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Hero MotoCorp Ltd (HEROMOTOCO) Q1 FY23 Earnings Concall Transcript

HEROMOTOCO Earnings Call - Final Transcript

Hero MotoCorp Ltd (NSE:HEROMOTOCO) Q1 FY23 Earnings Concall dated Aug. 13, 2022

Corporate Participants:

Umang Khurana — Head, Investor Relations

Mr. Niranjan Gupta — Chief Financial Officer

Ranjivjit Singh — Chief Growth Officer

Swadesh Srivastava — Head – Emerging Mobility Business Unit

Analysts:

Ashutosh Tiwari — Equirus Securities — Analyst

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Kumar Rakesh — BNP Paribas — Analyst

Kapil Singh — Nomura Group — Analyst

Pramod Kumar — UBS Group — Analyst

Pramod Amthe — InCred Capital — Analyst

Chirag Shah — Edelweiss Securities — Analyst

Joseph George — IIFL Securities Limited — Analyst

Rishi Vora — Kotak Securities — Analyst

Arvind Sharma — Citigroup — Analyst

Jyoti Singh — Arihant Capital Markets Private Limited — Analyst

Ronak Sarda — Systematix Group — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to Hero MotoCorp Limited Q1 FY ’23 Earnings Conference Call hosted by Equirus Securities. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ashutosh Tiwari from Equirus Securities. Thank you, and over to you, sir.

Ashutosh Tiwari — Equirus Securities — Analyst

Thanks, Michelle. Hi, good morning everyone. On behalf of Equirus Securities, I welcome you all on the Q1 FY ’23 earnings call of Hero MotoCorp. I would like to thank the management for giving us the opportunity to host this call.

Without further ado, I would like to hand over the call to Mr. Umang Khurana, who is Head, Investor Relations to introduce management participant. Over to you, Umang.

Umang Khurana — Head, Investor Relations

Thanks, Ashutosh, thanks for hosting us. It’s a pleasure to connect with all of you and thank you everyone for sharing your weekend with us. As usual, we’ll keep the call for an hour. Today we have on the call with us the CFO, Niranjan Gupta; and also the Chief Growth Officer, Ranjivjit Singh and Swadesh Srivastava, who is the Head of our Emerging Mobility Business Unit.

Thank you everyone again for joining us. We’ll begin with Niranjan’s comments, the CFO’s comments and then start to take questions. Over to you, Niranjan.

Niranjan Gupta — Chief Financial Officer

Thanks, Umang. So, welcome to our earnings call. And thanks, thanks for taking out time on Saturday. Our quarter one results published yesterday, this shows significant improvement sequentially on top line tracking the positive momentum in the industry coupled with gain in market share. We’ve been able to hold our EBITDA margins versus quarter four, which is the preceding quarter and improving the same on a year-on-year basis by around 180 basis point. This shows our focus on both growth as well as profitability as what we have been speaking many times.

Parts business, parts accessories merchandise continues to do very well. We delivered INR1,061 crores in the quarter at 12.6% of revenue. While focusing on building a robust portfolio in Premium segment, we’ve also been doing premiumization of our existing models through XTEC variants as you’ve seen through Splendor XTEC, Glamour XTEC, Passion XTEC and Destini XTEC. The demand for these variants is outstripping supply as of now. As we ramp this up, it should help us in improving market share along with of course pricing realization and margins as well.

Let me now talk a bit about macro and microeconomic factors and our outlook on industry. The global economy, as we all know is facing headwinds of inflation and compulsion of Central Bank to raise interest rates to tame this, which obviously has an impact on growth. We do expect however, the rate increase cycle to stabilize in a quarter or so. Given all this context, while India is not de-linked from global economy, however, it’s relatively much better placed whether we look at the currency, whether we look at the interest rates, whether we look at multiple other micro factors like the GST collection or the PMI Index or the recently released IIP index, they’re all indicators in positive direction coupled with of course in the short-term, as you can see the normal monsoon as we are talking about and crop cycle.

So effectively, when you combine all of these and also combine the consuming base of India with a low per capita consumption, it means that the underlying medium-term growth prospects are better than most of the countries. The recent geopolitical issues while they do pose headwinds on one hand, but they also could bring inflows into the country because there are very few country which are investment destination like India and so there are enough positives for us to rely on. We remain positive about the prospects of the economy in general and auto industry in particular.

So with that, let me now hand it back for the Q&A.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions].

Niranjan Gupta — Chief Financial Officer

Michelle, go on.

Operator

Okay, sir. The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Hi, thanks for the opportunity. First question is on the demand environment, can you touch upon how demand is shaping up, I mean especially in context of what, in terms of the ground level retail trend? And when we see in light of our own trend? So, July was a particularly weak month. Are we still undergoing inventory destocking or what it is?

Niranjan Gupta — Chief Financial Officer

Right, Jinesh. As far as demand environment is concerned, as we spoke about the entire industry along with us, and it’s also good to look at it sequentially given all the base effects of pandemic et cetera, et cetera, the quarter one has been better than quarter four as you have seen the industry as well as us in terms of the growth. In quarter one, our retails were actually better than wholesale. So, that’s the second point for you to take. As far as quarter 2 is concerned, the entire industry, as you know now build stock moving forward. Yeah, some of the stock build-ups, you could say is slower for us has been in July than expected because of some of the, in some of the variants, the chip impacted supply issues, but we are confident that over August-September, we will build for our festive season.

So, underlying as far as demand is concerned, it is now with the onset of festive everybody is looking forward to the festive season to get an indicator. So, as of now, I would say that the momentum is right and in the right direction with all the consumption spending, which is, which is happening. Of course a month here and there could always swing when you get more purchases in a quarter and therefore a month becomes a little soft. So, not really concerned about that, Jinesh.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Sure, sure. And the chip shortage is primarily for the XTEC variants, right and the premium variants?

