our inventory level at this point of time or what is the target? Just another thing is like if you can just help us understand how big is UP, Bihar and West Bengal for you as a company in terms of your total exposure. That would be great. Thank you.
Yeah. Our inventory levels are typically between six to eight weeks kind of range, depending on the month. That's what, you know, in the end of June it came down to about six to seven. We would be building it up as we go along. 20% is about the concentration that we get of the bigger markets. So that's, you know, these are the bigger markets and they will continue to be so.
Thanks a lot,[uncertain] . Wish you all the best. Thank you.
Thank you.
Thanks, Niranjan.
The next question is from the line of Pramod Amthe from Incred Capital. Please go ahead.
Yeah, hi. Thanks for taking the question. This is with regard to the regulatory environment. Wanted to know your inputs on the real driving emission norms, especially the RDE two which is expected to come in March. What is the technical changes required? One, what is the cost implication and how are you beefing up the supply chain? Second, added to the same question is even the government is trying to prepone the RDE three to the RDE two deadline of March 2023. In that case, what is the type of further cost escalation required and how are you preparing for the same and which basket you feel that it will advance or you feel will remain back again?
I think you are referring to what we call as OBD2, which is a regulatory change that we are saying. It doesn't change the emission by the way, it's just an emission tracking.
It's an onboard diagnostic. The emission is the BS6 which is implemented from first April 2020, which actually reduces ICE vehicle emissions on many of the counts by almost 90%. This is onboard diagnostic. This is not something which changes actual emission. There's already a plan there. Our products are ready for that. The cost impacts are not significant. As an industry also we'll be transitioning. This is a smooth transition. This is like any other smaller regulatory change that happens.
Do you feel RDE 3 will or the OBD 3 will come in and will that distort as compared to the initial plan of separating them both together?
No, it won't.
Thank you very much.
Thank you. The next question is from the line of Chirag Shah from Edelweiss Securities. Please go ahead.
Yeah. Thanks for the opportunity. My first question is on Eicher capital infusion that has happened. If you can help us understand what is the incremental stake we took in this round of capital infusion that we did, and what is our effective stake now in Eicher?
Actually, our effective stake in, you know, in Eicher, accounting for the full dilution of any of the ESOPs, MSOPs or the GOS pool, yeah, the net is around 35%.
35%. It has gone down from 38% to 35%, right?
38% was before the accounting for. You know, the way you report is that you don't account for the future potential dilution, right? That has not gone down. It stayed broadly the same.
Okay.
If you account for the net dilution, then of course it is 35%, right? On a gross basis.
Like to
If you look at current capital, it is more than 38%.
Okay. Like to like it is constant.
Yeah, yeah, slightly up.
Slightly up. Sir, okay, that is one thing. Second question was just a follow-up on the demand side. I have a slightly different and a broader question that last two, three years we have seen a very significant price hike anywhere between 25%-35%, depending upon model. Do you think consumers have absorbed the price hike? Are their income levels in place to absorb the price hikes or there is still some time for them to completely absorb it given the way their income levels have played out over last 12 months? If you can shed some light, what are your reading at ground level on this part? Are they still hesitant to come and buy the product in general at industry level and motorcycle too?
Right. Chirag Shah, let me start and then I'll ask Ranjivjit Singh to add on this. One is you're right. Obviously, the auto industry has seen significant increase, and all are on account of cost. Not on account of margin expansions of the industry. The industry has been very sensible in trying to absorb some of the margin hits so that the customers, the push-on to the customers is minimized as much as possible. Now, in terms of the absorption, you know, there are. It's not a one simple story. Now, if you see what's happening to the premium variants.
