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Good morning, ladies and gentlemen, and welcome to Hero MotoCorp Limited Q1 FY '23 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions]
I now hand the conference over to Mr. Ashutosh Tiwari from Equirus Securities. Thank you, and over to you, sir.
Thanks, Michelle. Hi, good morning, everyone. On behalf of Equirus Securities, I welcome you all on the Q1 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 the Head of Investor Relations, to introduce management participants. Over to you, Umang.
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.
Thanks, Umang. So welcome to our earnings call, and thanks for taking out time on Saturday. Our quarter 1 results as published yesterday, did show significant improvement sequentially on top line, tracking the positive momentum in the industry, coupled with gain in market share. We've been able to hold our EBITDA margins versus quarter 4, which is the preceding quarter, and improving the same on a year-on-year basis by around 180 basis points. This shows our focus on both growth as well as profitability as what we have been speaking many times.
Parts business, part accessories merchandise continues to do very well. We delivered INR 1,061 crores in the quarter at 12.6% of revenue. While focusing on building a robust portfolio in premium segment, we've also been doing premiumization of our existing models through Xtec variants, as you've seen through Splendor Xtec, Glamour Xtec, Passion Xtec and Destini Xtec. The demand for these variants is outstripping supplies as of now as we ramp this up. It should help us in improving market share along with, of course, pricing realization and margins as well.
Let me now talk a bit about macro and microeconomic factors and our outlook on industry. The global economy, as we all know, is facing headwinds of inflation and compulsion of central banks to raise interest rates to tame this, which obviously has an impact on growth. We do expect, however, the rate increase cycle to stabilize in a quarter or so. Given all this context, while India is not delinked from global economy, however, it's relatively much better placed, whether we look at the currency, whether we look at the interest rates, whether we look at multiple other micro factors like the GST collection or the PMI index or the recently released IIP index, they are 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 countries 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.
[Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
First question is on the demand environment. Can you touch upon how demand is shaping up, I mean, especially in context of what we see in terms of the ground level retail trend. And then we see in light of our wholesale trends. So our July was a particularly weak month, are we still undergoing inventory destocking or what it is?
Right. Jinesh, as far as demand environment is concerned, 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 1 has been better than quarter 4 as you have seen the industry as well as us in terms of the growth. In quarter 1, 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. Yes, some of the stock buildups, you could say, is slower for us right -- 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 through 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 happening. Of course, a month here and there could always swing when you get more purchases in any quarter and therefore, a month becomes really soft, so not really concerned about that, Jinesh.
Sure, sure. And the chip shortage is primarily for the Xtec variant side and the premium variants.
Absolutely. As you know, we launched -- we now have 4 Xtec variants, Glamour, Passion, Splendor and Destini as well. And basically, there -- and the good thing right away is that while on one side, we have the inflation story across the country and globally, but on the other side, what we are seeing is the moment you launch a premium variant and all these Xtec variants are at 7% 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.
Got it. Got it. And second question pertains to the RM cost inflation seen in this quarter. So on the quarter basis, there is a substantial Q-o-Q impact but I guess there is some inventory related change -- impact which there. But again, adjusted for that, there about 150 basis point Q-o-Q 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.
Yes, Jinesh. So I'll talk about the cost inflation first and you're right to pick that up. As you know, given our pipeline of supplies, the impact of any cost takes a quarter to benefit. Yes, and therefore, if you look at it across the commodities at quarter 4, in terms of the market index, that saw a spike.
And then thereafter, of course, 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 ordering well.
As far as price increase is concerned, we took from 1st April around 850 ex showroom and 1st July we have taken around INR 1,200 ex showroom, which will, of course, get reflected in the Q2 and the coming quarters as you see. And of course, in the past -- last few quarters, maybe 6, 7 quarters, 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.
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 they'll still be in the recovery?
So 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.
[Operator Instructions]
The next question is from the line of Kumar Rakesh from BNP Paribas.
My first question was around your employee head count. So over the last 9 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 is temporary employees. So, I wanted to understand why are we keeping such high number of employees, especially temporary employees?