Niranjan Gupta — Chief Financial Officer

Absolutely. As you know, we launched, we now have four XTEC variants; Glamour, Passion, Splendor and Destini as well and basically there — and the good thing by the way is that while on one side we have the inflation story across the country and globally. But on the other side, what we’re seeing is the moment you launch a premium variant and all these XTEC variants are at 7% to 10% higher price, the demand for these variants is far more than what we anticipated as a ratio. So clearly, it means that the consumers are willing to spend. They need to have a reason to spend.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Got it, got it. And second question pertains to the iron cost inflation seen in this quarter. So, on reported basis, there is a substantial QoQ impact, but I guess there is some inventory-related change impact that is there. But even adjusted for that there was about 150 basis point QoQ increase in RM cost. So, can you talk about what is actually commodity cost inflation which we saw in this quarter and the price increases taken in 1Q and 2Q so far? Thanks.

Niranjan Gupta — Chief Financial Officer

Yeah, Jinesh. So, I’ll talk about the cost inflation first, and you’re right to take that up. As you know, given our pipeline of supplies, the impact of any cost takes a quarter to manifest. Yes. And therefore, if you look at it across the commodities, the quarter four in terms of the market index that saw a spike and then thereafter of course, and now we have seen of late, a bit of softening in aluminum, in steel. All of this will get reflected in quarters as we move forward. And therefore, we do feel that the overall balance of the commodity basket seems to have peaked off and therefore moving forward stabilization or maybe even coming down depending on when the — all the rate increase cycles have an impact should be auguring well.

As far as price increase is concerned, you know, we took from first April 1, around INR850 ex-showroom and July 1, we have taken around INR1,200 ex showroom, which will of course get reflected in the Q2 and the coming quarters as you see. And of course in the past, last few quarters, maybe 6%, 7% and you’ve been talking and we’ve also been saying is that the price increases have lagged the cost inflation and rightly so because you want to balance off both growth and profitability. But moving forward as the commodity pool stabilizes, then we’ll have options and the opportunity to move the prices ahead of the cost and therefore, as an industry, an opportunity to actually recover some of the lost margins.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Got it. Just to clarify, the RM cost under recovery post-July price increase will be broadly taken care given the current commodity prices or still be under recovery?

Umang Khurana — Head, Investor Relations

No, there still be some under recovery, which needs to be recovered. As you know, our margins are at 11.2% and therefore, at some stage this needs to come back to around 14% at least and therefore there would be some recoveries to be made for sure.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Got it. Thanks. I’ll fall back in queue.

Operator

Thank you. [Operator Instructions] Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh — BNP Paribas — Analyst

Hi, team. Good morning and thank you for taking my question. My first question was around your employee headcount. Over the last nine years if we see, our production or volume has declined about 20%, but our employee head count has increased by close to 50%. And within that a large part of it is temporary employees. So, more than 70% of our employee base would be temporary employees. I wanted to understand why are we keeping such higher number of employees, especially temporary employees?

Niranjan Gupta — Chief Financial Officer

So, couple of things. I think number 1 is, we in an industry, we don’t move up or down the employee head count with the volume. I mean we have seen when you said the production or the volumes have come down over X number of years, a large part of that is manifestation of the pandemic. Yeah. If you look aside before pandemic, right and give us — leave aside the BS-VI, we were doing around 8 million of volumes. Right, pretty much there. So, you don’t actually take up or take down the employees based on that. And as we all know pandemic was not just an economic crisis, more than that it was an humanitarian crisis and we at Hero, we do believe in taking care of the employees and therefore having them with us, so we did not fire any one.

We, in fact ensured that even contractors and casuals, they also actually get their rightful, rightful pay. The solution is to increase the top line and which is what we are focused on rather than adjusting the employee. We’ve been of course judicious as far as our employee head counts are concerned, there are certain places that we are scaling it up like growth priorities whether it’s global business, whether it is the, you talk about the EV space. So, there are spaces where the head count will go up and we will be judicious in all that. But I think the solution to all of this to get the right ratios is to increase the top line, and which is what, which is what we’ll be focusing on, top line as well as the mix and which is where we are focusing on building a premium portfolio and premiumization of our variants as well.

Kumar Rakesh — BNP Paribas — Analyst

Yeah. Having a high temporary employee base should ideally would have given us the flexibility to maneuver our head count based on how the production and demand environment has been and this trend is something which even before COVID impacted, something which was that you were running higher head count, despite the volume coming down around BS-IV, BS-VI transition. Anyways, I’ll follow up on that later.

Niranjan Gupta — Chief Financial Officer

Yeah, sure, sure Kumar.

Kumar Rakesh — BNP Paribas — Analyst

My second question was on the Hero FinCorp business. So, last fiscal year Hero FinCorp credit cost was about 7% is what I estimate — calculate based on the numbers, which we have disclosed. But we have gone for another round of funding in the business this quarter. But that 7% credit cost was for a business, which has a yield of about 14%, 15% doesn’t look sustainable. So, whilst going for investment in this round, have you set any target to lower these high credit cost or we are okay with these numbers?

Niranjan Gupta — Chief Financial Officer

There is a target, so the funding round, there is target for growth at the AUM level. And as we — as we all know that the finance penetration, the scope for growth of NBFCs is huge and as growth comes back, Fincorp will have its opportunity to grow the asset base. So, that’s where the — that’s where the amount will get invested in. As far as credit cost is concerned, I wouldn’t say we are comfortable with that credit cost. I think Fincorp team is working on bringing that down from, let’s say, 7%, 7.5% to probably 5%, 5.5%. So, that’s the endeavor to bring down over the next four to six quarters, so that the ROA and the ROA is improved moving forward over the next six quarters.

Kumar Rakesh — BNP Paribas — Analyst

Thanks a lot for taking my question.

Operator

Thank you.

