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Edited Transcript of HEROMOTOCO.NSE earnings conference call or presentation 30-Jul-19 10:59am GMT

Q1 2020 Hero MotoCorp Ltd Earnings Call

New Delhi Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Hero MotoCorp Ltd earnings conference call or presentation Tuesday, July 30, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Niranjan Kumar Gupta

Hero MotoCorp Limited - CFO

* Sanjay Bhan

Hero MotoCorp Limited - Head of Sales & After Sales

* Umang Deep Singh Khurana

Hero MotoCorp Limited - Head of IR

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Conference Call Participants

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* Aditya S. Makharia

HDFC Securities Limited, Research Division - Analyst

* Ashutosh Tiwari

Equirus Securities Private Limited, Research Division - Research Analyst

* Ashwani Kumar

Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager

* Basudeb Banerjee

AMBIT Capital Private Limited, Research Division - Research Analyst & VP

* Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

* Hitesh Goel

Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst

* Jay K. Mehta

Edelweiss Securities Ltd., Research Division - Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

* Prateek Poddar

Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity

* Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - Analyst

* Ruchit Mehta

SBI Funds Management Private Limited - Analyst & Fund Manager

* Shyam Sundar Sriram

Sundaram Asset Management Company Ltd. - Research Analyst

* Sonal Gupta

UBS Investment Bank, Research Division - Director and Research Analyst

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Presentation

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [1]

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Thanks, Nirab. Good evening, everyone. On behalf of Equirus Securities, I welcome you all to the conference call. Without further ado, I will hand over the call to Umang Khurana, Head of Investor Relations, for introduction to senior management team from Hero MotoCorp. Over to you, Umang.

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Umang Deep Singh Khurana, Hero MotoCorp Limited - Head of IR [2]

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Thank you, Ashutosh. Thank you for hosting us. Hello, everyone. We have with us today, Niranjan Gupta, Chief Financial Officer; Sanjay Bhan, the Head of Sales and After Sales; and Surender Chhabra, Head of Corporate Finance.

We've planned the call for an hour, and we'll start to assemble questions first. Nirab, over to you.

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Operator [3]

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(Operator Instructions)

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Umang Deep Singh Khurana, Hero MotoCorp Limited - Head of IR [4]

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Nirab, we'll begin with Mr. Gupta making opening comments.

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Operator [5]

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Sonal Gupta?

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Umang Deep Singh Khurana, Hero MotoCorp Limited - Head of IR [6]

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We'll begin with Mr. Niranjan Gupta, the Chief Financial Officer, making opening comments.

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Operator [7]

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Go ahead, sir.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [8]

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Welcome, everyone, to Hero MotoCorp's quarterly call. You would have seen our results by now. As far as volumes are concerned, we sold 18.4 lakhs vehicles during the quarter, which was lower by 12.5% on year-on-year basis, versus industry, which was lower by 10%. However, this includes the effect of reduction of inventory by more than 80,000. And therefore, like-for-like, it would have been lower by 9% versus the industry decline of 10%.

Our revenue was reported at INR 8,030 crores. EBITDA margin was 14.4%. This reflects an improvement of 80 basis point sequentially. Our profit before tax included an exceptional item of INR 737 crores. You would have seen from our notes to our results. This is on account of MCCD provision, which we had made over the years and pursuant to favorable order from Supreme Court, we have reversed it in this quarter.

Other than this, there are couple of one-off items in PBT. One is higher charge in depreciation amounting to INR 65 crores. This is on account of accelerated depreciation on assets, which will be rendered -- which will end their useful life by 31st March 2020 on account of BS VI. And the other one-off is in other income, which is INR 50 crores and that the interest provision reversal consequent to NCCD. The reported PAT is INR 1,257 crores versus INR 909 crores last year same quarter, which reflects 38% of increase. The underlying PAT is, after adjusting these exceptional items and one-off items, is INR 786 crores for the quarter.

The parts business revenue, which we always disclose to you, for the quarter was INR 621 crores versus last year of INR 602 crores, which reflects 3% growth.

Sequentially, the quarter 4 was INR 790 crores. And it's usually -- quarter 4 is always a heavy quarter in terms of the increased sales on parts.

With that, I hand over for the questions.

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Questions and Answers

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Operator [1]

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The first question is from the line of Kapil Singh from Nomura Securities.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [2]

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Firstly, I wanted to check on retail sales trend. Could you comment on how the retail sales have panned during the quarter on a Y-o-Y basis? And how is the trend going through in July? Looking at FADA numbers, we can see that retails are down approximately 6% for the quarter. Is that representative? And how is the retail market share?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [3]

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Yes. Thank you, Kapil. Yes, I think the numbers you're probably referring to are the ones that FADA has published. This is Bhan reporting. So I think these numbers are quite consistent with what exactly is happening in the marketplace. So there is a decline in retail to the extent of about 6%.

And yes, the dispatches, overall, for the industry, have been down 11.5%. So I guess a lot of people have corrected stocks during the quarter. The retails have been slightly better than the dispatches, which is reflected there. And you would have also seen the market shares of these players in that report.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [4]

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Okay. And how's the outlook on retail?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [5]

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We do -- we did expect the retails to be a little better than a negative retail in the first quarter. We had expected some recoveries in the first quarter. This has been another soft quarter. May was a very good month, but April and June were not very good -- were not very strong.

So as things stand, we do expect things to get a little better. Things have started. There is a lot of expectation building up. We do hope that the season -- closer to the season, things might just start looking better.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [6]

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Okay. And secondly, I wanted to check on your market share, especially segment-wise we can see some improvement now happening in the economy segment after the heightened competition intensity. But now we are seeing some signs of increased competition in the Deluxe segment. So your thoughts on the same. And how you are going to handle that?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [7]

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See, market is a very dynamic situation. Last time around, in fact, several rounds of these earnings calls, we used to get this question about how competition is trying to discount their way in the entry segment. And we kept on saying that, that's something that we will definitely not do. We will gain back the share base with our own strategies, which is what we've done. And hence, we are back with a bang in the entry segment. About at a dispatch level as well as in terms of retail, we're doing quite well there now.