So a couple of things. I think number one is we -- in an industry, we don't move up or down the employee head count with the volumes. And we've seen -- when you've said the production or the volumes have come down over x number of years, a large part of that is manifestation of the pandemic. If you look aside before pandemic, right, and give us [ BS V ] to 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 a 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 anyone. We, in fact, ensured that even contractors and casuals, they also actually get their rightful pay. I think 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 at 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 we'll be focusing on, top line as well as the mix and which is where we are focusing on building our premium portfolio and premiumization of our variants as well.
Yes. I think having a high temporary employee base should ideally given -- would have given us the flexibility to maneuver the inside out head count based on how the production and demand environment has been. And this trend is something which even before COVID impact is something which was there as well and we were in higher head count despite the volume coming down around BS IV, BS VI transition. And I'll follow up on that later.
My second question was on the Hero FinCorp business. So last fiscal year, Hero FinCorp credit card was about 7% is what I estimate -- calculate. These are the numbers which we have disclosed. Now we have gone for another round of funding in the business this quarter. But that 7% credit cost for a business which has a yield of about 14%, 15% doesn't look sustainable. So while going for investment in this round, have you set any target to lower these high credit costs or we are okay with these numbers?
There is a target for the funding round, there is our target for growth at the AUM level. And 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 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, say 7%, 7.5% to probably 5%, 5.5%. So that's the endeavor to bring down over the next 4 to 6 quarters, so that the ROA and the ROEs improve moving forward over the next 6 quarters.
The next question is from the line of Kapil Singh from Nomura Group.
My question is more on the sub-segment. 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 1 or 2 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?
And I see that the restriction of 2 questions mean that in one question you've combined 4. 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 -- a lot many countries globally are facing the impact of the inflation, currency, et cetera. And mostly because our sales are in emerging markets, and these markets are facing, whether it is Bangladesh, Nepal, Srilanka, Nigeria, Columbia and all of those are facing now. We expect that to be a short term. So therefore, [indiscernible] exports is having a softer quarter. But we do expect in the second half to move up.
I think more importantly for us is to continue building scale, building the right product, and get to the right percentage of revenue in our portfolio from the global business. Let me, at this stage, hand it over to Ranjivjit to answer on the scooter market share and what we are doing to address that and also on the retail sales general trend. Ranjivjit, if you are there, can you just address this?
Yes, sure. My pleasure to do so. Hi, everyone. Ranjivjit here. The scooters business was actually very interesting for us in quarter 1. 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 variance.
So the 125 cc segment, we really served very well in the market and continues to become even stronger player 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 we see July, August, September, over the quarter, the whole portfolio is going to get far more consolidated and the results would be something that we will be happy to share in our next discussion.
Thanks, Ranjit. Let me hand it over to Swadesh, if you can just update on our EV.
Yes. thank you. Hello, Kapil. We are actually quite excited to be getting very close to our launch. We had announced some time back that we'll be launching our EV product and the overall ecosystem in the festive and which is going to happen sometime soon. And on that date, we'll 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 2 weeks.
The next question is from the line of Pramod Kumar from UBS Group.
My first question is on the margin front, Niranjan, as commodity prices increased and expected volume recovery, what the way you're looking at it. Is it fair to assume that we should see the margin levels improving meaningfully from the current levels because the recent quarter margin is definitely not 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 fiscal and also for next fiscal?
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 cost rather than what it has been for the last 4, 6 quarters.
And second thing is as the volume picks up and market share picks up, then obviously, we should have the operating leverage. So I think a combination of both these factors should -- there's no reason to actually doubt that the margin should improve or should not improve.
I think the combination of both these factors should help our margins to improve. How fast and how rapid we are able to accelerate or should we deploy part of that back into growth, et cetera, et cetera. That's something that we continue to take call from quarter-to-quarter. But yes, trajectory wise, I think all factors are going well for improvement of margin from here on.
And second question is on the demand side, because you've had a great marriage season [indiscernible] especially for you. And after that, however, demand has cooled off. There are seasonal factors driving the [ cooled off ]. But now the worry is that majority of the U.P., Bihar, and a big chunk of Madhya Pradesh have seen deficient -- very large deficiency in rainfall. And we are probably approaching the end of the monsoon in the next couple of weeks. So could there be an implication on the festive season demand?
Because these are pretty large markets, pretty large commuter markets, especially. So how should -- how are you as a company tackling that and especially to run, which in terms of how do you look at the inventory in this plant because those are significant markets for you and significant seasonal markets for the entire industry. So will there be somewhat of a moderation on your inventory approach going through the season because rainfall does affect sentiments. We have seen a number of these factors already. So if you can just help us understand that part.