When we are launching Splendor+ XTEC, when we are launching Passion XTEC or Glamour XTEC or any of these things, we all price it 7%-10% more than the base model, base variant or the base model which is there in that same segment to the same set of buyers. We can see far increasing demand of those variants, which are premium variants, than what we had anticipated. Really speaking, it's not about that a consumer in general is hesitating to buy more expensive products. It's more about that, how do you make the consumer buy those products? Yeah, the promise of the product, and the consumers are willing to spend. The second thing is, of course, financing is coming to help. As you know, the finance penetration has increased over the last three years, the same period that you talked about.
It used to be around 35%, if I remember right, three years back, and 35%-40%. It's now well above 50% now. That helps because it's spreading off the EMIs and helping it out. Having said that, obviously, there will be certain set of consumers which do feel the pinch of that, and therefore they become hesitant, but it's not all classes in general. Like Ranjit talked about, even with the employment in rural and other segments and bottom of the pyramid increasing, and with hospitality industry also coming back in full swing, which actually has a large scale employment in the semi-urban areas as well. That should augur well from the income perspective as well, even for that strata of the segment. Now let me hand it over to Ranjit to amplify. Ranjit, over to you.
Yeah. Thanks, Niranjan. Pricing obviously, you know, for our segment, is something now it's been over time that our consumers, they know that pricing is going. It's an inflationary market. Of course, it's understood. The financing that we're trying to do is really to help even the bottom of the pyramid to participate in personal mobility. There are some really interesting things which are being done in terms of direct cash collection. For those who don't have bank accounts or not very familiar with banking, they have a more convenient way of paying their installments on a weekly basis or more frequent than a monthly basis also. As they earn, they can pay that off.
That's created a huge new set of financial inclusion into you know, the consuming class. I think Hero's leading the way for that. That's at the bottom of the pyramid. The phenomenon of premiumization is also happening because the other corollary to this is people are looking for more value. When they're making that, you know, making the purchase decision, they want to see a better product, so they're going in for the XTEC version or the higher versions. In fact, our premium versions are often 50%-70% of the portfolio mix, and that's the trend that's coming in through. It's a very interesting dynamic that, you know, you have financial inclusion at one end and premiumization at the other.
This is what the economy is currently, I guess, making people think about their purchase decisions.
Okay. Thank you very much. All the best.
Thank you.
Thanks, Chirag.
The next question is from the line of Joseph George from IIFL Securities Limited. Please go ahead.
Hi. Thank you for the opportunity. Just one question. When we look at the commentaries coming in from different OEMs in relation to input cost pressures in 2Q, we have had a mixed bag. You know, some companies have said that there is further QOQ input cost pressure in 2Q compared to 1Q, and there are some companies that said that the 2Q will see easing of input cost pressure. The way you see it, which side are you on?
I won't pick a side. What happens, Joseph, is different companies, different OEMs may actually have a different way of absorbing the cost. In some cases, you take, after the quarter, in some cases, you may have arrangements with your suppliers where you do in quarter. Which is why you will see that disparity of, few months here and there. Because underlying the impact and the trend, is not very different, from an OEM to OEM. It's a question of a couple of months here and there that you could have the impact. If you look at the commodity basket itself, the commodity basket, aluminum and steel have softened. Now, the softening of that impact is likely to come in 2Q.
Maybe some part of it may come in 3Q, depending on where it and what your mechanism for the settlement is. Crude continues to stay high. Therefore that's something that in a trend, you can see a bit of softening, but softening from high levels. That can be a bit of a joker in the pack, and we'll have to just see how it actually pans out. That's also not because of any demand supply issues. As you know, the crude is behaving more from a geopolitical issue, where there are artificial supply constraints based on geopolitical compulsions. Then the last thing in this pack is the currency.
The currency, you know. We saw Fed hikes, and the Fed hikes also led to currency depreciation in most of the emerging markets. The rupee has behaved much better relatively if you look at the currency. The central bank and the government, I think they are doing a great job in actually managing inflation rates and currency in combination. If the currency stabilizes around the current level where it is, then there's no reason why the commodity basket softening impact should come quicker than expected. I think what we'll have to just pan out, I mean, honestly, a quarter here or a quarter there does not make a big difference in the overall trend line of the economy. As we said, I mean, life is uncertain, right? Very dynamic. We'll have to continue to navigate.
