Analysts expect motorcycle sales this year to be lower than those of the previous year.

Sagging demand, higher interest rates and rising costs have resulted in yet another weak quarter for Hero Honda. While revenues increased 3.5 per cent y-o-y - indicating that the company had pricing power in some categories - in the June 2007 quarter, its operating profit was down 17.4 per cent.

The only positive for Hero Honda was that its volume sales fell just 3.6 per cent y-o-y, while those of its competitors — Bajaj Auto and TVS Motor-were down 10 per cent plus.

Hero Honda’s operating profit margin declined 272 basis points y-o-y to 10.76 per cent in Q1 FY08. However, this was slightly better than the 10.2 per cent that it posted in the March 2007 quarter.

In the June 2007 quarter, Hero Honda’s raw material costs went up only marginally owing to a high base a year ago. Other expenditure went up 24 per cent, a result of higher advertising and promotional costs and discounts.

After the disappointing results, the Hero Honda stock was down 1.6 per cent. Analysts have downgraded their forecast for motorcycle sales this year, and expect it to be lower than in FY07.

The company has postponed commencing production at its 0.5-million unit Uttaranchal plant due to lower demand. Thus, the tax benefits of this plant are unlikely to kick in this year, and the stock is likely to underperform. At its current price, Hero Honda trades at about 15 times its estimated earnings.