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Edited Transcript of HEROMOTOCO.NSE earnings conference call or presentation 6-Feb-20 1:00pm GMT

Q3 2020 Hero MotoCorp Ltd Earnings Call

New Delhi Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Hero MotoCorp Ltd earnings conference call or presentation Thursday, February 6, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Naveen Chauhan

Hero MotoCorp Limited - Head of National Sales

* Niranjan Kumar Gupta

Hero MotoCorp Limited - CFO

* Umang Deep Singh Khurana

Hero MotoCorp Limited - Head of IR

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Conference Call Participants

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* Aditya Jhawar

Investec Bank plc, Research Division - Analyst

* Amyn Pirani;Yes Securities;Analyst

* Aniket Mhatre

Haitong International Research Limited - Research Analyst

* Bharat Gianani

Sharekhan Limited, Research Division - Analyst

* Chirag Shah

Edelweiss Securities Ltd., Research Division - Research Analyst

* Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

* Jayesh Chandra Gupta;JM Financial;Analyst

* Kumar Rakesh

BNP Paribas, Research Division - Analyst

* Pramod Amthe

CIMB Research - Head of India Research

* Pramod Kumar

Goldman Sachs Group Inc., Research Division - Executive Director

* Rajit Rajoriya;Angel Broking;Analyst

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary

* Vimal Gohil

Union Asset Management Company Private Limited - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Hero MotoCorp's Q3 FY '20 Earnings Conference call hosted by Ambit Capital. (Operator Instructions) Please note, this conference is being recorded. We have with us today the senior management on the call.

I will now hand the conference over to Mr. Umang Khurana, Head of Investor Relations, Hero MotoCorp. Thank you, and over to you, sir.

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

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Thank you, Vikram. Welcome everyone to the Q3 FY '20 post results investor call. We have our CFO, Niranjan Gupta, on the call with us today. He will begin with opening comments, and then we'll open the house for questions. Vikram, let's collate the questions. Mr. Gupta will start, and then let's collate the questions.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [3]

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Hi. Welcome, everyone, to the call. You would have seen our results by now. Good morning, and good evening, depending on from which geography or which part of the world you are joining. As you would have seen, we have delivered an EBITDA margin of 14.8% for the quarter, which is 80 basis points up year-on-year. And a profit after tax growth of 14%. These results are driven by cost savings and corporate tax cut as well.

Overall, revenue stands at INR 7,000 crores. We've also declared interim dividend of INR 65 per share, which is 3,250%. And as you all know that as far as the dividend is concerned, we've always been in the top decile of the companies that declared dividend.

Finally, as far as BS IV and BS VI transition is concerned, all our models are BS VI ready. We are very geared for the transition, and you would have read, we will be stopping our BS IV production by middle of February itself and we're completely geared for a smooth transition to the BS VI regime.

With that, let me just open for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from the line of Vimal Gohil from Union Mutual Fund.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [2]

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Congratulations on a very good execution on the margins front. Sir, first question is, could I get some -- is your data, can I get the spare parts revenue for this quarter? And what was it the same quarter last year?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [3]

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Yes, the spare part revenue for this quarter is INR 800 crores. And for the same quarter last year was INR 730 crores, which reflects a growth of 9.5%.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [4]

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Right, sir. And sir, on BS VI, if you could just share how has been the reaction with the customers? And have you passed on your entire cost and -- plus your margins? Or your margin is still to be covered as far as BS VI cost increase is concerned?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [5]

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Yes, as far as the customer reaction is concerned, it's too early to say anything. Really speaking, we will start picking up the customer reaction in terms of the volume and the price acceptance as an industry itself from the Q1 of next fiscal. But whatever has been sold or whoever has bought it, the [trend] has been positive as far as the product and the quality is concerned. But overall, in terms of the reaction to the pricing and the volume elasticity, you will figure out only in the quarter 1 of next fiscal. On your next question of the passing on the cost. Yes, on an absolute basis, we are able to pass most of the cost.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [6]

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Have you recovered the margins on it?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [7]

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As I said, that we are passing it on an absolute basis in terms of cost per vehicle, most of it. There would, of course, be whatever is the resulting mathematical impact of numerator and denominator on the margins.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [8]

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Right, sir. Sir, my last question was on your cost savings. I see your OpEx has gone down by 9%, and this has been consistently coming down since last 4 quarters. Adjusting for Ind AS, what would be your cost saving in the last 3 months? And how sustainable is this? I mean have you -- are we still left with some steam as far as cost savings are concerned? Or we could see some normalization going ahead?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [9]

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So yes, we've been driving savings program as you know earlier on the material cost side, which is reprogram and then thereafter, we have embarked on programs on the overheads and all the other OpEx and all the other spend as well. So it's part of the drive for the cost savings and driving return on spend and productivity of spend that you see these results. Ind AS impact is very minimal. Overall, Ind AS impact probably will be not more than 10 to 15 basis points on the EBITDA.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [10]

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And sir, could you just break up your gross margins improvement on a Y-on-Y basis. Or on a quarter-on-quarter basis of 100 basis points into how much has come from commodities and rest of -- and other efficiencies?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [11]

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Oh I think I won't detail out so much into mathematical variances. But suffice it to say, it's a combination of commodities, lead savings, both.

