Why did Hero MotoCorp shares hit a crater and how serious is the injury?

Shares of Hero MotoCorp, India’s largest two-wheeler manufacturer by unit volume sales, crashed almost 7% in Tuesday’s trading session following reports of alleged bogus expenses and tax evasion amid a probe by the Income Tax department.

The tax department raided Hero MotoCorp premises at multiple locations between March 23 and March 26 including the residence of its chairman and CEO Pawan Munjal. It is also analysing a Rs 100 crore deal involving a farmhouse located on the outskirts of Delhi.

What exactly is the matter?

As many as 25 premises were searched as part of “search and seizure action” on suspicion of tax evasion.

What is the tax department looking for?

Tax officials are analysing around Rs 1,000 crore in expenses that are suspected to be bogus in the probe at Hero MotoCorp. The department says it is going through digital data and various other documents as part of its investigation for alleged tax evasion. 

How did the stock market react?

The Hero MotoCorp stock fell nearly 9.5% on the NSE on the Tuesday before closing the day at Rs 2,219 apiece, down 6.68% from the previous close.

The stock is trading near its 52-week low and has lost nearly 22% of its value in the past six months.

On a consolidated basis, its net profit for the quarter ended December 2021 declined 31% to Rs 703.74 crore while revenue fell 18.5% to Rs 8,013.08 crore.

What did the company say about the raids?

"Officials from the IT Department visited two of our offices in Delhi and Gurugram and the residence of our Chairman and CEO Dr. Pawan Munjal. We have been informed that this is a routine inquiry, which is not uncommon before the end of the financial year," the company said in a statement as it looked to assure its stakeholders.

“We at Hero MotoCorp are an ethical and law-abiding corporate, and maintain the highest standards of impeccable corporate governance. In keeping with this philosophy, we are extending our full cooperation to the authorities,” it said.

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