Yes, there have been a few launches. And as is known, there is always a first scale attached to a launch. There is a certain amount of stock buildup that also happens in case of a launch. So you have to grant that, and therefore, when you look at these, there is a slight correction in terms of market share in the Deluxe segment, as you are pointing out. It's also a function of the amount of stock correction we've taken, as Mr. Gupta just talked to you about 80,000-plus stock correction. And majority of that has happened actually in the Deluxe segment because that's our key segment. And therefore, as a consequence, there would -- there is -- it's obvious it's bound to happen that you may lose a few market share points.

But otherwise, on retail terms, we're pretty strong. Surely, competition has intensified. It's always been very intense. It's just that we have been extremely strong, and we continue to be so. So hopefully, we'll see some further correction happening as we go along.

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Operator [8]

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The next question is from the line of Raghunandhan N.L. from Emkay Global Financial Services.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [9]

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Sir, like media reports have been indicating about tightening of bank funding to dealers, can you highlight the initiatives Hero has been taking to support dealers in terms of credit period, corporate guarantee, captive finance, unit support, et cetera?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [10]

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Yes. So the report -- yes, in the media, a lot of reports have appeared. I presume they are more to do with probably 4 wheelers. As far as we are concerned, we had also outlined in the last call that we have extended the credit period in order to support the dealers, and that's reflected in the high receivables that we have.

Other than that, as far as we are concerned, it's about ensuring that the retail sales grow. And therefore, all the schemes, promotions or our actions are more towards increasing the throughput and also reducing inventory, which I already highlighted that there is another means of ensuring that the stress comes down in the system. So those are the steps that we have taken and we'll be continuing.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [11]

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And sir, anything you can highlight what has supported other income in the quarter? And also, anything you can quantify on the Ind AS impact, sir?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [12]

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So as I explained, the other income in the quarter includes one-off income of INR 50 crores. This is on account of the interest provision that we had made linked to the NCCD provision that we talked about. And -- sorry, what was your other question?

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [13]

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Sir, Ind AS impact, sir? Ind AS 116 impact?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [14]

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Ind AS 116 impact is negligible. In fact, the net impact of all the adjustments is INR 4 crores for the quarter.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [15]

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Understood, sir. And sir, like, INR 65 crore was the accelerated depreciation? That is correct?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [16]

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Yes.

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Operator [17]

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The next question is from the line of Gunjan Prithyani from JP Morgan.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [18]

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Just this follow-up on the accelerated depreciation that you mentioned. This essentially will be a similar number through the rest of this year? Or you've just kind of taken the whole adjustment in this quarter?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [19]

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So for the rest of the year, for the valid 3 quarters, you will see around INR 30 crores per quarter in terms of the accelerated depreciation against the INR 65 crores for this quarter. And that ends by March 31, 2020.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [20]

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And then we'll move to the normalized depreciation of about INR 150 crores, INR 160 crores a quarter. Of course, we have the new plant commissioning, but that should be the level at which it will continue, right?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [21]

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Yes. So it will be normalized depreciation subject to the capitalization consequent to Andhra plants.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [22]

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Okay. The other thing I wanted to follow up was on the market share in scooters. Now we did have couple of launches here and -- which, last quarter, you had indicated we were doing well on the retail side. But the market share really hasn't improved at all. In fact, in this quarter, it is deteriorated. So I'm just trying to understand what is happening in this segment with your new launches now out in the market?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [23]

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Yes, Gunjan, I think when you look at the market, scooter market overall has been doing -- has not been doing well. The 75% of market is 100, 110cc, and that has been declining at about 23% in the quarter. Whereas the 25% market, which is a 125cc upwards, has been growing at about 12%. So this growth has come down from what it was earlier, but still growing.

Thankfully, we are now reasonably well covered. We've had 2 more launches in the 125 segment. With the Maestro 125 and the Maestro FI 125 to support Destini. We talked about Destini doing extremely well in the post-launch and it continues to do well. It's doing very well in terms of retail. We continue to have approximately about 15% retail market share on Destini. And with the support from the 2 other siblings in the form of Maestro 125 trends, we do expect to gather more share in the 125 variants.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [24]

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I think just to add to what Mr. Bhan has explained, the launch of Maestro Edge 125cc, which has done -- which has been done recently in June, will not only help us occupy more space, much more space in 125cc, which is actually the growing segment, but will also likely to help the Maestro Edge equity and therefore, help the sales of Maestro Edge 110cc as well.

Other than that, we've also launched Pleasure 110, which is a full body refresh. And therefore, that addresses Pleasure in the 110cc segment as well. So I think as these -- as the volumes pick up of the new launches, we should see our scooter portfolio getting boosted moving forward.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [25]

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So the market share is essentially a reflection of some drag coming from the rundown of the earlier models as well, right?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [26]

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Partly, yes.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [27]

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Which we are seeing on the wholesales.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [28]

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Yes.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [29]

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Okay. Just last question on the gross margin. If I look at your sequential, there seems to have been almost about -- the item has moved up about 60 basis point Q-on-Q. Is there any commodity easing that we are seeing at all? I mean what is the reason for this increase? And even ASPs have come down, so if you can just share some thoughts on this.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [30]

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So actually the underlying ASPs of 2-wheelers has gone up. What you see is a reflection of parts revenues, which is lower in percentage terms for this quarter. So if you see quarter 1, our parts percentage to revenue is 7.7%. And since you are comparing sequentially, quarter 4 was 10%.

So if you have to eliminate the impact of parts, then you would see that actually 2-wheeler realization has gone up by close to around INR 350 per vehicle sequentially. And you would also see that the material cost underlying has come down.

Of course, the material cost has an adverse impact of HSRP as well as CBS rollover. Part of the portfolio got rollover. You can see the full impact sequentially in this quarter.