Let me start, and then I'll hand it over to -- let me start, and I'll hand it over to Ranjiv. Ranjit just give me probably a couple of minutes, I'll just start off. So first, Pramod, as you yourself rightly said, is that marriage season was the good season. Now what that indicates is that the moment you have an event or a season or generally reason to actually buy, then 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 reason 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 cycle, the crop production. If you look at it, if you look at the income, 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's no reason to prune down on our plans for festive or inventory buildup. Ranjit, can you just add on this? Over to you.
Yes. 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 states were fabulous in terms of April and May concentration that really got us to a great start.
Obviously, as we manage this start riding down the demand changes. But that's not new. We are all experiencing this industry. We know the consumer buying cycle, July when the onset of the monsoons happen. 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 in for them than expected.
So it's really a balance, and I think the dealers understand that. From the 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 the 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's a preparation for that.
As far as the inventory is concerned, the inventory typically is something that we, like Niranjan already mentioned, that the retails were ahead of our dispatches. And therefore, there's an opportunity for us to make sure that there is enough inventory for the festival season, because at that time, we just have to have the right mix, the right model, the right number so that we can satisfy the consumer demand. So absolutely, we are very good on the festival season.
Just a clarification here, what could be our inventory level at this point of time or what is the target? And sir, another thing is like, if you can just help us understand how big is U.P, Bihar and Madhya Pradesh for you as a company in terms of your total exposure? That would be great.
Yes. So our inventory levels are typically in the -- between the 6 to 8 weeks kind of a range depending on the month. And that's what -- at the end of June, it came down to about 6 to 7. We would be building it up as we go along. 20% is about the concentration that we get of the bigger markets. And so that's -- these are the bigger markets, and they will continue to be so.
The next question is from the line of Pramod Amthe from InCred Capital.
This is with regard to the regulatory environment, I wanted to know your inputs on the real driving emission norms, especially the RDE2 which is expected to come in March. What is the technical changes required, one. What is the cost implication and how are you beefing up the supply chain?
Second, added to the same question is even government is trying to prepone the RDE3 to the RDE2 deadline of March 23. So then in that case, what is the type of customer cost escalation required? And how are you preparing for the frame in which basket do you feel that it will advance? Or if you feel will remain back in this?
I think you're referring to what we call is OBD II, which is a regulatory change that you are saying. 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 was implemented from 1st April 2020, which actually reduces our ICE vehicle emission on many of the accounts that are 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 will be transitioning. And this is a smooth transition. This is like any other smaller regulatory change that happens.
And do you feel RDE3 -- or the OBD III will come in and will that restart as compared to the initial plan of separating them both together?
No, it won't.
The next question is from the line of Chirag Shah from Edelweiss Securities.
My first question is on Ather capital infusion that has happened. If you can help us understand what is the incremental stake you took for the -- in this round of capital infusion that we did? And what is our effective stake now in Ather?
Our effective stake in Ather accounting for the full dilution of any of the ESOPs and SOPs [ that was pooled ], the net is around 35%.
35%. So it has gone down from 38% to 35%, right, sir?
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 stays broadly the same. And if you account for the net dilution, then of course, it is 35%, right? But on a gross [indiscernible] current capital, it is more than 38%.
Okay. So like-to-like, it is constant.
Yes, yes, slightly up.
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 than a broader question that last 2, 3 years, we have seen a very significant price hike anywhere between 25% to 35% depending upon model. .
Do you think consumers have absorbed the price like, are their income levels in place to absorb the price hike? 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 you reading at the ground level on this part? Are they still hesitant to come and buy the product in general at industry level and [indiscernible].
Let me start and then I'll ask Ranjiv to add on this. One is, you're right of, 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 in 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 one simple story. Now if you see what's happening to the premium variants, now when we are launching Splendor Xtec, when we 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-based -- base variant or 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 a consumer in general is hesitating to buy more expensive products. It's more about that how do you make the consumer buy those products. You have the promise of the product and the consumers are willing to spend.
The second thing is, of course, financing is coming to help. As you know, that finance penetration has increased over the last 3 years, the same period that we talked about. It used to be around 35%, if I remember right, 3 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 up.