Niranjan Gupta — Chief Financial Officer

You’re welcome.

Operator

The next question is from the line of Kapil Singh from Nomura Group. Please go ahead.

Kapil Singh — Nomura Group — Analyst

Good morning. My question is more on the sub-segments. If you could talk about the growth that we are expecting for scooters and exports because these segments have also seen some kind of decline for last few months. And similarly, for the retail sales also they have declined in last one or two months. So, are there any factors, which are impeding the recovery? And also EVs, from which month should we expect that the sales will start?

Niranjan Gupta — Chief Financial Officer

Right, Kapil. Kapil, good morning. And I see that the restriction of two questions mean that in one question you combined four, but we will answer each of these. Let me take up the exports first and then thereafter I’ll pass on to Ranjivjit to answer on the scooter and the retail sales and then I’ll pass on to Swadesh for EV. As far as exports is concerned, we all know that a lot of, lot many countries globally are facing the impact of the price inflation, currency, et cetera and mostly because our sales are in emerging markets and these markets are facing whether it’s Bangladesh, Nepal, Sri Lanka, Nigeria, Colombia. I mean all of those are facing.

Now, we expect that to be a short-term, so therefore, you’ll see exports as having a softer quarter. But we do expect in the second half to move up. I think more importantly for us is to, is to continue building scale, building the right product and get to the right percentage of revenue in our portfolio from the global business. Let me at this stage hand it over to Ranjivjit on to answer on the scooter market share and what we are doing to address that and also on the retail sales, general trend. Ranjivjit, Ranjivjit if you are there, can you just address this?

Ranjivjit Singh — Chief Growth Officer

Yeah, sure. My pleasure to do so. Hi, everyone. Ranjivjit, here. The scooters business was actually very interesting for us in quarter one. We launched the Destini 125 XTEC, XTEC is really extra technology and with the LED headlamp and with Bluetooth connectivity, it’s really become a hit favorite amongst people and consumers are loving it. There’s a new campaign that’s out there with — getting a lot of good reviews. The product is doing extremely well in terms of all its variants. So, the 125 CC segment, we really serve very well in the market and continues to become even stronger play for us.

Going forward, we’re going to see some more action in the 110 CC as well some groundbreaking innovation that I’m very personally excited about. We’ll be bringing in some new stuff in this quarter in time for the festival season. So, I would say July is a time of transition, it’s the time for rejuvenation of the portfolio. And as you see, July-August-September, over the quarter, the whole portfolio is going to get far more consolidated and it will be the results will be something that we will be happy to share in our next discussion.

Niranjan Gupta — Chief Financial Officer

Thanks, Ranjiv. Let me add it over to Swadesh, if you can just update on our, on our EV.

Swadesh Srivastava — Head – Emerging Mobility Business Unit

Yeah. Thank you. Hello, Kapil, good morning. We are actually quite excited to be getting very close to our launch. We had announced sometime back that we’ll be launching our EV product and the overall ecosystem in the festive and which is going to happen sometime soon. And on that date we are also going to be announcing the dates for dispatches across the launch cities, which we have in mind. So, it’s just a matter of few weeks.

Kapil Singh — Nomura Group — Analyst

Thank you, team for the very detailed answers. Thanks.

Operator

Thank you. The next question is from the line of Pramod Kumar from UBS Group. Please go ahead.

Pramod Kumar — UBS Group — Analyst

Yeah. Thanks a lot for the opportunity. My first question is on the margin front, Niranjan, as in this commodity prices easing now and expected volume recovery of the way you are looking at it, is it fair to assume that we should see the margin levels improving meaningfully from the current levels because the recent quarter margin is definitely not what something Hero historically has delivered. I would see that as a one-off. So, how should one look at the margin trajectory for the remainder of the fiscal and also for next fiscal?

Niranjan Gupta — Chief Financial Officer

Right, Pramod. Good morning. So, absolutely Pramod, as I said, mentioned earlier as well, as the positive impact of the commodity basket cooling off happens, it ensures that moving forward we have more opportunities for pricing to go ahead of the costs rather than what it has been for the last four six quarters. And second thing is, as the volume picks up and market share picks up, then obviously we should have the operating level. So, I think a combination of both these factors should there is no reason to actually doubt that the margin should improve or should not improve. I think the combination of both these factors should help our margins to improve. How fast and how rapid we are able to accelerate or should we deploy part of that back into into growth, et cetera, et cetera, that’s something that we’ll continue to take call come quarter to quarter. But trajectory wise, I think all factors augur well for improvement of margin from here on.

Pramod Kumar — UBS Group — Analyst

Thanks, thanks, Niranjan, for that. And second question is on the demand side, because we have had a great marriage season as well as the industry, especially for you. And after that however, demand has cooled off. There are seasonal factors wherein the cool off is softer and now the worry is that majority of the UP, Bihar and big junk of Madhya Pradesh are seeing deficient to very large deficient rainfall and we are probably approaching the end of the monsoon in the next couple of weeks. So, could there be any implication on the festive season demand, because these are pretty large markets, pretty large commuter markets, especially?

So, how should or how are you as a company tackling that and especially to Ranjivjit, in terms of how do you look at the inventory in this [Indecipherable], because those are significant market for you and significant seasoned market for the entire industry? So, will there be some bit of a moderation on your inventory approach going into the season? Because rainfall does affect sentiment, you have seen some bit of weakening in tractors already. So, if you can just help us understand that part.

Niranjan Gupta — Chief Financial Officer

Let me start and then I’ll hand it over to — let me start and I’ll hand it over to Ranjiv. Ranjiv, just give me probably a couple of minutes, I’ll just start off. So first, Pramod, as you yourself rightly said, marriage season was a good season. Now, what that indicates is that the moment you have an event or a season or a generally reason to actually buy, when people are coming and buying and of course the current cool off is a seasonal cool off that always happens. So moving forward, we have no reasons to believe for festive to be not to be strong. Yes, there could be — there is some deficient rainfall, but honestly speaking, the income line in the rural India is augmented by the crop — crop cycle, the crop production if you look at it, if you look at it the incomes, even the pattern of the consumption spending that’s happening, the indicators are positive.