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Operator [12]

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We have next question from the line of Amyn Pirani from Yes Securities.

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Amyn Pirani;Yes Securities;Analyst, [13]

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What is your outlook on the commodity costs, especially in a BS VI environment where the proportion of some of the commodities like palladium, which have gone up significantly -- goes up quite a lot? So how should we look at commodity cost environment over the next maybe 2 to 3 quarters?

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

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See, it's very difficult to, I mean, guide on commodities. But if you look at it, there are multiple factors at play, which are happening right now. If you see -- and yes, precious metal is a new kid on the block for BS VI. But if you see, there are other core commodities, which still will constitute almost 70%, 80% of your material cost. And most of those commodities will depend on the outlook for the global economic growth, right? And various other factors. And if you see crude has been range bound for a while. Aluminum has been soft for a while. Now of course, you can see a bit of coronavirus impact on the commodities. So it's very difficult to see. We have seen years of high commodity. We have seen years of low commodity. I think as a company, we are very clear to navigate through this cost inflation, and we have adequately demonstrated that to the market as well.

So I think rather than forecasting commodities, I would say that we have seen the times of high and low growth, so we know how to navigate through these various volatilities that happen in the market.

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Amyn Pirani;Yes Securities;Analyst, [15]

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Okay. So -- and just on the financing brick, can you share what has been the share of financing for you in the quarter or for the 9 months, whatever number your comfortable sharing? And what has been the share of in cost within that?

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

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Yes, financing, as far as the financing penetration is concerned, 46% of our sales have been on financing in quarter 3 and this has been the trend, by and large, last year also, same quarter, it was 45%, 46%. It used to be around 40% sometime back, but now it's gone to a range of 45%, 46%. And [sales drop] is almost 50% share of the financing.

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Operator [17]

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(Operator Instructions) We have a next question from the line of Gunjan Prithyani from JPMorgan.

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

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I have 2 questions. Firstly, on this margin thing. If I look at last 2 quarters, your gross margin has improved pretty meaningfully. And last quarter, if I recall, there was an inventory adjustment, which was a positive adjustment. So it seems surprising in that context that we've even seen further improvement from second quarter levels. So if you can just share what is really happening? Or where are the cost savings really coming from? And I mean, directionally, where should we see this moving if we are projecting our F '21 number?

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

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Thanks, Gunjan, for the question. Yes, our margins have improved over the last couple of quarters. If you see, again, it's a combination of commodities because the commodities impact us with a lag per quarter. And if you see the trends in the aluminum or the tin or the other commodities over the past couple of quarters. So the benefit has come into this quarter because when it comes with a lag, of course, if commodities are now stabilized.

And moving forward, like Amyn said, there are some couple of headwinds that you could see, whether it is steel or precious metals, but these things keep playing out. Apart from that, yes, there are cost-saving programs.

There is a bit of inventory adjustment part of this as well because December end also probably as far as client side is concerned, we had inventories, though they were pretty similar to the September end inventories as well. So once they wind down, some part of it should get wind down in coming quarters.

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

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Okay. Will you be able to quantify that how much will it be because last quarter, I think it was fairly sizable?

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

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Oh it wouldn't be, I think, a big number. I mean probably 20, 30 basis points would be on account of that if you actually wind down the entire inventory itself.

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

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So this 20, 30 basis points refers to whatever commodity on the precious metals side, we are seeing increases. Barring that, the only headwind, meaningful headwind would be the percentage that you see because of BS VI. You don't see any...

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [23]

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Sorry, that can only be in the FY '21.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [24]

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Yes. Okay. Otherwise, you see pretty much in this range BS VI impact margins should stay in this range.

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [25]

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No, Gunjan, I won't give a guidance on the margin. I know. So you can make your math. But yes.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [26]

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Okay. And second question I had was on the growth and the inventory level. How are we looking at growth for next year, given these steep price increases that BS VI products are having? And where are we in terms of inventory levels now after December quarter?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [27]

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As far as growth for next year is concerned, it will be extremely difficult to give a number right now, simply because as you know that with BS VI, the prices have gone up anywhere between 12% to 15%. Really, the retails of BS VI will start in March and maybe meaningfully from quarter 1. So we will have to see what kind of volume elasticity plays out. And in different segments, how differently it plays out. It's very difficult to say that, that's one big variable which is there.

Second, of course, is that we know that as far as overall economy is concerned, there has been a slowdown. Yes, there have been a lot of measures announced by the government, this budget and -- as well as earlier as well. But some of these will take time. So again, the time that it takes for the economy to pick up. And of course, for customers to absorb the price and the new table to stabilize is when one can say. So realistically speaking, you will have to wait for the H1 of the new fiscal. And let it settle down. And then one can be in a position.