Having said that, obviously, there will be a certain set of consumers, which do feel the pinch of that, and therefore, they become hesitant, but it's not all classes in general. And like Ranjivjit talked about, even with the employment in rural and other segments and bottom of the pyramid increasing and the hospitality industry also coming back in full swing, which actually has a large-scale employment in the semiurban 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.
Yes. Thanks, Niranjan. Pricing, obviously, for our segment is something now -- it's been over a time that our consumers, they knew that pricing is going now to inflationary market. Of course, it's understood. The financing that we're trying to do is really to help even the bottom of the pyramid to participate in personal mobility.
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 installments on a weekly basis or more frequent than a monthly basis also. As they earn, they can pay that off. And that's created a huge new set of financial inclusion into the consuming class. And I think it is leading the way for that. So that's at the bottom of the pyramid.
But the 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 doing it for the Xtec version or the higher versions. In fact, our premium versions are often 50% to 70% of the portfolio mix and that's the trend that's coming in through.
So it's a very interesting dynamic that you have financial inclusion at one end and premiumization at the other. And so this is what the economy is currently, I guess, making people think about their purchase decision.
The next question is from the line of Joseph George from IIFL Securities Limited.
Just one question. So when we look at the commentaries coming in from different OEMs in relation to input cost pressures in 2Q, we've had a mixed bag. Some companies have said that there is further Q-o-Q input cost pressure in 2Q compared to 1Q, and there are some companies have said that 2Q will see easing of input cost pressure. So the way you see it, which side are you on?
So I won't pick a side. What happens, Joseph, is different companies, different OEMs, may actually have a different way of absorbing the cost. In some cases, you take after the quarter, in some cases, you have arrangement with your suppliers where you do in quarter. So which is why you will see that disparity of a 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 then a couple of months here and there that you could have the impact.
If you look at the commodity basket itself, the commodity basket, aluminum and steel have softened. Now the softening of that impact is likely to come in 2Q. Maybe some part of it may come in 3Q, depending on where it -- and what your mechanism for the settlement is. Crude continues to stay high. 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's 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 issue 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's 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 a 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've said so many times -- but this is what the current indicators are. And as a company, as OEMs, as industry, as economy, as country, we'll have to continue navigating whatever uncertainty or the surprises that come along our way.
Sure. And just continuing with that, so we're already mid-2Q, right? We are mid-August now. So I'm guessing you have a good sense of whether you would see incremental RM -- pressure in RM and other overhead pressure in 2Q compared to 1Q? Or we have seen the worst in 1Q and we'll have a good sense, right?
So Joseph, I'll stay away from a very specific Q2 or a mid-Q2 guidance. I think overall, I believe that you would have got a sense from what we are saying, and let's wait and watch how it moves forward.
The next question is from the line of Rishi Vora from Kotak Securities.
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 -- and it continues to remain at lower levels?
Yes. So the replacement demand is something that is coming back. We've seen that in Q1. We are also playing the role as a market leader. So we recently launched the Wheels of Trust, which is basically a consumer just needs to, give a QR code, go to the site, do a self-evaluation of any brand of 2-wheeler that they currently own. And we can get an evaluation and that prompts them to exchange 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 are also talking about, not too much of a shift as yet. If you look at it from a 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 they're doing that. With the Wheels of Trust, we also have some new stores, which are called Hero Sure, which are into the refurbished secondhand vehicle and we are bringing them to those stores -- consumers to those stores from multi-brands. And I think they're having an excellent experience there. The whole message is, don't postpone, this is a good time to buy. I think that that's something that can't go wrong.
And what could be this number prepandemic, closer to 30%?
No, it wasn't in that region. I think there's a couple of points around 20-odd -- but it doesn't fluctuate that much. And what we want to do is to take it back to about 20% to 24%.
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.
It is mostly seasonality only because if you look at overall quarter 4 is always a big quarter that happens on the Part Accessories and Merchandise. Fundamentally, we continue to be above INR 1,000 crores. So quarter 1 has delivered INR 1,061 crores at 12.6% of revenue. If you remember, a couple of years back, it used to be well around 10% or less than 10% of revenues.
So I think trajectory is good in terms of moving forward. So that's more a seasonal this thing. And moving forward, we do expect our PAM business to register healthy growth in fiscal year '23. Ranjiv would you like to add on our PAM business what are we going to make this happen.