Moving forward, yes, the commodities have remained in a range on a softer note. So as far as margin is concerned among the headwinds and tailwinds, if I were to identify a tailwind, it would be commodity costs.

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Operator [31]

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The next question is from the line of Aditya Makharia from HDFC Securities.

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Aditya S. Makharia, HDFC Securities Limited, Research Division - Analyst [32]

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Yes. Sir, what is our volume growth outlook for the industry for FY '20?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [33]

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As things stand currently, we do believe that there is going to be an improvement in the sentiment as we get into H2, which will be partially reflected during the festive season, which incidentally starts off on the 29th of September.

So while some effect will come into quarter 2, but largely in quarter 3. And we do hope that a lot of these -- some of these changes that we expect in terms of good monsoons, bringing in some share into the rural markets. So better participation by rural -- by the ruling is likely to create some positive impact in the H2.

So going forward, versus H1, we do expect a better H2. And there is also this possibility that, as we get into the quarter 4, there is this old piece of our BS VI coming in on 1st April 2020, which is also going to support some numbers in quarter 4. I know pre-buying is likely to happen given the overall structure.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [34]

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But as a number, just to add, it's really, I would say, early days to recalibrate. Probably we will be recalibrating the outlook number in terms of after seeing how the festive season goes.

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Aditya S. Makharia, HDFC Securities Limited, Research Division - Analyst [35]

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Okay. What is our current outlook, if I may just ask?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [36]

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So right now, it's very difficult to put a full year number on it. And as we said, the second half, we expect better than first half. There are various factors, which we believe should play out. And once the festive season plays itself out, then we can take a call on the full year number.

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Aditya S. Makharia, HDFC Securities Limited, Research Division - Analyst [37]

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Sure. And just second, on the other expenditure, there's been a decline on the absolute amount on a Y-o-Y basis. So anything to read into that?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [38]

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No, the decline is more to do with -- there are certain expenditures, which are lower in quarter 1, which will get elevated in quarter 2. Some of the advertisement phasing on our new launches will be seen in quarter 2.

So it's more a reflection of that rather than any underlying decrease in absolute. Also, there is also an impact of the volume. So you see lower volume year-on-year basis, so you have lower logistics expenses, which is obviously underlying reduction that happens because the variable part in the other expenses.

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Operator [39]

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The next question is from the line of Hitesh Goel from Kotak Securities.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [40]

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Sir, basically, most of your competitors are talking about the decline in the industry in FY '20. And the outlook for FY '21 also looks a little bleak because of the BS VI changes, which is likely to come in. Can you please point -- is -- are you in a position to quantify the kind of cost increase you may see on your bank because of BS VI? And when will you migrate to BS VI in terms of the overall portfolio?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [41]

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So as far as BS VI is concerned, like we said last time as well, you would see the increases, whether it's cost or price as the models start getting launched. So as of now, we are not in a position to give that number out.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [42]

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And when will you migrate the models to BS VI, sir?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [43]

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We are ready with the -- as you know, we were the first ones to get the BS VI certification. Our models are getting ready in time. And as far as launch is concerned, as we said, we will be launching in second half. The exact timing, we will decide model by model based on our own transition strategy.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [44]

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Okay. And are you ruling out a decline in the industry in FY '20 because of prebuy that you're expecting? Or it's a wait and watch currently?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [45]

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It's a wait and watch currently. As we have said, let's wait for the festive season how it pans out because last year, festive season was soft. There have been a few adverse factors impacting 2-wheelers so far. There is also a buying postponement, which has been happening. There's been liquidity problem, which seems to be easing out a bit. There's been interest rate cuts, which has been happening. So we'll have to see how these positive factors play out and what role do they play moving into festive season. So let's wait and watch.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [46]

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Okay. And my final question, if I can squeeze in. On the electric side, are you launching any product in the next 1 year? Because TVS and Bajaj has already announced that they'll be launching electric products. Is Hero in a position to tell us about the electric brands right now?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [47]

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So we won't be able to give a time line to you right now. But what we can say is that we are working on multiple fronts as far as electric vehicle is concerned.

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Operator [48]

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The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [49]

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My question pertains to, firstly, on inventory. You indicated there is reduction by 80,000. How much it would be now? Would be, what, about 6, 7 weeks or lower than that?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [50]

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So we indicated last time that was 45 to 50 days, 80,000 actually translates to around 3 days, roughly 3 to 4 days. So that's the reduction over the 45- to 50-day range that we talked about based on the forecasted sales.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [51]

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Okay. Okay. And this is where we would be comfortable entering into festive season?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [52]

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Well, I mean the point is that -- at this point in time, last year, we had started building up inventory already. So in a sense that from here on, as you build up for the festive, one would be comfortable with these levels.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [53]

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Understood. Understood. Right. Secondly, you mentioned about second half to be better than first half in terms of expectation. This I'm presuming would be from retail volume perspective, not necessarily from wholesale.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [54]

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Yes. So Jinesh, I think the reason for us -- I think Mr. Gupta mentioned about it that this is what we currently understand from the customer dynamics point of view because I think the best judge of how the industry is going to pan out is not a few of us sitting in this room and the rest of you out there, it's just our customers who kind of have, in some sense, indicated in more ways than one that there is a certain amount of genuine intent to buy, which is that, for now, they're holding up their purchases.

We have a reason to believe that there is a whole bunch of customers who are -- have a solid intent to buy, but have deferred their purchases. One, clearly, seems to be a deferment approach, which at some point in time is basically [caves in] given the overall context in which buying happens and festivals tend to become one of those opportunity areas and periods and spaces wherein a customer eventually decides to go out there and buy.

So I guess, that said, it will be very hugely incumbent on a couple of factors. Of course, the factor of rains in the monsoon the way they pan out, how the Kharif crop really comes up and how the prices there in the rural market farmers and up country markets respond. It also depends on the entire NBFC piece, how that pans out in terms of liquidity.