Nobody has been able to forecast any of the commodities accurately, whether in the past, current or maybe in the future, and I've said so many times. But this is what the current indicators are. As a company, as OEMs, as industry, as economy, as country, we'll have to continue navigating whatever uncertainty or the surprises that come along our way.
Sure. Just, you know, continuing with that. We are already mid-2Q, right? We are mid-August now. I'm guessing you have a good sense of whether you would see incremental RM pressure in RM and, you know, other overhead pressure in 2Q compared to 1Q, or we have seen the worst in 1Q, and you have a good sense, right?
Joseph, I'll stay away from a very specific Q2 or a mid-Q2 guidance. I think overall, I believe that you would have got a sense from what we are saying. Let's wait and watch how it moves forward.
All right. Okay. Thank you.
All right, Joseph.
The next question is from the line of Rishi Jhunjhunwala from Kotak Securities. Please go ahead.
Hello. Thank you for taking my question. Sir, on the first thing on the replacement demand side. Can you just give us some indication, like what was the replacement mix for the industry, let's say, pre-COVID, and now how it's shaping up over the last few months? Is it improving or, you know, it continues to remain at lower levels?
Ranjit?
Yeah. The replacement demand is something that is coming back. We've seen that in Q1. We are also playing a role as a market leader. We recently launched the Wheels of Trust, which is basically a consumer just needs to you know through a QR code go to the site do a self-evaluation of any brand of two-wheeler that they currently own. They can get an evaluation and they you know that prompts them to exchange their product. Broadly it's in the region of 15%-18% is the replacement demand. It stays in that region depending on the kind of segments that we are also talking about. Not too much of a shift as yet.
If you look at it from a 2017, 2018, 2019 kind of timeframe to now, thanks to the pandemic, and a little bit of cautiousness there. It's in the region of 15%-18% is broadly what we look at. It's very difficult to forecast this kind of a thing on a short-term basis. What we can do is stimulate the market and make it very interesting for them to bring in instead of, you know, going on, prolonging that decision. We encourage people to at least see what else there is in the market and what value they can get for their existing vehicles. We're doing that with the Wheels of Trust.
We also have some new stores which are called Hero Sure, which are into the refurbished secondhand vehicles. We are bringing them, you know, to those stores, our consumers to those stores from multi-brands, and I think they're having an excellent experience there.
All right.
The whole message, you know, is don't postpone. This is a good time to buy. I think that that's something that can't go wrong.
What could be this number pre-pandemic, closer to 30%?
No, it wasn't, you know, in that region. I think there were couple of points around 20-odd. But it doesn't fluctuate that much. What we want to do is to take it back to about 20%-24%.
Right. The second question on the spares bit. You know, we have seen a sequential drop in spares revenues. It's just seasonality or are there any other factors that has led to decline?
It is mostly seasonality only. If you look at, you know, overall, quarter four is always a big quarter that happens on the parts, accessories and merchandise. Fundamentally, we continue to be above INR 1,000 crores. Quarter one has delivered INR 1,061 crores at 12.6% of revenue. If you remember a couple of years back, it used to be well around 10% or less than 10% of revenue. I think trajectory is good in terms of moving forward. That's more of seasonal this thing. Moving forward, we do expect our PAM business to register healthy growth in Fiscal Year 2023. Ranjit, would you like to add on our PAM business, what all we are doing to-
Yeah.
Take care of that?
Yes. It's always a pleasure to talk about this business because there are some fundamental and structural changes that we are bringing in and strengthening that. You know, it's a very interesting model of distribution so that the consumers have the parts available wherever they need them. It's a far more distributed model in terms of the number of retailers which have now become 40,000, and that's up from 39,000 that we had in FY 2022. The parts distributors also we've taken up to 315 plus. Overall, you know, selling more to each-
Making sure that we also keep refreshing our portfolio. We've got into the oil business and that's going well. I think we've got pretty good progress coming in from this business. Yeah. Okay. That's broadly what I wanted to say.