Yes, it's always a pleasure to talk about this business because there are some fundamental and structural changes that we are bringing in and strengthening that -- 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 a far more distributed model in terms of the number of retailers that -- which have now become 40,000, and that's up from 39,000 that we had in FY '22.
The parts distributors also we've 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 going well. So I think we've got pretty good progress coming in from this business So that's broadly what I wanted to say.
The next question is from the line of Arvind Sharma from Citigroup.
Just one question on the quarter specifically. There is a decline in the average generation quarter-on-quarter. Is it because of the mix or other thing that you would want to indicate as a reason for this, sir?
Arvind, that's because of the, a, the parts business, which is there. As you saw in the past for 2-wheeler if you divide it that way in the past sequentially quarter 2 to quarter 1 has come down.
And the second is our other operating income, that has come down. So in quarter 4, the other operating income was at INR 186 crores, and in quarter 1 INR 109 crores. Part of that is a quarter 4, quarter 1 issue and part of it is because Neemrana fiscal benefit expired in quarter 4 FY '22. So that is why it's come down.
Underlying, if you look at excluding these, the 2-wheeler ASP, that has gone up by around INR 800 per vehicle from around 51,200 to 51,900 or around 52,000 this quarter. This is on the back of the INR 870 increase that we took in ex showroom price from 1st April add a bit of a better mix impact resulting in the net. As I said, 1st July, we have taken a INR 1,250 ex showroom price increase, which has reflected in quarter 2.
And one thing you've already told about the staff cost, but a little bit more on that. There is a very sharp increase in quarter-on-quarter staff cost. Is it the run rate that was sustained throughout the year or is it one-off for the first quarter? And then one should expect it to probably go down a bit?
The increase is also on account of the increments, as you know, across the industry. The increments have been higher than previous years. And therefore, you see that impact will turn 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 we move forward, some part of it can get moderated. But by and large, it is an increment and some bit of head count increases that have happened.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Just a clarification on the other income. So can you quantify the MTM loss, which derived from lower other income? And also, what would be the duration of our treasury book now?
Yes. So the other income had 2 types of MTM impact that we had. So one, we carry the [ FNP ] but we actually do mark-to-market on the [ FNPs ] which are held to maturity.
And the second is, as you know, we made strategic investment in Gogoro of $15 million a few months back. And as temporarily, the prices have come off on the stock, so we provided for that. So put together, that's around INR 60 crores. So [ INR 35 crores ] on account of the [ FNP ] MTM and [ INR 25 crores ] on account of the Gogoro MTM. So that's what is built in into our other income.
As you know, most of the treasuries of banks and corporates, everyone have reported the MTM losses on account of the hardening yields that have happened. So that's the stuff that has happened as far as the other income is concerned, Sorry, was there another question on this?
What was the duration of the book?
We actually moved to a shorter duration, which is why actually our impact is less pronounced. In fact, our duration is less than 1.5 years on our bond side.
The next question is from the line of Jyoti Singh from Arihant Capital Markets Pvt. Ltd.
Sir, my question is on the EV side. So as we are seeing more people on the EV front, as everyone is rushing to launch EV, so why we are delaying it?
Swadesh?
So you're right. There is 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 on the product or the ecosystem or anything new, which we are doing actually from the connected side. So rest assured, all of this is in place and will be coming out soon in the festive to cater to the customers.
Next question is from the line of Chirag Shah from Edelweiss Securities.
Sir, just a follow-up on Ather, is it possible to indicate what is the value of your investment because -- and is there a need to do any devaluation of that investment related, annual basis or in some of the other forms?
So I won't be able to answer this question, but let me at least give. First of all, we account for lease investments at book value and the value that is invested. That's our accounting policy. Of course, if there's an impairment that we see, then we take that also. So that's a conservative accounting principle that we've been following. .
Now in terms of what the market value of these investments are, I think, Chirag, you and the fraternity will be in a better position to actually assess that given that HR is doing pretty well. They have a large open new orders to be serviced. Their brand has been receiving excellent traction. They have launched another 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 market valuation. But from our book point of view, we'll continue to account at the book value.
Sir, at [ consol ] results, there is a loss on share of associates. Would it be right to presume it largely pertains to Ather or there is a split between Ather and Hero Moto -- Hero FinCorp ?