And even if you look at the consumer confidence, I mean that’s the highest post pandemic right now as you know. And all the indicators are giving us reasons to — strong reasons to believe that there is no reason to prune down on our plans of festive or inventory buildup. Ranjiv, can you just add on this? Over to you.

Ranjivjit Singh — Chief Growth Officer

Yeah, in fact, I was going to say that this time the Q1 was much anticipated by the industry and more so, by the consumers of Hero, who were — there was pent-up demand. The marriage dates were fabulous in terms of April and May, our concentration that really got us to a great start. Obviously, as the marriage dates start withering down, the demand changes but that’s not new. We are all experienced in this industry. We know the consumer buying cycle, July is, when the onset of the monsoon happens, there will be a change in that. And then we have to prepare for the festive season.

So, there are some areas, which are deficient rainfall, there are some, which have a lot more rainfall than expected. So, it’s really a balance and I think the dealers understand that from an anticipation of the festival season, it’s very clear that it’s looking like a double-digit growth for us. There is unemployment reduction in rural area, We think that rural will pick up even better for this festival season. Urban has already picked up much better as we saw in Q1. So, that will sustain. But there is a change in the buying season of course between Q1 and Q2. And then there is a preparation for that.

As far as the inventory is concerned, the inventory typically is something that we like Niranjan already mentioned that our retails were ahead of our dispatches and therefore there is an opportunity for us to make sure that there is enough inventory for the festival season, because at that time, we just have to have the right mix, the right models, the right numbers so that we can satisfy the consumer demand. So, absolutely, we’re very good on the festival season.

Pramod Kumar — UBS Group — Analyst

Just a clarification. What would be our inventory level at this point of time and what is the target? And just another thing is like, if you can just help us understand how big is UP, Bihar and Madhya Pradesh for you as a company in terms of your total exposure? That could be great. Thank you.

Ranjivjit Singh — Chief Growth Officer

So, our inventory levels are typically in between the six to eight weeks kind of range depending on the month and that’s what the end of June, it came down to about six to seven. We would be building it up as we go along. 20% is about the concentration that we get up the bigger market and so that’s — these are the bigger markets and they will continue to be so.

Pramod Kumar — UBS Group — Analyst

Thanks a lot and wish you all the best. Thank you.

Umang Khurana — Head, Investor Relations

Thanks, Pramod.

Operator

Thank you. The next question is from the line of Pramod Amthe from InCred Capital. Please go ahead.

Pramod Amthe — InCred Capital — Analyst

Yeah, hi, thanks for taking my question. This is with regard to the regulatory environment, wanted to know your inputs on the Real Driving Emission norms, especially the RDE 2, which is expected to come in March. What is the technical changes required, one? What’s the cost implication and how are you beefing up the supply chain? Second, added to the same question is even government is trying to prepone the RDE 3 to the RDE 2 deadline of March ’23. So, then in that case, what is the type of further cost escalation required and how are you preparing for the same and which basket you feel that it is, it will advance or you feel will remain back ended?

Niranjan Gupta — Chief Financial Officer

I think you’re referring to what we call as OBD 2, which is the regulatory change that we are seeing, it doesn’t change the emission by the way, it’s just an emission tracking. It’s an onboard diagnostic, so the emission is the BS-VI, which is implemented from April 1, 2020, which actually reduces ICE, vehicle emissions many of the count by almost 90%. So, this is onboard diagnostics, which is not something, which changes actually emissions. So, there’s already a plan there. Our products are ready for that. The cost impacts are not significant. And as an industry also, we will be transitioning, and this is a smooth transition. This is like any other smaller regulatory change that happens.

Pramod Amthe — InCred Capital — Analyst

And do you feel RDE 3 or the OBD 3 will come in and will that distort as compared to the initial plan of separating them both together?

Niranjan Gupta — Chief Financial Officer

No, it won’t.

Pramod Amthe — InCred Capital — Analyst

Thanks. And all the best.

Operator

Thank you. The next question is from the line of Chirag Shah from Edelweiss Securities. Please go ahead.

Chirag Shah — Edelweiss Securities — Analyst

Yeah, thanks for the opportunity. Sir, my first question is on Ather capital infusion that has happened. If you can make us understand what is the incremental stake we took for the — in this round of capital infusion that we did? And what is our effective stake now in Ather?

Niranjan Gupta — Chief Financial Officer

Hi, Chirag. Our effective stake in Ather accounting for the full year dilution of any of the ESOPs, MSOPs, or those pool, the net is around 35%.

Chirag Shah — Edelweiss Securities — Analyst

35%? So, it has gone down from 38% to 35%, right?

Niranjan Gupta — Chief Financial Officer

38% was before the accounting for — the way you report is that you don’t account for the future potential dilution. Right. So, that has not gone down. It stayed broadly the same. And if you would account for the net dilution, then of course, it is 35%. Right. But if you look at the current tax rate, it is more than 38%.

Chirag Shah — Edelweiss Securities — Analyst

Okay. So like to like, it is constant?

Niranjan Gupta — Chief Financial Officer

Yeah, yeah, slightly up.

Chirag Shah — Edelweiss Securities — Analyst

Slightly up. And sir, okay, so that is one thing. Sir, second question was just a follow-up on the demand side. So, I have a slightly different and a broader question that last two, three years, we have seen a very significant price hike anywhere between 25% to 35% depending upon model. Do you think consumer has absorbed the price hike? Are their income levels in place to absorb the price hikes or there is still, there is still some time for them to completely absorb it given the way their income levels have played out over the last 12 months? If you can share some light, what are your reading at ground level on this part? Are they still hesitant to come and buy the product in general at industry level I’m more referring to.