Thank you. Thank you so much for taking my questions.
Thank you. The next question is from the line of Arvind Sharma from Citigroup. Please go ahead.
Yeah. Good morning, and thank you for taking my question. Hello, am I audible, sir?
Yeah, go ahead.
Yeah. Good morning, sir. Just one question on the quarter specifically. There's a decline in the average realization quarter-on-quarter. Is it because of the mix or anything that you would want to indicate as a reason for this, sir?
Arvind, that's because of the A, the parts business, which is there. As you saw the parts as a, you know, per two-wheeler, if you divide it that way, then the parts sequentially quarter four to quarter one has come down. The second is our other operating income that has come down. In quarter four, the other operating income was at INR 186 crores, and in quarter one it was INR 109 crores. Part of that is a quarter four/quarter one issue, and part of it is because Neemrana fiscal benefit expired in quarter four FY 2022. That is why it's come down.
Underlying, if you look at excluding these, the two-wheeler ASP that has gone up by around INR 800 per vehicle, from around INR 51,200 to INR 51,900 or around INR 52,000 this quarter. This is on the back of the INR 870 increase that we took in ex-showroom price from April 1, and a bit of a better mix impact resulting in the net. As I said, July 1, we have taken a INR 1,250 ex-showroom price increase, which will get reflected in quarter two.
Got it. Thank you so much. Sir, one thing you've already told about the staff costs, but a little bit more on that. There's a fairly sharp increase in quarter-on-quarter staff costs. Is it the run rate that will sustain throughout the year, or is it a one-off for the first quarter, and then one should expect it to probably go down a bit?
The increase is also on account of the increments, as you know, across the industry. The increments have been higher than previous years, and therefore you see that impact built in into our employee cost. Some bit of it also happens because of the variable pay and the bonuses that gets paid out. As we move forward, some part of it can get moderated, but by and large, it is the increment and some bit of headcount increases that are happening.
All right. Thank you so much for taking the question, sir. That's all from my side. Thanks so much.
Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.
Hi. Just a clarification on the other income. Can you quantify the MTM loss, which resulted in lower other income? Also, what would be the duration of our treasury book now?
Yeah. The other income had two types of MTM impact that we had. One, we carry the FMP, but we actually do mark to market on the FMPs, which are held to maturity. The second is, as you know, we made strategic investment in Gogoro of $15 million few months back. As temporarily the prices have come off on the stock, so we provided for that. Put together, that's around INR 60 crores. 35 on account of the FMP MTM, and 25 on account of the Gogoro MTM. That's what is built in into our other income. As you know, most of the treasuries of banks and corporates, everyone have reported the MTM losses on account of the hardening yields that have happened.
That's the stuff that have happened as far as the other income is concerned. Sorry, was there another question on this?
What was the duration of the book?
We've actually moved to the shorter duration, which is why actually our impact is less pronounced. In fact, you know, our duration is less than one and a half years on our bond size.
Okay. Got it. Thanks.
Thank you. The next question is from the line of Jyoti Singh from Arihant Capital Markets Limited. Please go ahead.
Yeah. Thank you for the opportunity. Sir, my question is on the EV side. As we are seeing more people on the EV front, as everyone rushing to launch EV, why we are delaying it?
Swadesh?
Yeah. Hello, Jyoti. Good morning.
Good morning.
You're right. There are a lot of excitement in the EV world, and we are happy to see that consumers are becoming more aware and more interested in EV. Coming from Hero, which is known to be the reliable high quality product OEM, we are getting ready to launch our best offering in the festive. You know, it is important that we don't rush to the market in a frenzy and make sure that all customer experiences and expectations are met, whether it's from the product or the ecosystem or anything new, which we are doing actually from the connected side. Rest assured, all of this is in place, and we'll be coming out soon in the festive to cater to the customers.