So if these 2 factors, the farm income and liquidity on both sides start working positively to the industry, we do expect a very robust, hopefully, a good solid recovery getting into the second half. That's the reason we are very hopeful and optimistic about -- though cautious yet optimistic about the second half.

So at this stage, it would be too early for us to give up on the second half. I think it's evident. It's not just as I think in the question earlier was put forth that, is it entirely on account of the preponement of prebuying on for -- from BS VI to BS IV? No, not really that. That's one factor. But beyond that, also some fundamental demand drivers. If this start playing up, we do expect some recoveries.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [55]

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Got it. Got it. And with respect to Ind AS 116 impact, to indicate at INR 4 crore. That is negative impact at PBT level, right?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [56]

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Yes.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [57]

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And any idea how it will split between other expenses, depreciation that...

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [58]

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Sorry, I didn't understand the question.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [59]

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So there'll be some expenses which would have shifted out some other expenses to depreciation?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [60]

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So that's really marginal. It's an impact of around probably 10 basis point in terms of EBITDA levels.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [61]

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Okay. Okay. And lastly, with respect to our CapEx guidance, we maintained the CapEx guidance, which was given off (inaudible) and INR 1,500 crores for FY '20? Or is there any change?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [62]

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Could be a tad lower as we move forward because that was the overall estimate that we had. And we'll recalibrate this as we move towards second half.

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Operator [63]

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The next question is from the line of Ruchit Mehta from SBI Mutual Funds.

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Ruchit Mehta, SBI Funds Management Private Limited - Analyst & Fund Manager [64]

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Just on the BS VI transition, any comments on the potential for e-carb? Or are we ruling that out at this point? And do you see that as a risk factor, especially in the economy segment if competition does launch on that?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [65]

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So as far as we are concerned, we are going ahead with FI, as our lead technology. And as far as e-carb is concerned, it's more to do with our own strategy that we didn't want to risk the portfolio transition, given that the FI is more robust and tested technology. While e-carb may or may not have a cost opportunity, but could also entail risk to the portfolio. So that's the strategy we have chosen.

And as we move forward, we will see how it pans out in terms of cost, in terms of performance, in terms of on-road capability, in terms of its adaptability to OBD II, which is going to come out. So we'll see how it pans out. It's not a very easy and simple choice that you choose a technology just based on costs. And also, we are, as a backup -- not as the backup, but just to ensure that we keep working on something, our R&D is also working in parallel with e-carb as well. But going in, the transition will happen on FI basis.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [66]

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I think earlier also, we mentioned this in an earlier call. I think one technology that seems to have all the answers to dealing with compliance is FI, right? And I think this is global and this is agreed to and largely everyone endorses that. E-carb is a relatively new animal in that sense.

Yes, we are aware that there are some people who are working as -- for -- on e-carb as the primary solution. In our case, we obviously would like to take a more secure path because it's about seriously adhering to compliance and e-carb like Niranjan mentioned is something that we are working parallelly on, just to keep our options open.

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Ruchit Mehta, SBI Funds Management Private Limited - Analyst & Fund Manager [67]

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Okay. Okay. And just to go back to the electric vehicle question. Your competition has talked of launching something this year itself. Is there a risk that we are falling behind on the R&D side, again, on this front? And we could be launching after competition launches and therefore, struggle to create any sort of large first-mover advantage or sort of impression in the market that you have the technology or capability out there?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [68]

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Not at all. First of all, by investing in Ather, we are the ones who got the product in the market earlier than everyone else. And that generates a lot of learning, lot of experience, first of all. And that's why we made a strategic investment in Ather. They launched in Bangalore. They're expanded to Chennai. So that's answering your question on are we behind or are we ahead.

The second thing is, in terms of our plan, our plan we are in-house also working on multiple fronts. Also, I want to explain that it's not going to be about that one launches, and then you start picking up thousands or lakhs of volumes. It will be a lot of experiment. The industry will go through a lot of experiment, a lot of experience in this whole journey of EV. It's not going to scale up overnight just by launching.

So there will be a lot of trials and errors and experience building that will happen, and it will be more about who gets the product right at the right cost and actually, right customer preference and convenience, will determine the winner.

Further, we've also expanded our R&D center. As you know, by actually putting a node in Germany, TCG, which is our Tech Center Germany. And there are people that source from experienced manufacturers, and they're also working parallelly on e-vehicle as we speak.

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Operator [69]

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The next question is from the line of Jay Mehta from Edelweiss Financial Services.

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Jay K. Mehta, Edelweiss Securities Ltd., Research Division - Analyst [70]

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Sir, am I audible?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [71]

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Yes, Jay. Go ahead.

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Jay K. Mehta, Edelweiss Securities Ltd., Research Division - Analyst [72]

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Am I audible?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [73]

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Yes. You're audible. Please go ahead.

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Jay K. Mehta, Edelweiss Securities Ltd., Research Division - Analyst [74]

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Yes. Sir, 2 questions. One, if you can throw some light on the discounting trend Y-o-Y on Q-on-Q basis? And would it be a right statement that the current gross margin in the current quarter also separate because of higher retail supporting activity you have taken?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [75]

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So I'll answer first, and then maybe Mr. Bhan can add on to that. So it won't be right to say that the gross margin is impacted because of that. As I said, the ASP actually has moved up sequentially, if you see, reflecting that the price increase that we have taken is actually translating into our numbers. What you see the decline in ASP is a result of the parts revenue mix as a percentage of overall revenue.

Having said that, Mr. Bhan can comment more on the overall nature of and what's happening in the market on the scheme, et cetera.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [76]

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See, right now, I don't think there's any -- we've maintained this. We've not been discounting. We would continue to kind of support that agenda. I think it's all about brands at the end of the day. Right now, the only thing that seems to be something that really the customer is looking forward to is how do we find ways to break those barriers for them in terms of adoption to the category.

I guess that would obviously entail more aggressive, penetrative financing options. That's something that we work on very regularly. Obviously, that's an area which would need further impetus going forward. I guess, increasingly, there would be a dire need for us to make sure that we are able to get in more customers into the fold, and financing would be a good way to do that. I think that's very critical. And price increase has been there. Already we've seen the price increase in April. We've also increased our prices in the month of July, 1st of July or thereabouts.