Niranjan Gupta — Chief Financial Officer

Right, Chirag. Let me start and then I’ll ask Ranjivjit to to add on this. One is, you are right, obviously the auto industry has seen significant increase and all are on account of cost, not on account of margin expansions of the industry and industry has been very, very sensible in trying to absorb some of the margin hit, so that the customers, the push on to the customers is minimized as much as possible. Now, in terms of the absorption, there are — it’s not a, it’s not one simple story. Now, if you see what’s happening to the premium variants. Now, when we are launching Splendor XTEC, when are launching Passion XTEC or Glamour XTEC or any of these things, these are all priced at 7% to 10% more than the base model, base variant, the base model which is there in that same segment to the same set of buyers. And we can see far increasing demand of those variants, which are premium variants than what we had anticipated.

So, really speaking, it’s not about that the consumer in general is hesitating to buy more expensive products, it’s more about that how do you make the consumer buy those products. The promise of the products and the consumers are willing to spend. The second thing is, of course, financing is coming to help. As you know, the finance penetration has increased over the last three years, the same period that you’ve talked about, it used to be around 35% if I remember right, three years back and 35% to 40%. It’s now well above 50% now. So, that helps because in spreading of the EMIs and helping it out.

Having said that, obviously there will be certain set of consumers, which do feel the pinch of that and therefore they become hesitant, but it’s not all classes in January and like Ranjivjit talked about even with the employment in rural or other segments and bottom of the pyramid increasing and with hospitality industry also coming back in full swing, which actually has a large scale employment in the semi-urban areas as well, that should augur well from the income perspective as well even for tax strata of the segment.

Now, let me hand it over to Ranjiv to amplify. Ranjiv, over to you.

Ranjivjit Singh — Chief Growth Officer

Yeah, thanks, Niranjan. Pricing obviously, for our segments is something now, it’s over been over a time that consumers, they know that pricing is going up, it’s an inflationary market, of course, it is understood. The financing that we’re trying to do is really to help even the bottom of the pyramid to participate in personal mobility and so there are some really interesting things, which are being done in terms of direct cash collection. For those who don’t have bank accounts or not very familiar with banking, they have a more convenient way of paying their instalments on a weekly basis or or a more frequent and monthly the base also. As they earn, they can pay that off. And that’s created a huge new set of financial inclusion into the, into the consumer — the consuming class. And I think Hero is leading the way for that. So, that’s at the bottom of the pyramid.

But phenomena of premiumization is also happening because the other corollary to this is people are looking for more value. So, when they’re making that — making the purchase decision, they want to see a better product, so they’re going in for the XTEC version or the higher version. In fact our premium versions are often 50% to 70% of the portfolio mix. And that’s a trend that’s coming in through. So, it’s a very interesting dynamic that you have financial inclusion at one end and premiumization and the other and so this is what the economy is currently I guess making people think about their purchase decision.

Chirag Shah — Edelweiss Securities — Analyst

Okay, thank you very much. And all the best.

Operator

Thank you.

Niranjan Gupta — Chief Financial Officer

Thanks, Chirag.

Operator

The next question is from the line of Joseph George from IIFL Securities Limited. Please go ahead.

Joseph George — IIFL Securities Limited — Analyst

Hi, thank you for the opportunity. Just one question. So, when we look at the commentaries coming in from different OEMs in relation to input cost pressures in 2Q, we have had a mixed bag. Some companies have said that there is further QoQ input cost pressure in 2Q compared to 1Q and there are some companies that have said that 2Q will see easing of input cost pressure. So, the way you see at which side are you on?

Niranjan Gupta — Chief Financial Officer

So, I won’t pick a side. What happens Joseph is, different companies, different OEMs may actually have different way of absorbing the cost. In some cases, you would take after a quarter, in some cases, you may have arrangements with your suppliers where you do in quarter. So, which is why you will see that disparity of few months here and there, because underlying the impact and the trend is not very different from an OEM to OEM. It’s a question of them, couple of months here and there that you could have the impact.

If we look at the commodity basket itself, the commodity basket, aluminum and steel have softened. Now that softening of that impact is likely to come in 2Q, maybe some part of it may come in 3Q, depending on where it and what your mechanism for the settlement is. Crude continues to stay high. Yeah. And therefore, that’s something that though I can — in a trend, you can see a bit of softening but softening from a high level. So, that kind of a bit of a joker in the pack and we’ll have to just see how it actually pans out. And that’s also not because of any demand-supply issues. As you know, the crude is behaving more from a geopolitical issues where there are artificial supply constraints based on geopolitical compulsion.

And then the last thing in this pack is the currency. And the currency, we saw Fed hikes and the Fed hikes also led to currency depreciation in most of the emerging markets. The rupee has behaved much better relatively, if you look at the currency. The Central Bank and the government, I think they are doing a great job in actually managing inflation, rates and currency in combination. So, if the currency stabilizes around the current level where it is, then there is no reason why the commodity basket softening impact should come quicker than expected. So, I think — but we’ll have to just pan out. I mean honestly, a quarter here or quarter there does not make a big difference in the overall trend line of the economy.

But as we said, I mean, life is uncertain. It’s very dynamic. We’ll have to continue to navigate. Nobody has been able to forecast any of the commodities accurately whether in the past, current or maybe in the future and I have said so many times. But this is what the current indicators are and as a company, as OEMs, a industry, as economy as countries, we’ll have to continue navigating whatever uncertainty or the surprises that come along our way.

Joseph George — IIFL Securities Limited — Analyst

Sure. Just continuing with that. So, we are already mid 2Q, right. We are mid-August now, so I’m guessing you would have a good sense of whether you would see incremental RM pressure in — RM and are there overhead pressure in 2Q compared to 1Q or we have seen the worst in 1Q and you’ll have a good sense, right?