Okay. Thank you, sir.
Thank you. The next question is from the line of Chirag Shah of Edelweiss Securities. Please go ahead.
Yeah. Thanks for the opportunity. Just a follow-up on Ather. Is it possible to indicate what is the value of your investment. Is there a need to do any evaluation of that investment in Ather, like on an annual basis or in some other form?
I won't be able to answer this question, but let me at least. First of all, we account for these investments at book value, at the value at which we invested. That's our accounting policy. Of course, if there's an impairment that we see, then we take that also. That's a conservative accounting principle that we've been following. Now, in terms of what the market value of these investments are, I think, Chirag, you and the fraternity will be in a better position to actually assess that, given that Ather is doing pretty well. They have a large open PO orders to be serviced. Their brand has been receiving excellent traction. They have launched another variant. Their customer feedback is excellent.
I think most of the indicators of the long-term value creation are in the right direction. Of course, I would say that, you know, you and the team are better placed to see what should be the market valuation. From our book point of view, we'll continue to account at the book value.
Sir, at consolidated results, there is a loss on share of associates. Would it be right to presume it largely pertains to Ather or there is a split between Ather and Hero FinCorp?
Yeah, it is entirely Ather, Chirag. In fact, Hero FinCorp for the quarter has turned out a profit of around INR 100 crore. Yeah. We know that last year they had losses, but they have turned around on the profit, and we do expect those profits to keep on increasing. So the loss is entirely Ather. We don't expect any losses from Hero FinCorp even moving forward. The profit should keep on increasing. Ather, as you know, in EV, it is cash burn for some period of time to come, and therefore you continue to see that kind of trajectory there.
INR 100 crore is Hero FinCorp's profit, right? We will account for our share accordingly.
Yes, absolutely right. We've got around 40%, so that's what we'll account. I think we are getting down to what is exact split, but now you can work that out without me telling you, but you're absolutely right.
Thank you. Thank you very much, sir. Thank you very much.
Thank you. The next question is from the line of Ronak Sarda from Systematix Group. Please go ahead.
Yeah, hi. Thanks for the opportunity. Niranjan, a question on the other expenses. If I look at other expenses in the quarter, it is one of the lowest which we have in May, June quarter. Can you help us understand, you know, despite the inflationary concerns, how are we able to, you know, keep this under control?
Ronak, the other expenses, obviously a quarter is not the right way to actually look at it, you know. Of course, we've been exercising all the cost tightening measures when we see a certain inflation going up on materials, on the other things, and we tighten our belts on the other parts of it. I think it's much better to look at on annual basis that look whatever was the annual last year and then you account for certain inflation, certain savings. That is the best way to actually look for in terms of the other expenses trajectory.
Okay. Got it. Second, a clarification on one of the comments you made that one of the plant, I think Neemrana plant has the benefits has concluded there. Did I hear that correctly?
Yes, Ronak. The benefit concluded in quarter four FY22 because it was for a period, and the subsidy period actually ended in quarter four of FY22. Now we have incentives which are there in Gujarat, which is our Halol plant and Chittoor, which is where also we are going to start our EV production as well. Now, as Chittoor and these, you know, the requirement, the local requirement ramp up, so then we will see the fiscal benefits of these two units, especially Chittoor actually going up moving forward. Yeah, for now the Neemrana fiscal benefit has completed its term of the incentive that we had.
Got it. We might see some production realignment now, based on the fiscal incentives that,
Yes, naturally and logically. Absolutely. That would then logically moving forward should also help, you know, while there's one story of Neemrana fiscal benefit going out and obviously there's some realignment that will happen in the manufacturing plants that can also positively actually benefit our logistics cost. Because as incentive goes out and then you actually spread, that doesn't become incentive, doesn't remain a reason for actually moving it to north when as you move to south and west, then you can have some benefit on logistics cost as well.