But of course, I mean, sitting today, if you were to just ask me directionally, then I would say that probably H2, we should -- we can reasonably expect positive trends to emerge on the back of, let's say, the economy and the effect of slowdown having waned off and the positives of these actions coming today, and the BS VI prices are getting settled down and -- plus, of course, the better rabi crop, the water reservoirs, the water tables, which are there should help the farm crop and farm incomes as well. But I think we'll have to wait out realistically speaking, for H2 for any positive terms to happen.

As far as inventory is concerned, we are -- we were down to close to 6 weeks at the end of December. And by January end, we are down to actually 5 weeks of our retail. So effectively, inventory is a nonissue. And pretty much we're geared for a transition.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [28]

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And this is largely the BS IV only, right? Because BS VI has only been more signaling launches rather than distributing?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [29]

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Yes, yes, yes. So it's largely the BS IV right now than inventory.

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Operator [30]

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Our next question from the line of Chirag Shah from Edelweiss.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [31]

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Just -- sir, some clarifications. First, what is the tax rate as well as the treasury income? Tax rate seems to be extremely low. So is the treasury income. So can we just clarify what would the normal tax rate for next year that we should look at?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [32]

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Treasury income is not extremely low. I don't know why you're saying that because...

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [33]

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As a trend, if you look at your cash flow generation in general, is it -- but it's okay. It could be seasonality. More question was on the tax rate.

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

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Yes, yes, Chirag. So treasury income, as you know, I -- yes, our size of treasury has grown, but equally, the rates of returns have been coming down, as you know, with the rate cards and the [deset] and the yields and even the liquid funds. So you see that, but equally, if you see overall around INR 182 crores of other income versus INR 187 crores, I think, in the same quarter last year.

So I think that's the treasury income part of it. On the tax rate, why you see lower rate is because the change happened from quarter 2. So therefore, the whole adjustment of the rate happens for the forward 3 quarters, yes? And there, that's why you see the rates which are lower for the quarter. Of course, as you move to the next year, you will stabilize at a nominal rate of the 22% plus charge, which will be close to around 25%.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [35]

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Okay. And just again, on the inventory side, so you said 5 weeks of follow up was not much of BS IV inventory -- BS VI inventory, right? That's what I heard?

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

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Yes, yes, yes. Absolutely, and not stopping -- BS IV production, we are stopping by mid-Feb. So therefore, you can see that we are well positioned to transition, and we don't see at all any issue or a need for any excessive discounts for selling this off. In fact, it's a good opportunity for any buyer today to actually pick up the BS IV because he gets to buy at INR 8,000 to INR 10,000 lower even on a BS IV or BS VI price. And the more he delays, the more he will run out of this opportunity.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [37]

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And just one, again, clarify on this precious metal because of BS VI, what is the content jump from industry perspective that is happening because of this precious metal? Because if they were x percent earlier, how much that content is going up for precious metals in general because of BS VI transition?

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

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So overall, if you see that BS -- precious metals will be comprising probably around 4% to 5% of the overall material cost. So really speaking, if you look at a percentage basis, on the material cost composition, it's still not sizable. But it will depend on the quantum of increase. Yes, it sharply increased of late in the last couple of quarters. But some of these things can be volatile and certainly the demand comes. And then thereafter, they have stabilized. So we'll have to just watch the trend a bit more.

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Operator [39]

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We have next question from the line of Kumar Rakesh from BNP Paribas.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [40]

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I'm looking at this [dayparts] revenue this quarter, which you noted is worth around INR 800 crores. Now the mix in our total revenue contribution coming from spare is one of the highest. It's actually the highest in whatever record I could see, both sequentially and Y-o-Y, it has jumped up by around 200 basis points. Sir, should that would have also help you in your margin -- gross margin performance during the quarter.

Can help with understand your thoughts of it? When is -- how we trend from the margin trend and b, what are you doing over there that its performance is a bit disconnected from the retail weakness which we have seen?

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

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Right. So you picked up, right, that these spare parts grow between 9.5% versus 2-wheeler, which has gone down by 14%, so the ratio of parts to the overall revenue has gone up to 11.4%, and that does help the margin, given that the past margin are typically higher than the 2-wheeler sales.

There are a couple of things happening. One is, of course, as a percentage, it looks higher simply because on a dispatch basis, the volumes are 14% down, right? So that's one effect.

The second effect, of course, is on the parts. What we are doing is we are going deeper with our distribution system through micro distributors. And therefore, that has started giving us some results. Early days, but yes, we are structurally trying to penetrate more because potential in the past business is huge, and what we capture is not more than 35%, 36% of the potential.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [42]

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That's encouraging. My second question was around your Andhra plant. Can you just help us with the update and when is it going to ramp up and start production and when we should start seeing the cost and the P&L effect of that?