Niranjan Gupta — Chief Financial Officer

So, Joseph, I’ll stay away from a very specific Q2 or mid-Q2 guidance. But I think overall I believe that you would have got a sense from what we are saying and let’s wait and watch how it moves forward.

Joseph George — IIFL Securities Limited — Analyst

All right. Okay, thank you.

Niranjan Gupta — Chief Financial Officer

All right, Joseph.

Operator

Thank you. The next question is from the line of Rishi Vora from Kotak Securities. Please go ahead.

Rishi Vora — Kotak Securities — Analyst

Hello, thank you for taking my questions. Sir, on the first thing on the replacement demand side. So, can you just give us some indication, like what was the replacement mix for the industry, let’s say pre-COVID and now how it’s shaping up over the last few months? Is it improving or it continues to remain at lower levels?

Niranjan Gupta — Chief Financial Officer

Ranjivjit?

Ranjivjit Singh — Chief Growth Officer

Yeah, so the replacement demand is something that is coming back. We’ve seen that in Q1. We are also playing a role as a market leader. So, we recently launched the Wheels of Trust, which is basically a consumer just needs to, through a QR code, go to the site, do a self evaluation of any brand of two-wheeler that they currently own and they can get an evaluation and that prompts them to exchange their their product. But broadly, it’s in the region of 15% to 18% is the replacement demand. It stays in that region depending on the kind of segments that we’re always talking about. Not too much of a shift as yet if you look at it from our 2017, ’18, ’19 kind of time frame to now thanks to the pandemic and a little bit of cautiousness there, but it’s in the region of 15% to 18% is broadly what we look at.

And it’s very difficult to forecast this kind of a thing on a short-term basis, but what we can do is stimulate the market and make it very interesting for them to bring in instead of going on prolonging that decision, we encourage people to at least see what else there is in the market and what value they can get for their existing vehicles. And so we’re doing that with the Wheels of Trust. We also have some new stores, which are called HeroSure, which are into the refurbished second-hand vehicle and we’re bringing them to those stores, our consumers to those stores from multi-brands and I think they are having an excellent experience there. The whole message is don’t postpone. This is a good time to buy. I think that’s something that can’t go wrong.

Rishi Vora — Kotak Securities — Analyst

And what could be this number, pre-pandemic closer to 30%?

Ranjivjit Singh — Chief Growth Officer

No, it was, it wasn’t in that region. I think there’s a couple of points around 20-odd. But it does, it doesn’t fluctuate that much and what we want to do is to take it back to about 20% to 24%.

Rishi Vora — Kotak Securities — Analyst

And the second question on the spares bit, we have seen a sequential drop in spares revenues. It’s just seasonality or there are any other factors that has led to decline?

Niranjan Gupta — Chief Financial Officer

It is mostly seasonality only because if you look at overall, quarter four is always a big quarter that happens on the parts accessories merchandise. We fundamentally we continue to be above INR1,000 crores. So, quarter one has delivered INR1,061 crores at 12.6% of revenue. If you remember, couple of years back, it used to be well around 10% or less than 10% of revenues. So, I think the trajectory is good in terms of moving forward. So, that’s more a seasonal this thing. Moving forward, we do expect our PAM business to register healthy growth in fiscal year ’23. Ranjivjit, would you like to just add on our PAM business, what all we are doing to…

Ranjivjit Singh — Chief Growth Officer

Yeah, it’s always, it’s always a pleasure to talk about this business because there are some fundamental and structural changes that we are bringing in and strengthening that, you know, it’s a very interesting model of distribution. So, that people have — the consumers have the parts available wherever they need them. So it’s, it’s a far more distributed model in terms of the number of retailers, which now become 40,000 and that’s up from 39,000 that we had in FY ’22. Parts distributors also we have taken up to 315 plus. So overall, selling to more, selling more to each and making sure that we also keep refreshing our portfolio. So, we got into the oil business and that’s growing well. So, I think we’ve got pretty good progress coming in from this business. Yeah, okay. So, that’s broadly what I wanted to say.

Rishi Vora — Kotak Securities — Analyst

Thank you. Thank you so much for taking my question.

Operator

Thank you. The next question is from the line of Arvind Sharma from Citigroup. Please go ahead.

Arvind Sharma — Citigroup — Analyst

Good morning and thank you for taking my question. Am I audible, sir?

Niranjan Gupta — Chief Financial Officer

Yeah, go ahead, Arvind.

Arvind Sharma — Citigroup — Analyst

Yeah, good morning, sir. Just one question on the quarter specifically, there is a decline in the average realizations quarter-on-quarter. Is it because of the mix or any other things that you would want to indicate as a reason for this, sir?

Niranjan Gupta — Chief Financial Officer

That’s, Arvind, that’s because of the, a, the parts business, which is there. As you saw the parts, for two-wheeler if you divide it that way then the parts sequentially quarter four to quarter one has come down. And the second is our other operating income, that has come down, so, in quarter four. The other operating income was at INR186 crores and in quarter one, it is INR109 crores. Part of that in is quarter four, quarter one issue and part of it is because [Indecipherable] fiscal benefit expired in quarter four FY ’22. So, that is what has come down.

Underlying, if you look at excluding these, the two-wheeler ASP, that has gone up by around INR800 rupees per vehicle from around INR51,200 to INR51,900 or around INR52,000 this quarter. This is on the back of the INR870 increase that we took in ex-showroom price from April 1 and a bit of a better mix impact resulting in the net. July, we have taken a INR1,250 ex-showroom price increase, which will get reflected in quarter 2.

Arvind Sharma — Citigroup — Analyst

Got it. Thank you so much. And sir, one thing you’ve already told about the staff cost. But a little bit more on that. There is a fairly sharp increase in quarter-on-quarter staff cost. Is it the run rate that will sustain towards the year? Or is it a one-off for the first quarter and then we — then one should expect it to probably go down a bit?