Okay. Thank you and all the best for the festive season and launch.
Thank you. The next question is from the line of Saurabh. Please go ahead.
Hi, sir. Most of my questions have been answered. Just, if you could shed some light on the Hero FinCorp business, just, some key numbers or gross GNPA and net NPA numbers, that would be great. How is the profitability to be expected going forward?
Hero FinCorp is an associate entity. I will be constrained by what I can share in terms of the numbers. As I already shared, Hero FinCorp, the asset under management is growing. They are looking good in terms of the growth for the next two years. They are well capitalized. Their GNPA ratios I talked about is around 7.5, 7.7%, which they intend to bring it down over the next six to eight quarters. I think that's what I can say. Other than that, I can actually add a color that our financing as a percentage of our retail is above 50%, and Hero FinCorp's share in that is close to around 35-36%. I think that's the color I can provide.
You can of course offline also connect with Umang in case he's able to provide anything else.
Understood. Secondly, on the demand side, just want to know so that now we've seen that COVID effect has almost subsided. Schools and colleges have reopened. Work from office has also started. We at Hero MotoCorp are slightly relatively less affected by the chip shortages being in the entry segment. Do we see, you know, the levels of 2018, 2019 in the current financial year or in the next financial year? Would that be a possibility?
Saurabh, you should have asked this question before Pramod asked. I would have answered him exactly the points that you have mentioned. That's on a lighter note. Yes, there are a lot of positive factors, look. Exactly the ones that you have spelled out. There are, of course, the headwinds, you know, like Pramod was also talking about, which is the monsoon or some rainfall in some pockets, you know, some, rural, et cetera, et cetera. This is a play of the headwinds versus the tailwinds that we have, and that's the balance where, that one expects and which is where we are expecting, the festive, to be good. Then we'll have to take on from there. The underlying factors of 2W demand, they remain very strong and very intact.
I mean, one has to move away from months or some of the quarters. If you look at the underlying demand, I mean, whether you look at more women in education and employment. Whether you look at the aspirations of young people. Whether you look at personal mobility. Whether you look at you know, the finance penetration or our penetration overall vis-à-vis some of the South Asian countries. I think overall, if you look at it, the long-term factors of demand of two-wheelers remain very strong. It's only a question of how fast they manifest back, coming out from the pandemic and the recovery, and that is what will determine how fast we are able to get back to the highest levels that the industry has seen.
Okay. Thank you. Thank you so much, sir.
Yeah. I just wanted to add, you know, just some very interesting stuff. I'm sure you'll enjoy this when I say it. That there are a number of towns now that in premium, talking about demand and, you know, outlook, that actually have a market share in premium to be over 10%. And they're big towns like Bangalore, Coimbatore, Cochin, Allahabad, even Azamgarh and Bareilly that our market share in premium has increased to over 10%. Now, you were saying that, you know, things are becoming a little bit normal. What are we doing about that? We've just announced the biggest Hero Dirt Biking Challenge, and that's going across 45 cities.
In fact, today is when the city trials start, and in November we'll have the national grand. Bani J, who's, you know, famous for the Roadies and our Hero MotoSports people, they will be the judges, the mentors. It's. There's already 100,000 people who registered, and we had to close that down. When we opened up bookings for our XPulse rally edition, in four days we had to close that down because we'd sold out all of it. There is that positivity, and I think a lot of great questions came in the call where, you know, there may be stress at one segment, but there's a lot of buoyancy also and need for that, you know, moving out and moving on.
That we are absolutely experiencing in our portfolio with our consumers and with our dealers, and that's a great run-up to the festival season that we see.
This side ends here.
Understood. That is all. Thank you.
Thank you.
Thanks so much. Thanks, Ashutosh. Thanks everyone for coming on the call. We've run out of time. Thank you again for sharing your weekend with us. Happy Independence Day, everyone, in advance. Yeah, look forward to keeping connected. Thank you.
Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.