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

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As far as Andhra plant is concerned, we do have plans to commission it this quarter. And as far as P&L is concerned, it won't have a meaningful impact because it will start producing. It will take time to scale up. And also, given the FY '21, BS VI transition volume projection is probably -- initially, we would be manufacturing it only for south or probably only for Andhra. So yes, in terms of the fiscal benefits and logistics, we will have advantages. But not a significant or any meaningful P&L impact in the FY '21 because of Andhra.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [44]

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So what kind of volume we would be expecting from that plant, at least in the first year?

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

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It will be difficult for me to give out a volume projection right now. But as I said, it will not have a meaningful impact on the top line or on the P&L, but we can talk about it in the next quarter, once we actually commissioned it.

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Operator [46]

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We have next question from the line of Jayesh Chandra Gupta from JM Financial.

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Jayesh Chandra Gupta;JM Financial;Analyst, [47]

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Sir, my first question is regarding today's announcement by [MPC], saying that they don't have to keep CRR for the auto disbursal until July of this year. So do you see financial penetration increasing and maybe supporting sales despite BS VI cost up? And what's your outlook regarding that?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [48]

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See, liquidity hasn't been an issue in the last 6 to 9 months, right? It was an issue earlier, so it wasn't an issue of liquidity. Yes, I mean, no CRR helps in the liquidity improvement. But liquidity is not an issue. And also this helps more of banks and not NBFC, while most of the financing penetration in 2-wheelers happened through the NBFCs. So I don't see this as a factor driving finance penetration. But if I just take the question a little deeper that is finance penetration, can it be a big driver for growth? The answer is yes.

So I think innovative financial products and finance penetration can actually help offset some part of BS VI headwind, which may come due to volume elasticity. And definitely, we are on it, and we will try to see how much of this factor can be played out when we get into the BS VI regime.

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Jayesh Chandra Gupta;JM Financial;Analyst, [49]

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Sir, my last question would be regarding -- so you see some of the competitors are coming with e-carburetor, where they're saying they can control the air, air flow and mix and do the same as FI. What's your view on this technology e-carburetor? Is it effective? Do you plan to do it some time? Is it an effective product to save cost in BS VI, technologically clean and efficient, what's your view sir?

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

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So you've already seen that now e-carb has been launched by one of our competitors. And the price differential between the e-carb launch and the FI that we have launched is not more than around INR 1,000. So the entire concern that probably a lot of you had that maybe e-carb will come at a INR 2,000 or INR 3,000 price, while compared to EFI of INR 7,000, INR 8,000, I think that concern has gone now. Now coming to the technology part of it. EFI certainly is a premium technology. It is proven on a more stable technology. It's more fuel efficient. It can be a better acceleration. It doesn't have a start-stop issue, which sometimes the carburetor technology can have and also the start-stop usually in the cold weather I'm talking about.

And also remember in the next 2 years, the OBD is coming, which is onboard diagnostics regulation. And clearly FI is well placed for -- and very compatible with the OBD technology. The carburetor technology is yet to prove itself to be compatible with OBD. So I think there are lots of ifs and buts about that in comparison. FI is clearly superior, and therefore we don't have any concerns about actually the slight difference. And we believe it's the best technology to go through with the product.

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Operator [51]

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We have next question from the line of Pramod Amthe from CGS-CIMB.

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Pramod Amthe, CIMB Research - Head of India Research [52]

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Two questions. First one is with regard to BS VI, the price hikes already been announced and it looks steep. Looking back at the insurance experience, it really came as a shock and the system took time to adjust. What are you doing differently with financials and the entire ecosystem to take care of such steep hike in pricing?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [53]

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Right, Pramod. So one thing, remember, insurance came as a shock. So it came as a shock to OEMs as well. And there was no time for even OEMs to get prepared or for them to prepare their dealers or the customers. So even the reasons and the story and the logic, and there's a lot of confusion. And in fact, insurance came and then one part was rolled back. And then the other part, the representations, a lot of uncertainty created and a lot of logic issues created as to why the customer should pay. Compared to that, if you see the BS VI, everyone knows, yes, so the BS VI has been there in communication in interactions and the customers to stay right on the last 9 to 12 months that yes, BS VI is coming, they know that there is a price hike coming. And now the models have started getting launched in the last couple of months. And therefore, a transition happens by March end. So there's enough time, first of all. So comparison with insurance was a shock, while BS VI, which is planned and known, the reactions would be different. Second thing is, of course, along with BS VI, everyone and we are also doing, we are trying to do a better product. So you would have seen our pleasure scooter, which went out a week back, and we said it goes with a 10% better fuel efficiency. Now if you just take 10% better fuel efficiency that saves you almost INR 2,500 a year. And the capital value of that could be INR 7,000, INR 7,500 over a 5-year NPV. So I think, of course, customers want to NPV calculation, but they can see some part of savings coming.

And also when you see acceleration, better technology, futuristic technology, our technology has a premium associated with that. So I think these are the things that can help BS VI price landing in a much more softer manner as compared to the insurance landing. Apart from that, of course, we will have to do some work on financing products in order to make it easy as far as the upfront payments are concerned.