Niranjan Gupta — Chief Financial Officer

The increase is also on account of the increments as you know, across the industry. The increments have been higher than previous years and therefore you see that impact built-in into our employee costs. Some bit of it also happens because of the variable pay and the bonuses that gets paid out. And so as you, as we move forward some part of it can get moderated but by and large, it is the increment and some bit of head count increases that have happened.

Arvind Sharma — Citigroup — Analyst

All right. Thank you so much for taking the question, sir. And that’s all from my side. Thanks.

Operator

Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Just a clarification on the other income, so can you quantify the MTM loss, which resulted in lower other income and also what could be the duration of our treasury book now?

Niranjan Gupta — Chief Financial Officer

Yes. So, the other income had two types of MTM impact that we had. So, one, we carry the F&P but we actually do mark-to-market on the F&Ps, which are held to maturity. And the second is, as you know, we made strategic investment in Gogoro of $15 million few months back and as temporarily, the prices have come off on the, on the stock. So, we have provided for that. So, put together that’s around INR60 crores to INR35 crores on account of the F&P MTM and INR25 crores on account of the Gogoro MTM. So that’s what is built-in into our — into our other income.

As you know, most of the treasuries of banks and corporates, everyone have reported the MTM losses on account of the hardening yields that have happened. So, that’s the, those are the stuff that have happened as far as the other income is concerned. Sorry, was there another question on this?

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

What was the duration of the book?

Niranjan Gupta — Chief Financial Officer

We actually moved to a shorter duration and which is why actually are in fact is less pronounced. In fact our duration is less than 1.5 years on our bond side.

Jinesh Gandhi — Motilal Oswal Financial Services Ltd. — Analyst

Okay. Okay, got it, thanks.

Operator

Thank you. The next question is from the line of Jyoti Singh from Arihant Capital Markets Private Limited. Please go ahead.

Jyoti Singh — Arihant Capital Markets Private Limited — Analyst

Yeah, thank you for the opportunity. And sir, my question is on the EV side. So, as we are seeing more people on the EV front as everyone rushing to launch EV, so why we are delaying it?

Niranjan Gupta — Chief Financial Officer

Swadesh?

Swadesh Srivastava — Head – Emerging Mobility Business Unit

Yeah. Hello, Jyoti. Good morning. So, so you’re right, there are a lot of excitement in the EV world and we are happy to see that consumers are becoming more aware and more interested in EV. And coming from Hero, which is known to be the reliable, high quality product OEM, we are getting ready to launch our best offering in the festive and it is important that we don’t rush to the market in a frenzy and make sure that all customer experiences and expectations are met, whether it’s from the product or the ecosystem or anything new, which we are doing actually on the connected side. So rest assured, all of this is in place and we’ll be coming out soon in the festive to cater to the customers.

Jyoti Singh — Arihant Capital Markets Private Limited — Analyst

Okay, thank you, sir.

Operator

Thank you. The next question is from the line of Chirag Shah from Edelweiss Securities. Please go ahead.

Chirag Shah — Edelweiss Securities — Analyst

Yeah, sir. Thanks for the opportunity. Sir, just a follow-up on Ather. Is it possible to indicate what is the value of our investment because — and is there a need to do any evaluation of that, that investment in Ather like and on an annual basis or in some of the other forms?

Niranjan Gupta — Chief Financial Officer

So, I won’t be able to answer this question but let me at least give an idea. First of all we account for these investments at book value at the value that’s invested. That’s our accounting policy. Of course if there is an impairment that we see then we take that also. So, that’s a conservative accounting principle that we have been following. Now in terms of what the market value of these, these investments are I think, Chirag and the fraternity will be in a better position to actually assess that given that Ather is doing pretty well. They have a large open PO orders to be serviced. Their brand has been receiving excellent traction, they have launched in other variant. Their customer feedback is excellent. So, I think most of the indicators of the long-term value creation are in the right direction and of course, I would say that you and the team are better placed to see what should be the the market valuation. But from our books point of view, we will continue to account at the book value.

Chirag Shah — Edelweiss Securities — Analyst

At consol results there is a loss on the share of associates. Would it be right to presume it largely pertains to Ather or there is — there is a split between Ather and Hero FinCorp?

Niranjan Gupta — Chief Financial Officer

Yeah, it is entirely Ather, Chirag. In fact, Fincorp for the quarter has turned out profit of around INR100 crores. Yeah. We know that last year they had losses, but they have turned — turnaround on the profit and we do expect those profits to keep on increasing. So, the loss is entirely Ather. We don’t expect any losses from Fincorp even moving forward. The profit should keep on increasing, but Ather, as you know, in EV it is cash burn for some period of time to come. And therefore, you’ll continue to see that kind of trajectory there.

Chirag Shah — Edelweiss Securities — Analyst

Sir, INR100 crores is FinCorp’s profit. Right. So, we will account for our share accordingly?

Niranjan Gupta — Chief Financial Officer

Yes, absolutely. Right. So, we have got around 40%. So, that’s what we will account. I think you are getting down to what is exact split, but now you can work that out without me telling you, but you are absolutely right.

Chirag Shah — Edelweiss Securities — Analyst

Thank you. Thank you very much, sir. Thank you very much.

Operator

Thank you. The next question is from the line of Ronak Sarda from Systematix Group. Please go ahead.

Ronak Sarda — Systematix Group — Analyst

Yeah, hi, thanks for the opportunity. Niranjan, a question on the other expenses. If I look at the expenses in the quarter, it is one of the lowest, which we have in the June quarter. So, can you help us understand despite the inflationary constraint — I mean concerns, how are we able to keep this under control?