So in that sense, just to take care of some of the costs, et cetera, that are there, but there is no discounting to the customer at the -- in the current situation. What we are trying to do is we're trying to create a far more robust enabling system for the customer to be able to adopt and come in because if one thing is very critical is the availability, and therefore -- availability of finance in an urban center has become a challenge actually because of the NBFC liquidity issue. And the footprint of finance in rural markets is the other challenge. So we're trying to tackle both and make sure that customers are able to get to buy the bike.

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Jay K. Mehta, Edelweiss Securities Ltd., Research Division - Analyst [77]

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So why I was asking this is that the whatever customer support activity that you would be running and I presume that would be at a reasonable, high decibel for the entire industry or either get accounted in other expenses or in raw material expenses in terms of lowering of GST and hence raw material ratio turns slightly adverse. But we are seeing neither of the two things happening. So that's why I was curious to understand what kind of activities have been -- and has the intensity of support activity gone down? Is it a right statement? And that activity has bottomed out from industry perspective?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [78]

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See, when there are these kind of times that we are undergoing right now, we have to be smart about the way we position our strategies in the market. If you would have heard about our strategy on [bisurance], for instance, now that might seem to, some of us, as some sort of a promotion, but the fact is that there is very little outgo from our side. In fact, there's none. It has been primarily funded. It's almost like a crowd source kind of a fund, wherein there is a certain third-party, which is ensuring that they're able to give the price coverage to our customers, and therefore, making decision of being able to sell their bikes or 2-wheelers at a price which is perhaps the most attractive.

As a consequence of things like that, the retail prices in those markets are also taking up -- taking obviously going upward, which is, therefore, helping the brand further. Now we have to be innovative. And that's what we've done exactly. Therefore, like I said, we've not really been running any promotions during the course of this particular quarter, except for some local promotion that gets factored in this part of our sales promotion cost, which is very normal, but there are no discounts, and there is nothing like that. And we have really no immediate plans because that's not what a customer is really looking at. A customer is trying to find out ways how we can be able to reach out and make that decision. I guess to break those barriers will be far more critical. Yes, of course, there has been this whole set back about insurance cost increase, et cetera, et cetera, but that, I think, by now, customers have really subsumed that as part of it. There are some more surprises in store, like you would have read registration costs going up, et cetera, which is another pain area. So we are trying to -- trying to seek ways and find ways to minimize the pain for the customer to be able to eventually buy.

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Jay K. Mehta, Edelweiss Securities Ltd., Research Division - Analyst [79]

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And one last question on commodity prices. So it seems there has been some benefits in the quarter. Is it a right statement? And outlook for ensuing quarters, please?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [80]

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Yes, it is. So you're right, there is some benefit in the quarter. And one could see probably, as I said, if you were to count among the headwinds and tailwinds then one of the tailwinds, one could look at is commodities moving forward.

The good thing is, as long as they remain at the even the current level, then that helps in terms of stability of margins.

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Jay K. Mehta, Edelweiss Securities Ltd., Research Division - Analyst [81]

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Congrats on the [second results].

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Operator [82]

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The next question is from the line of Ashwani Kumar from Reliance Mutual Fund.

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [83]

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My question to Mr. Bhan. Sir, are you experiencing this delay or postponement across rural and urban alike, which means that people are postponing at both places? Or is it specific in some certain markets?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [84]

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Thanks, Ashwani, for the question. I think it's a very important question. If you were to ask me, frankly, the postponement is more significant in the case of rural markets. It's not as sharp in case of urban markets because of the available options there. But in case of rural, it's a little more pronounced. But it's there in both rural and urban, far more sharper in urban than in rural -- so far more sharper in rural than in urban.

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [85]

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And let's say, within rural also, let's say, if you look at 2 segments, but one is the first-time buyer and another is the upgrade buyer, this replacement in our earlier conversation with you, the replacement cycle has been, let's say, 5 years; for some, it may be 6, 7; for some, it may be 3.5. But this -- do you still stand by that this 4.5, 5 years is the replacement cycle for the 2-wheeler buyer for Hero Moto, for example?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [86]

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Honestly, we don't have specific data to kind of validate what I'm about to tell you right now more in the current context. But it's bound to happen, Ashwani, because when you have people postponing, so it would be a postponement both from somebody who's coming in new and as also by someone who is actually there in the category. And he can always -- he always have that 2-wheeler with him right now, and he doesn't really want to keep this and maybe wait for 3 more months or 4 more months.

So I guess -- I don't have segregated data right now. But it -- in any case, I think it would be in both categories. Now how different would they be? I don't have specific information to share at this stage.

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [87]

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And sir, what would -- let's say, if the person who is postponing today change his mind, what has to happen for him who is postponing to come back and stay in the next 1 or 2 or 3 quarters?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [88]

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Well, I think it's...

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [89]

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What has to change? What is the critical factor?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [90]

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2-wheeler is a considered purchase. And it is as emotional as it is rational. So I guess more from a rational point of view because obviously the inclination for a person to emotionally embrace a brand will stay on. It's not really changed significantly. But I think the rational reasons, for instance, the change in sentiment of the market, the availability of credit, the ease and comfort or the interest rate is up, some impact from a price point of view. There's something, some intervention from the government. And we are hoping that the government who are (inaudible) be gone and been requesting across that there is a reason for the government to look at auto industry, 2-wheelers in specific, it's a common person's vehicle.

If the government sees that and the kind of impact it has on the GDP growth rates and we get some support from those areas, I'm sure the sentiment will change. I'm sure the person who is holding back right now would want to come happily and buy. I guess it's a mix of both emotional and rational reasons. But right now, the reason that he's holding back or she's holding back is only rational. Emotionally, they're still very connected to 2-wheelers and that's what gets turn back when you look at data in terms of the extent of postponement.