Yes. It is entirely Ather Chirag. In fact, FinCorp for the quarter has turned out a profit of around INR 100 crores. We know that last year, they had losses, but they have turned around on the profit, and we do expect those profits to keep on increasing. So the loss is entirely -- we don't expect any losses from FinCorp even moving forward. The profit should keep on increasing. But Ather has you know, in EV it is cash burn for some period of time to come. And therefore, we'll continue to see that kind of trajectory there.
So INR 100 crores is FinCorp's profit, right? So we will account for our share accordingly?
Yes, absolutely right. So we've got about 40%, so that's what we'll account. I think they're getting down to what is exact split. But now you can work that out without need to question but you are asking...
The next question is from the line of Ronak Sarda from Systematix Group.
A question on the other expenses. If I look at other expenses in the quarter, it is one of the lowest which we had in the June quarter. So can you help us understand, despite the inflationary constraints -- I mean, concern, how are we able to keep this under control?
So, Ronak, the other expenses, obviously, a quarter 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 a certain inflation, certain savings, that is the best way to actually look for in terms of the other expenses trajectory.
Okay. Okay. Got it. And second, a clarification on one of the comments you made that one of the plants, I think Neemrana plant, has the benefits have concluded. Did I hear that correctly?
Yes, yes, yes, Ronak. The benefit concluded in quarter 4 FY '22 because it was for a period and the subsidy period actually ended of quarter 4 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 2 units, especially Chittoor actually going up moving forward. But yes, for now, that Neemrana fiscal benefit has completed its term of the incentive that we had.
Got it. So we might see some production realignment now based on the [indiscernible].
Yes. Naturally and logically. Absolutely. And that would then, logically, moving forward, should also help. You know why, because one story of Neemrana fiscal benefit going out. And obviously, there is some realignment that can happen in the manufacturing plant that can also positively actually benefit our logistics costs.
Because as incentive goes out and then you actually spread, that doesn't become incentive, it doesn't remain the reason for actually moving it to north then as you move to south and then you can have some benefit on logistics costs as well.
The next question is from the line of [ Sourab ]
Most of my questions have been answered. Just if you could shed some light on the Hero MotoCorp -- FinCorp business, just some AUM numbers or gross NPA, GNPA and net NPA numbers, that would be good. And how is the profitability to be expected going forward.
So look, FinCorp is an associate entity. So I will be constrained by what I can share in terms of the numbers. As I already shared, FinCorp, the asset under management is growing. They are looking good in terms of the growth for the next 2 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 6 to 8 quarters.
So I think that's what I can say. Other than that, I can actually add a color that our financing as a percentage of our retail is about 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.
Understood. And sir, secondly, on the demand part. So I just want to know, so that now we've seen that COVID effect has almost subsided, schools and colleges have reopened, work from office has also started and we at Hero MotoCorp are slightly relatively less affected [indiscernible] being in the entry segment. So do we see the levels for 2018, '19 in the current financial year or in the next financial year? Wouldn't that be a possibility?
Sourab, you should have asked this question before Pramod asked. So then I would have answered him exactly the point that you have mentioned. That was the lighter note. But yes, there are a lot of positive factors.
Look, exactly the ones that we have spelled out. And there are, of course, 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 headwinds versus the tailwinds that we have. And that's the balance 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 2-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 2-wheelers remain 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 determine and how fast we are able to get back to the highest levels that the industry is seeing.
Yes, I just wanted to add just some very interesting stuff. I'm sure you've enjoyed this when I say 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 town like Bangalore, Coimbatore, Cochin, Allahabad even Azamgarh and Bareli 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've just announced the biggest Hero Dirt Biking Challenge, and that's going across 45 cities. In fact, today is when the city trials start. And in November, we'll have the Nationals and Bani J who's more famous for the Roadies and our Hero MotoSports people. They will be the judges and mentor. It's -- there's already 100,000 people who registered and we had to close that down.
When we opened up bookings for our Xpulse Rally Edition, in 4 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 stress at one segment, but there's a lot of buoyancy also and need for that moving out and moving on and that we are absolutely experiencing in our portfolio with our consumers and with our dealers, and that's a great run up to the festival season that we see.
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 yes, look forward to keeping connected. Thank you.
Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.