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Pramod Amthe, CIMB Research - Head of India Research [54]

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And the second one is with regard to the top management. In spite of the company taking up [ease-off] programs to regain the key performers, we have seen a substantial change in the CY '19. Do you think you need to install a much stronger program as a much attractive program to retain employees? And how do you plan to and what's your observation in terms of how to come out of retained handle the BS VI metal?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [55]

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Right. So let me just talk about -- I think what happens is that when 2 or 3 movements get bunched together so that actually seems to be like a big issue that's happening. However, if you see in isolation, we had [CTO] moving and that was part of the plan because it completed its 5-year contract. That was a contract period. And in that time, markets actually established the R&D center. The depot center with INR 1,000 crore investment. We have 1,000 engineers. We have second, third line. So the whole organization is established that way. And then it has been seamlessly in a sense of taken over by Vikram Kasbekar, who also handles manufacturing. And you can see it hasn't affected our BS VI transition at all. And all the models are ready, it's moving into the market. Equally, if you look at the transition of Sanjay Bhan, he served the company for 30 years. So it's not like people are coming and going, it's just that probably 2 or 3 moves have got bunched together. So we don't see an issue on that front. And of course, the organization, the structure, the systems are all institutionalized. So we don't see any impact as far as short and medium term is concerned.

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Pramod Amthe, CIMB Research - Head of India Research [56]

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The last one, if I can ask, what is in the context of changing dividend tax rate. What is your broader payout policy to remain intact? Or how do you look at it?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [57]

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The broader policy doesn't change because of the change in the taxation. We continue to be a company, which believes in paying out on a progressive basis. We continue to be a company which are in the top quartile, and will remain there. And therefore, we don't see any significant change as far as the dividend policy is concerned.

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Operator [58]

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We have next question from the line of Ronak Sarda from Systematix Shares.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [59]

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Sir, first question on the rural sentiment last quarter, and we had -- during the call, we were hopeful that the [wins] should be strong, and it has actually been pretty strong. But any change on ground? I mean are we seeing any improvement in the sentiments? Any spending change?

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

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Ronak, so thanks for the question. Yes, early days. But I would say that there are some hints that are coming. For instance, when we look at our January retail, we can see some areas, some states, right? UP, Rajasthan, Maharashtra, parts of Gujarat, we can see actually growing 10%. We had double-digit growth in retail in January. Now these are early days, but it's a positive that we take out. But I guess, once the rabi crop is harvested and the incomes go in the hands of the farmers, and of course, people who are dependent on the farm sector, then one could start seeing these green shoots as getting more established.

Apart from that, of course, a lot of programs have been announced by the government for the rural and the infra that all of you have seen. I think if they are executed well in time and in full, which means the amount that are intended, then, of course, the dividends of those initiatives should start coming in 6 months' time. So I would say a good crop followed by the output from the initiatives implemented should auger well for the rural sector.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [61]

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Sure, sure. That's helpful. So part question here, again, how is the financing in the rural -- I mean you gave the overall financing numbers, but anything -- I mean, have you seen a major jump in the rural? Are the financials -- happy to do in the financing in rural areas now?

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

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See, I won't be able to give out a split of rural financing and urban financing, but I can say that, look, in this area, the financing companies have a job to do. Right now, they are also risk averse. Actually, the whole financial sector is risk averse, right from the banks to NBFCs, which is why you don't see liquidity converting into lending. And I think as the economy picks up a bit, and with technology intervention, and with better financial inclusion and integration, that's a big opportunity as far as rural is concerned. So I think the finance companies also have a job to do in this area. But the potential is there. And that could actually give a lot of boost. In fact, there have been new products, which we have experimented, and we have introduced whether it's flexi cash or whether it is low LDTs, et cetera. And we continue to innovate around that as pilots, and we are seeing good results.

But I think for a big jump on that, the confidence from the NBFCs and finance companies is also extremely important. And confidence as far as they are concerned is dependent on the confidence of their own lenders. So therefore, the whole financing sector, right from banks to the NBFCs to the entire thing has to get a little more confident before they can actually take a jump here.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [63]

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Okay. So basically, this -- the 10% retail growth is without financing for sure. That's helpful. Sir, second, I mean, we were working on...

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [64]

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Oh wait. I'm sorry. Sorry, Ronak, it includes a bit of financing but yes, there are other drivers as well.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [65]

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Sure, sure. Sir, second question, I mean, we were also working on the e-carb technology, and we were hoping to launch it later in the year as an option. So I mean can you assume now we are not working on it, given the pricing is not very different and to have the challenges with the e-carb technology? Or we still a go? Are we still working on the scene?

And other part question to this is, how is the BS VI pricing feedback from the retail side because we have launched 2 of our largest selling products in BS VI. So any customer feedback that you can share?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [66]

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So as far as the carburetor technology is concerned, we had said that as part of our cost optimization plan, yes, one section of our team is also working on that, right? And of course, the technologies can be improved over a period of time. And we will see how it goes, yes? And if it works out, if something where the customer wants a far lower cost versus the modern technology, one could always have an option of an SKU or a variant or a product. So I think that's where I would say we see that going.