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [91]

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So does that mean that your inquiries have not gone down, but the conversion has gone down? Is that the right way to look at it?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [92]

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See, inquiries have been more or less there. It's not been such a dramatic decline. Inquiries are there. People are checking out. People are hoping that they will come back sooner than later. And it's also kind of being played back, listen, I would rather wait for a few months and see how things pan out. So it's a wait and watch. That's what a customer is doing right now and hoping that some things might give in and things might change for better.

It's hard -- it could be anybody's guess at this stage that if they don't change too much when the customer still come and buy, I guess if there are other things around and the environment will change, if the rains are good, if the monsoons are good, and if crops are healthy and fine, if the liquidity in the market improves, his disposable or her disposable level of income is looking much better, well that's good enough reason for customers to start looking back at industry.

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [93]

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Yes. Just one last thing, sir. Are there any bright spots? I mean when we get the total 6 pack data per month, which you are doing currently, are there any states or cities who are doing better and...

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Operator [94]

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Sorry to interrupt you Mr. Kumar, your voice is breaking. Can you please come in a better reception area?

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Ashwani Kumar, Reliance Nippon Life Asset Management Limited - Senior Equity Fund Manager [95]

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Yes. Hello?

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Operator [96]

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Yes, Mr. Kumar, go ahead. The line from Mr. Kumar dropped. We'll move on to the next participant. The next question is from the line of Shyam Sriram from Sundaram Mutual Fund.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [97]

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Sir in our annual report, we have spoken about business from the secondary network contributing 53% to our overall business. Can you -- are these sub-dealers that we are talking about? And what has changed over the last few years in terms of cultivating this channel? If you can just talk about that a bit.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [98]

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So we've always had a very strong network, overall, not just the primary network, but we've got a very robust secondary network, which includes our authorized service centers and what we call as ARDs, which operate under dealers.

And therefore -- and in massive footprint, we've been talking about that huge footprint that we have across the country. So that's always been very robust. And therefore, a lot of these people are -- have been significantly contributing to our overall growth. I guess their growth, right now, is in line with overall market sentiment. So hopefully, when the market opens up, we will also benefit from that opportunity.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [99]

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Right, sir. So when we talk about dealer inventory, that includes these sub-dealers as well, right, sir?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [100]

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Yes, that includes the sub-dealer as well. In terms of number of days, that really counts for that.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [101]

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Right, sir. Sir, in terms of this electric vehicles, we hear that even some customers have started coming to showroom, inquiring about electric vehicles. Clearly, the government themes intent on promoting EVs, whether be it cutting the GST or hiking registration fees whatever be the way. From your own customer service, what factors need to be in place for adoption of EVs, more from a customer mindset perspective. Of course, price is one key factor that impacts the purchasing decision. What other factors do you think are required to be in place for adoption of EVs.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [102]

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See, there are multiple factors. The game of EV is not so easy that you put out a product in the market, and market will migrate from traditional IC engine to EV. First, there is a price factor. So if you see, even the current like-for-like vehicles which are in the market, they are priced at almost 2x compared to their IC siblings. The second factor then becomes is a convenience of charging. You don't have as many charging stations as the petrol fueling stations that you have. And therefore, building up that infrastructure is another thing. Third is the time that it takes to charge. Fourth is how does it feel on acceleration and movement, when the battery dies out, battery infrastructure, battery technology, so there are plethora of factors, which will determine the EV transition from a sourcing side, manufacturing side, viability side and the customer side. So I think this is a game of -- at least, one thing is sure, that, yes, as an industry, we are supportive of this EV movement. But there will be a transition, which will be more slower than what one would be expecting.

And one will have to learn and put that out. And then actually -- probably, it will be more about coexistence of the 2 technologies rather than 1 technology giving in place for another one.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [103]

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Right, sir. Sir, are -- we have been adding capacity in Andhra as well, I mean INR 650 crores in Phase 1. Are we planning any EV production there? Is the line fungible if at all either at a later point of time?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [104]

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Yes, the production can be done there. Once we are ready with the product.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [105]

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Okay. Okay. Got it, sir. Sir, one last question. Sorry, I missed it. The part sales, absolute number that you shared, sir? Spare parts?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [106]

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Okay. So the parts quarter 1 is INR 621 crores. Last year, quarter 1 was INR 602 crores. And in Q4, FY '19 was INR 790 crores. And just one bit of modification or correction on what Mr. Bhan said is the inventory numbers that we put out is the inventory that we hold and the dealers hold because that's what we account for in the sales forecasting, inventory management, all that sort of stuff. Beyond that is something that the dealer takes the call.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [107]

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Sorry sir, beyond that the dealer takes the call as when...

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [108]

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Dealer takes the call on the network because the network sales are done by the dealer.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [109]

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Okay. Okay. Okay. Understood.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [110]

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Dealer takes the call. We don't track that inventory.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [111]

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Okay. Okay. Understood, sir. Understood.

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Operator [112]

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The next question is from the line of Prateek Poddar from Reliance Nippon Life Insurance.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [113]

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Sir, 2 questions. One was with regards to your accelerated depreciation. Could you just talk about what is the nature of these accelerated depreciation, which you're taking this year instead of next? Because I would have thought it would have come with BS VI, but you're taking it in advance. Just that is one. Second is, if I were to look at monsoon this year, there has been a wide disparity between some states in [excerpts] and some states in extreme red. In fact, something like Saurashtra is very -- it has deficient of 50%. So just on this variation, are you seeing that in these states, which are red as of now, inquiries are very low and walk-ins are low, whereas states where the monsoon is healthy, walk-ins are higher? Those are the 2 questions.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [114]

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So I'll address the BS VI depreciation question, and I'll hand over for monsoon to Mr. Bhan. As far as depreciation is concerned, this is of the asset as you migrate from BS IV to BS VI, there will be certain assets and machines, which will be rendered obsolete or it actually reaches the end-of-life by 31st March 2020. Now one could technically say that, okay, I could take it after determining 31st March 2020, one could take in FY '21, but being prudent in our accounting and financial, and that's why we've taken that accelerated depreciation this year itself.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [115]

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There are no -- sir, if may interfere, there are no product development-related expenses under these accelerated. These are all basically...