Niranjan Gupta — Chief Financial Officer

So, Ronak, the other expenses, obviously a quarter is, is not the right way to actually look at it, but of course we’ve been exercising all the cost tightening measures when we see a certain inflation going up on materials, on the other things and we tighten our belts, on the other parts of it, but I think it’s much better to look at on an annual basis that look whatever was the annual last year and then you account for certain inflation, certain savings that’s the best way to actually look for in terms of the — in terms of the other expenses trajectory.

Ronak Sarda — Systematix Group — Analyst

Okay. Okay, got it. And second, a clarification on one of the comments you made that one of the plant, I think Neemrana plant has — the benefits have concluded there. Did I hear that correctly?

Niranjan Gupta — Chief Financial Officer

Yes, yes, yes, Ronak. The benefit concluded in quarter four FY ’22, because it was for a period and the subsidy period actually ended in quarter 4 of of FY ’22. Now we have incentives, which are there in Gujarat, which is our Halol plant and Chittoor, which is where also we are going to start our production as well. Now as Chittoor and these — the requirement, the local requirement ramp up, so then we will see the fiscal benefits of these two units, especially Chittoor actually going up moving forward. But yeah for now, that Neemrana fiscal benefit have completed its term of the incentive that we had.

Ronak Sarda — Systematix Group — Analyst

Got it. So, we might see some production realignment now based on the [Indecipherable]?

Niranjan Gupta — Chief Financial Officer

Naturally and logically, absolutely. And that would then logically moving forward should also help whilst there is one story of Neemrana fiscal benefit going out and obviously there is some realignment that will happen in the manufacturing plant that can also positively actually benefit our logistics cost because as incentive goes out and then you actually spread that doesn’t become — incentive doesn’t remain a reason for actually moving it to North, then as you move to South and West then you can have some benefit on logistics costs as well.

Ronak Sarda — Systematix Group — Analyst

Thank you and all the best for the festive season.

Operator

Thank you. The next question is from the line of Saurabh. Please go ahead.

Unidentified Participant — — Analyst

Hi, sir. Most of my questions have been answered, just if you could shed some light on the Hero MotoCorp FinCorp business, just some AUM numbers, our gross NPA, GNPA and net NPA numbers that would be great. And how is the profitability to be expected going forward?

Niranjan Gupta — Chief Financial Officer

Look FinCorp is an associate entity, so I will be constrained by what I can share in terms of the number. As I already shared, FinCorp, the asset under management is growing. They are looking good in terms of the growth for the next two years. They are well capitalized, their GNPA ratio as I talked about is around 7.5%, 7.7% which they intend to bring it down over the next six to eight quarters. So, I think that what I can say other than that I can actually add a color that our financing as a percentage of our retail is above 50% and FinCorp share in that is close to around 35%, 36%. I think that’s the color I can provide. You can of course offline also connect with Umang in case he is able to provide anything else.

Unidentified Participant — — Analyst

Understood. And sir, secondly, on the demand side. So, just want to know, so that now we’ve seen that COVID affect has almost subsided. Schools and colleges have reopened, work from office has also started and VAT, remote to copar [Phonetic], slightly relatively less affected by the chip shortages being in the entry segment. So, do we see the levels of ’18-‘9 in the current financial year or in the next financial year? Would that be a possibility?

Niranjan Gupta — Chief Financial Officer

Saurabh, you should have asked this question before Pramod asked, so then I would have answered him exactly the points that you have mentioned. That was a lighter note. But yes, there are lot of positive factors. Look exactly the ones that you are spelled out and there are of course the headwinds like Pramod was also talking about which is the monsoon, some rainfall in some pockets, some rural, et cetera, et cetera. So, this is a play of the headwind versus the tailwind that we have and that’s the balance that, that one expects and which is where we are expecting the festive to be good. And then we’ll have to take on from there. But the underlying factors of two-wheeler demand they remain very strong and very intact.

I mean, one has to move away from months or some of the quarters. If you look at the underlying demand, I mean, whether you look at more women in education and employment, whether you look at the aspirations of young people, whether you look at personal mobility, whether you look at the finance penetration or our penetration overall vis-a-vis some of the Southeast Asian countries. So, I think overall, if you look at it, the long-term factors of demand of two-wheeler remains very strong and it’s only a question of how fast they manifest back coming out from the pandemic and the recovery and which is will — that is what will get reminder how fast we are able to get back to the highest levels that the industry has seen.

Unidentified Participant — — Analyst

Okay, thank you. That’s it from my side.

Ranjivjit Singh — Chief Growth Officer

Yeah, I just wanted to add some very interesting stuff. I’m sure you’ll enjoy this when I say it, that there are a number of towns now that in premium talking about demand and outlook that actually have a market share in premium to be over 10% and they’re big towns like Bangalore, Coimbatore, Cochin, Allahabad, even Azamgarh and Bareilly that our market share in premium has increased to over 10%. Now you are saying that things are becoming a little bit normal. So, what are we doing about that. And we just announced the biggest Hero Dirt Biking Challenge and that’s going across 45 cities. In fact today is when the city trials start and in November, we will have the Nationals, and Bani J who’s famous for the Roadies and our Hero Motor Sports people they will be the judges, the mentor. There’s already 100,000 people who registered and we had to close that down. When we opened up bookings for our Xpulse Rally Edition, in four days, we had to close that down because we sold out all of it. So, there is that positivity. And I think a lot of great questions came in the call where there may be stressed at one segment but there’s a lot of buoyancy also and need for that moving out and moving on and that will be our absolutely experiencing in our portfolio with our consumers and with our dealers and that’s a great run up to the festival season that we see.

Unidentified Participant — — Analyst

Understood. That’s it from my side. Thank you.

Operator

Thank you.

Umang Khurana — Head, Investor Relations

Thanks so much. Thanks, Ashutosh. Thanks everyone for coming on the call. We’ve run out of time. Thank you again for sharing your weekend with us. Happy Independence Day everyone in advance and yeah, look forward to keeping connected. Thank you.

Operator

Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.

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