As far as BS VI is concerned, I think I told earlier also in this call, right now, it's very early to measure any pricing feedback meaningfully because the retails of BS VI are far, far lower. So you can't really gauge from that. It's only from April onwards that we have -- we'll be able to gauge the reaction of the customers.

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Operator [67]

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We have a next question from the line of Pramod Kumar from Goldman Sachs.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [68]

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Congratulations on a great margin performance. My first question is on the BS VI transition. Sir, so if you can just help us understand, out of the 16 brands, what we have in our portfolio, how many brands are already kind of moved to a BS VI production? And if you can share a time line, actually, by when do you see 100% BS VI production across all your 16 brands, sir?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [69]

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Pramod, thanks for the questions. So first of all, you would have seen that we've already started dispatching HF dealers. We started with iSmart much earlier. And at that time, also, we said that we will calibrate our dispatches as per our transition plan. We've also started the attaching Pleasure and you will see more and more products coming, yes? From an R&D side and the production side is complete readiness. From selling side and dispatch side, as I said, it's all calibrated as per our BS IV, BS VI transition. What -- however I can say is that we are stopping BS IV production by middle of February. I think that should give you enough indication of our transition and the volumes.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [70]

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And related to that is what happened with the scooter portfolio? Because is it just BS is -- the BS IV ramped down. That's why our numbers have fallen to 7 because that number looks abnormally low, even from a dealer support and sales perspective, sales continuity perspective on the end market. So if you can just because we had much higher volume ambitions there, thanks to the new launches on the 125cc. And we heard in the past that we had almost 15%, 20% retail market share in the 135cc category, but the volumes of the wholesaler have been slipping, and last one was a kind of absolute shocker. So can you just explain a bit of that, sir?

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

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Okay, Pramod, you're absolutely right. It is basically because we are stopping the BS IV. And therefore, all the scooter production was stopped in December itself. And therefore, you won't see them in dispatches. And there's always when you plan a transition for BS IV and BS VI. So you ramp down the BS IV and you ramp up the BS VI, there's always going to be some gaps between when the BS IV gets ramped down, BS V gets ramped up. So you're absolutely right, it is because of the transition and not something that is adjusted to say.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [72]

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So in a way, we should expect a sharp comeback from February, March itself? And then from February, it's a [buyer base] because the channel must be really like dry right now, given the heightened momentum.

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

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Hopefully. I hope you also go and ride a couple of our scooters, Pramod.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [74]

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I'm waiting for the electric one, sir.

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

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Don't buy electric. There is a change on [are you] in the charging stations. Go and buy something that you can fuel and drive right now.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [76]

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Okay. I was thinking about the carbon footprint, sorry. And last one, Niranjan, as on the export side, sir, again, we have seen extremely good performance from Bajaj and TVS on a much larger basis, but some of these seemed to have been kind of not benefiting from the boom in the export side in many of the markets. So is there -- if you can just help -- and does it been a sustained issue what we've been facing on the export side, even with the [volatile] environment. So if you can throw some color on that, sir? And this on...

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [77]

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So admittedly, Pramod, the exports is taking time to pick up. There's no denying that. Having said that, Colombia has started doing very well. For instance, in the last quarter, we grew 18% in Colombia versus market, which grew by 10%. These are, of course -- Colombia is one of our strategic markets, because it's 0.5 million this one. As far as Bangladesh is concerned, there has been some fiscal changes in the regulatory space there. So there is some adjustments happening there. But we're not worried there. The Bangladesh company is profitable. We have 20% market share there.

But having said that, there are enough opportunities, which are there. It is taking time for us to pick up. We are configuring our products also to suit the market. So it will take some time, but we are at it.

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Operator [78]

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We have next question from the line of Aniket Mhatre from Haitong Securities.

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Aniket Mhatre, Haitong International Research Limited - Research Analyst [79]

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Could you talk a bit about your working capital? How has it moved and about the asset generation this quarter?

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

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So as far as the working capital is concerned, while I won't give you a number, maybe off-line, Umang can help you, but all I can say is that one of the things that we've been pointing out is the receivables in the past. And our receivables have come down in December to the normal levels.

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Aniket Mhatre, Haitong International Research Limited - Research Analyst [81]

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Okay. And any sense on the FCF generation this quarter?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [82]

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Sorry?

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Aniket Mhatre, Haitong International Research Limited - Research Analyst [83]

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Any sense on the FCF, you would have done this quarter?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [84]

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So we don't give out FCF numbers on a quarterly basis. You can connect off-line, of course, with Umang.

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Aniket Mhatre, Haitong International Research Limited - Research Analyst [85]

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Sure. Sir, my final question is, you alluded to the fact that part of the gross margin is because of commodity cost benefit. Is there -- I mean have you got the benefit on a retrospective basis? So second quarter's benefit has also come in this quarter or it's entirely third quarter benefit?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [86]

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So it's always with a lag. So there is no accounting adjustments here. It's always been like that, that the commodities for us impact us with the lag of a quarter.