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [116]

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No. No. These are all machines.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [117]

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Okay. Okay. Understood. Sorry, for my understanding was that. Okay.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [118]

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Over to Mr. Bhan for monsoon.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [119]

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So on the monsoons, yes, you're absolutely right. Like I said, these are all very strongly linked to with the customer sentiment. I guess you said it yourself. I guess in the markets where the monsoons are deficient, aren't as good, the problem obviously is that there is a slight bit of a setback in terms of customers not being as forthcoming, and therefore, there is a challenge even now. So going forward, if things don't improve, then we do expect those markets in those pockets, specific like the ones that you mentioned, would continue to struggle. But there is also a problem of plenty like we have certain areas, which are marooned, right now, pretty much under water, while there is a sentiment in the market where people are saying (foreign language), but there is also too much of (foreign language) that is coming down from the heavens right now. So yes, I think there are 2 sides to the story. One, of course, is the excess in certain areas, which is leading to problems currently and creating further depression in the market because, obviously, that kind of rain, it's very difficult for people to come out and buy. But it's good news for future. There are also markets where there is a certain deficiency. I think the last count, end of 26th or 27th of July, there was about 90% expectancy of the monsoon, which is pretty much in the zone that we have been having for the past 6, 7 years, 86% to 97% range. So I guess we will be pretty much there. Hopefully, even if we are close to about 90%, 92%, 93% overall, there would obviously be some pockets in certain states, which might be a challenge. But like I said, we will obviously deal with that as things move.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [120]

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And sir, just 1 question. There have been comments by the industry to keep the GST rates at 18% next year versus 28% currently. My only question was, even if you keep the rate same, what makes you -- what makes the industry believe that come next year, people would come and buy because the prices are same as what it would be today. So just on that, if you could clarify.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [121]

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First of all, before Niranjan answers that, my point is that I don't think anybody has specifically said that next year, I think everybody in the industry is saying now. So that's the whole point. Yes, Niranjan.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [122]

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So I think I agree with Mr. Bhan when he's saying that we are not saying next year, we are saying this is an immediate step which is required. And in any case, if you look at the customers, customers are building in or planning -- or in their own calculations that this will be the x amount that will go up because of BS VI. And therefore, clearly, a 28% to 18% is always favorable. Because if you pay something at 28%, you will be pay 10% lower at 18%. So that's a simple equation, and that's there in customers' mind as well.

So definitely, a, that will help boost the sentiment right now in terms of customers coming back. Second, it helps to insulate the BS VI impact. Third, is also that -- apart from all this, it's just logical and rational. Because 2-wheelers, by no means of imagination, can be called either a luxury good or a sin good. All of us know that. It's a means of basic mobility and basic income enabler for most of the commuting classes who hail from rural and semi-urban areas. So there's a strong rationale to it. We as industry are representing. And let's see what happens.

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Operator [123]

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As the line for the participant got disconnected, we move on to the next question. The next question is from the line of Basudeb Banerjee from AMBIT Capital.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [124]

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Congrats for decent set of numbers. A few questions. One, if I remember, last quarter con call, you said that Hero FinCorp has been bit cautious in terms of financing in this kind of demand environment. So how that has progressed this quarter? And how much is financing mix? And how much is from FinCorp this quarter?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [125]

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The overall financing of our sales this quarter is 37.3% and FinCorp share out of this is 47%.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [126]

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And in terms of liquidity issues and financing this, how are you looking towards that in coming months?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [127]

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So I think from a 2-wheeler financing point of view, I wouldn't say that's a big problem given that we have FinCorp as an associate company. And as you can see, the share of FinCorp has gone up to 47%. So obviously, there are other NBFCs who would have brought down or gone down on their shares are facing liquidity issues.

So FinCorp has been managing its affairs quite well. In fact, their loan book has grown almost by 40% on a year-on-year basis, and that's helping 2-wheeler financing. I think what's important is moving forward, if the interest rate cuts, which are happening at the RBI level, and you would have seen today, SBI cutting deposit rates, so therefore, it is a transmission of these rates by the banks, and therefore, through the NBFCs, that could result in actually lower cost and lower EMIs moving forward. And if that helps, that could be another positive factor moving forward in second half.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [128]

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Sure. Second thing, sir, if I see the combination of insurance price hike per vehicle and safety norm let price hike. These two have been the major price hikes over last year, and this kind of retail sentiment has happened and now down the line, this proposed registration hike of almost INR 950 per unit, plus few states' road tax hike of similar quantum plus BS VI price hike. So incremental price hike looks much, much larger than whatever has happened in past 12 months. So how do you look at customers accepting this and impact on retail demand?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [129]

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So the impact on demand of the prices, whatever has happened, has already reflected in the market and which we've talked about and which you have seen. Also, I have to say that it's not just the impact of the price. If price is the only factor, if the rest of the things were doing well, liquidity, interest, economic sentiments, rural incomes, then of course, if you have a higher income, you can afford to pay higher price as well. So it's multiple factors and not price alone. And these are getting reflected, absorbed as cumulative impact into the sales, as you see. So moving forward, it will be only a sequential impact of BS VI, whatever comes when you transition to BS VI, and then we'll have to see what happens from thereon.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [130]

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Surely. And one small thing, sir, as you mentioned, mix of spares declined by 230 basis points as a percentage of revenue sequentially. Despite that, I see typically spares margin are much higher than product margin. And I see your margin improving. Where am I missing? Is it purely reflected in the 60 bps sequential gross margin decline? Or somewhere else? Because your other expense on absolute is like lowest in 10 quarters. So how to look at that?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [131]

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Yes. It's partly to do with, as we said, that the quarter 1, other expenses are lower, partly on account of the logistics costs and partly on account of some of the expenditures on advertisement or the media breakout that'll happen in quarter 2. Other than that, there have been some of the commodity benefits as well. And parts, if you see on sequential basis is what you're saying 230 basis point down as a percentage, but year-on-year basis, it's moved up from 6.8% to 7.7%. Just to correct that on the parts revenue.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [132]

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Just to add, I think, the quarter 1 typically on parts is always the lowest, smallest quarter. It starts building post that. In any case, what is happening in the vehicle sales is also true in terms of what is the sentiment -- what the sentiment is in the aftermarket.