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Aniket Mhatre, Haitong International Research Limited - Research Analyst [87]

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No, what I'm trying to understand is whether even one edge benefit is in this quarter? Or you have got the benefit for only this quarter?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [88]

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No, it's only the quarter benefit.

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Operator [89]

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We have next question from the line of Aditya Jhawar from Investec.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [90]

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Yes. And then my question is about -- what is the share of rural in our overall portfolio?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [91]

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I can -- let me just hand over this question to Naveen Chauhan, who is the Head of National Sales, and he is with me. Naveen, would you like to throw some light on rural and others?

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Naveen Chauhan, Hero MotoCorp Limited - Head of National Sales [92]

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Sure. I think rural has been doing good for us. And consistently, I think that is a positive number that we're getting this and I think in excess of around 50% that we get from rural market. I think the continued focus there, which is helping us harness the opportunities which are there. Yes.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [93]

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Okay. Yes. And Niranjan, are you guys seeing any increase in delinquencies in Hero FinCorp? And does it have a kind of a recourse on Hero Motor?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [94]

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No, there's no increase in delinquencies and also no recourse to Hero. Hero is only doing as an equity shareholder. And there is no underwriting of any debt or any other obligation whatsoever. It's on an arm's length basis, so there's no recourse. They operate as an NBFC in their own right.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [95]

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And there's no increase in delinquencies that we are seeing there?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [96]

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I mean they manage their own business, honestly speaking. You can take it off-line also with Umang. But the business is progressing well. Their loan book has gone to INR 23,000 crores there. Their profits have increased on a year-on-year basis. So I think the company is doing well. But you can connect off-line with Umang for anything more that you want on FinCorp.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [97]

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Okay. And is there a differential in credit period offered in spare part versus our main business?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [98]

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Not meaningfully. I mean there's a bit of difference here and there. But honestly, spares is 10% of our revenue. And I would say broadly, spare parts would be close to around 30 days of credit on an average. And 2-wheelers operate on a 15-days interest rate credit.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [99]

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Okay. That's it from my side and congrats on great set of numbers, especially in this environment.

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Operator [100]

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We have next question from the line of Rajit Rajoriya from Angel Broking.

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Rajit Rajoriya;Angel Broking;Analyst, [101]

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Sir, my question is regarding that in the segment, which we are -- our product mix is the highest debt of 75cc to 110cc. In past 9 months, April to December, we have actually lost market share by 1.2 percentage volume-wise. So may I know the specifics here? And also the export growth has been down by 36%. So is there any -- can you throw some colors on this one?

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

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Yes. So basically, overall, there are two reasons for that. So one is you're kind of looking at this, just the CC classification on a stand-alone and one segment does not help because customers do migrate from one together. The way we look at it is, look, on a year-to-date basis, 9 months, motorcycle, we have gained 70 basis point market share. So I think that's the way we look at it. And with whichever mix we have been able to do, our margins have gone up. So I think there is a mix and as a margin management, and that's what we navigate. Having said that, since you asked a specific question. Within that fashion is a brand where we've talked about earlier as well. So that has lost some shares because in the past, we haven't done enough refreshes on that. And we are addressing that in BS VI, and you will see soon once the Passion BS VI gets launched, that the changes that have been reflected in that model.

As far as exports is concerned, I've already answered that, yes, exports is taking a bit of time for us to pick up. We are customizing products for the specific markets and building it brick by brick. Some of the markets have started showing signs. But currently, exports is a very small percentage of our revenue, but it gets the full focus. Exports, which we have launched in most of our markets of exports, has been received very well. So again, early days, it will take time to build into these markets. So we are at it.

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Rajit Rajoriya;Angel Broking;Analyst, [103]

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Okay, sir. And sir, my next question is on the GST front, sir, that as we all know that the segment in which Hero is that is a mass category pillar. But they have been charged with the rate, which is of luxury item, 28%. So may I know if there are any possibility of probability that how the government will take it or whether they will revise the rate from 28% to 18%? Is there any hint from the governor? Any assurance from the government side? What is the status of that, sir?

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

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So first of all, thank you for this question. And maybe you could also help us represent. So I think we've represented multiple times to the government. But finally, look, we have to run our own business with what we have. And that's what we are doing. Government probably also would have constraints as far as fiscal space is concerned. So we will see how it goes. Right now, we are not really focusing on that. We are focusing on that with the current cost and pricing and margin structures, how do we make the auto industry grow and also grow as well.