So I guess, as we go on, as in sentiment keeps improving, things could start looking upward.

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Operator [133]

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The next question is from the line of Ronak Sarda from Systematix Group.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [134]

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Congrats on decent set of numbers. So my question is on the premium model launches, XPulse, Xtreme 200R. How has been the initial feedback from customers, dealers, anything which you can share?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [135]

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Ronak, thank you very much. Yes. First of all, thanks for appreciating the performance. And yes, the initial excitement has been pretty good. I think the response is, it's a little too early to really conclude anything. But yes, the response has been extremely overwhelming in terms of our customers and dealers, and I have looked at the models. The numbers, right now, may not seem very significant because it's only towards the second half of June, towards the end of June that we were able to finally start selling these models. But even in this short while, we've done fairly decent on retails. There is clearly, in markets like Kerala, for instance, there is a serious demand for some of the variants of the XPulse. We are struggling to really supply given the overall ramp-up time it takes. But yes, I think the response has been extremely encouraging, and we are looking forward to really making some impact to these models as we go forward in the premium segment.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [136]

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Sure, sir. That's great to hear. And sir, second, two, I mean, clarification on financial side, employee expenses. I mean, if I look, they have been growing double digit, a split fall in volumes. Is this largely to do with Halol ramp-up? And also some reports, which we -- some media reports that highlighted some voluntary retirement scheme announced by the company. Is that significant? Can you highlight any impact on that?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [137]

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So as far as the employee expenses are concerned, what you're looking at is on year-on-year basis, which is the absolute increase of around 12%, 13%, but that's very normal because if you look at around 3%, 4% is the [increase] in the manpower, which would be -- get accounted, as you rightly said, by the Halol ramp-up and also R&D ramp-up because that's where we've been investing to ramp up our R&D. And balance around 8%, 9% reflects the annual increases. So nothing abnormal, I would say, given the ramp-up of manufacturing capacities and ramp-up of our R&D capability, that's pretty much expected. As far as VRS is concerned, we don't comment on speculation.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [138]

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Sure, sir. Okay. And sir, price hike during the quarter. Just wanted to understand what would be the price increase because of CBS and ABS. And has that been passed on for the entire range now?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [139]

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So CBS ABS price increase had happened way back. I mean we have started migrating our portfolio from January onwards itself. So that's way back. And thereafter, recently, what we have done is from -- in July, we have taken a price hike, which is close to around 0.8% to 1% of the pricing. Some of it mitigates cost, some of it goes towards increasing in dealer margin and some of it comes -- will come as a net increase in our ASP.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [140]

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Sure, sir. So when you say that 2-wheeler motorcycle-related ASP increase that, that is largely driven by the ABS/CBS price hike over the year? Or the -- because the product mix has been slightly inferior as well?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [141]

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Yes, but then there was a price increase in the month of April as well. So that's kind of feeding into it. Yes.

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Operator [142]

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The next question is from the line of Sonal Gupta from UBS.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [143]

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So just wanted to understand on -- I mean like just putting two and two together. I mean like the scooter market clearly has seen a much sharper decline. At the same time, from your comments, like you said, that you're seeing more postponement in rural than in urban. So just -- and given the scooters are more indexed to urban. I mean just wanted to understand, are you -- I mean how are you reading the scooter slowdown, really speaking? Is there some sort of a major shift happening in the market? Or what do you think is the factors driving the sharp slowdown in urban markets for scooters?

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [144]

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Well, the jury is still out, we've been having -- we've been having this chart for a long time now. So null, in fact, this probably is the third time around or the fourth earnings call that we've got this question on scooters moving back to motorcycles, et cetera. But I think it will be a little premature to conclude or assume that is happening. But yes, if you look at the past 2 years, the contribution of scooters has come down from 34% to roughly about 30%, 30.2% in this quarter. So that gives you some sense in terms of directionally, but you must also factor in the kind of stock corrections that competition has done in their scooter volumes, including us. We've also done some corrections in our dispatch volumes. But that said, there is a certain evidence with some of the markets where penetration of scooters wasn't very high, aren't really adopting as quickly as one would have imagined or expected. But that's good news for us, in any case, because that's bringing up to our strengths, in some sense, motorcycles are -- we are extremely strong. Surely we're there pretty much in scooters, and we would obviously have a lot of headroom opportunity in terms of gaining market share and gaining penetration opportunities in some of these markets.

But by and large, I think motorcycles gaining at the cost of scooters does seem like an initial trend. Early to conclude. But yes, there are some green shoots there.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [145]

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Right. And just on the cost reduction. I mean can you -- I mean given the slowdown, I mean, do we see that full AP ramp-up happening? I mean how much capacity are you adding? And what's the, I mean, plan there?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [146]

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We will be commencing our production in AP within this fiscal, which is FY '20. The exact production and calibration of that, obviously, will depend on what we need to supply to the market.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [147]

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So the Phase 1 is what 600,000 units or how much?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [148]

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Yes. The capacity would be thereabouts, which is -- it could go up to around that level or really more.

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Operator [149]

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Ladies and gentlemen, due to time constraint, that was the last question. I will now hand the conference to the management for closing comments.

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Umang Deep Singh Khurana, Hero MotoCorp Limited - Head of IR [150]

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Thank you all for dialing in. Have a good rest of the day. Feel free to call us should you have more questions as well. Bye-bye.

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Sanjay Bhan, Hero MotoCorp Limited - Head of Sales & After Sales [151]

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Thank you.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [152]

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Thank you.