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Operator [105]

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We have next question from the line of Chirag Shah from Edelweiss.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [106]

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A question on exports, while it has been asked -- so I just wanted to understand why is it taking time because some of your peers who were late entrants have been able to expand reasonably well over the last 2, 3 years. So while some of them establish really advanced, but some of them have been through. We were focusing on exports in the region at a reasonable time. So is there anything specific that we are not able to address while some others are able to address or -- we're not going to take risks as much as others are taking? Is that the reason? How should we look at this opportunity? Sir, I don't think this is an issue carried in most of the markets from your perspective?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [107]

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Yes. So Chirag, you rightly pointed out, it's a big opportunity for us and opportunity that we know. If you see, there are 2 places where we have put in our manufacturing centers in our fully dedicated teams. And both places, Bangladesh started growing earlier itself well, 20% market share. It's a profitable company. In the first year itself has paid off all its loans and everything. And if you look at Colombia, it took time to get our act together there. But now in the recent quarters, we have started growing.

If you look at again, Nigeria, we launched with our product. But then in Nigeria, the taxi market, and therefore, that product didn't do well. So we actually finally paused and stopped selling into Nigeria. So therefore, that case has gone up. And now we will be putting out with a completely customized product, which is suited for that market.

So similarly, there are examples. There are multiple examples of different countries. It's about understanding each country in its isolation. We started it only 4, 5 years back. Yes, we have an ambitious target. We still have that target for [GB] to be 10% of our revenue in fullness of time. There is a very good team working on it. We can see success in a few geographies, but yes, it's taken time, but I can tell you that there's a lot of focus on this because it's a huge, huge opportunity from a Hero portfolio perspective, and we will get it right.

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Operator [108]

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We have next question from the line of Bharat Gianani from Sharekhan.

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Bharat Gianani, Sharekhan Limited, Research Division - Analyst [109]

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Yes. So thanks for the opportunity and congratulations on a great set of numbers in such a challenging environment. I just have one query, if you can close right in the same. Do you see oil marketing companies increasing the cost of fuel of BS IV, BS VI, anything you can -- do you have any sense on how -- what you'd like to share at this moment would be helpful. So just wanted to [get your thoughts on that].

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

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It's difficult to comment on that because, yes, we've also seen oil marketing companies announcing increase of the -- for the BS VI. I think they've announced a INR 1 per liter, which amounts to probably 1%, 1.5% in terms of the price per liter. So it doesn't seem to be significant. Equally, fuel actually apart from this INR 1 actually depends largely on the crude oil, which is more volatile and actually can take away or given more than that INR 1 by its movement itself.

So honestly, at this point in time, we don't see that as an area or a topic to focus on, and we will see how it moves.

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Bharat Gianani, Sharekhan Limited, Research Division - Analyst [111]

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Okay, okay. That's really helpful, sir. I was thinking like it might have had an impact, but given the huge fuel efficiency increase that we see under the basic [we'll be in], it shouldn't be a problem, I think.

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Operator [112]

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We have next question from the line of (inaudible) from Centrum Broking.

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Unidentified Analyst, [113]

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Congrats on a good margin numbers. Two questions from my side. First, you mentioned that why keeping we have gained 70 basis points market share. Is this only in motorcycles or both [scooters and] motorcycles?

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

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It's in motorcycles.

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Unidentified Analyst, [115]

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And similar, what are the scooters?

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

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Overall, if you look at our scooters, we have lost the market share on a YTD basis by 280 basis points. Our scooter market share is at 8%. And overall, our 2-wheeler basis, both put together, we are, by and large, flat as far as market share is concerned on a year-on-year basis.

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Unidentified Analyst, [117]

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And the second question is on the discount trends. What has been in the discount levels in Q3? And how has it has been trending in Jan? And going forward, what are...

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

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So as far as discount is concerned, Q3, of course, was a festive period. And our margins factor in that so the margins are after factoring the discounts, and you've seen that. Even at that time, we have said that we are doing the schemes in line with what we have been doing in the earlier years and no meaningful change, no substantial change on that and it has gone out by our numbers.

As far as the quarter 4 is concerned, again, yes, you do run schemes here and there into geography specific, and you would have seen that. But you won't see -- you would not have seen any substantial jump there simply because the inventories are low, and we are geared up. So we don't see a reason for any substantial or a significant hike in discounts.

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Unidentified Analyst, [119]

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I mean does the -- I mean the Q3, the discount levels have been more or less similar to what it was in last Q3?

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Niranjan Kumar Gupta, Hero MotoCorp Limited - CFO [120]

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Yes, yes, you can assume that. I mean it will be probably slightly higher, but not significantly higher. In fact, we had said that earlier as well. In our last quarter call, we have said that we won't be going with significantly higher discounts. We have said that, yes, it will be up, but it is not like mother of all discounts or father of all discounts.

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Unidentified Analyst, [121]

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If I can request, would you like to put in a number for a discount per unit?

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

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No, no, no. We won't give out a specific number.

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Operator [123]

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Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Umang Khurana, Head of Investor Relations, Hero MotoCorp, for closing comments. Sir, over to you.

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Umang Deep Singh Khurana, Hero MotoCorp Limited - Head of IR [124]

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Thank you, everyone, for coming in. Lovely getting all your questions. Let's connect after this as well. Have a good evening. Bye.

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Operator [125]

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Thank you very much. Ladies and gentlemen, on behalf on Ambit Capital, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.