Fate of Hero Honda

It was all bad news for Hero Honda for the last few months. It has been struggling with the situation of increasing competition from its peers and interest rate hike that may hurt its sales while the rumours of stake sale by Honda added fuel to fire.

I have been buying Hero Honda since March 2010 and my average cost is 1,852.22. I bought 4 lots of equal value since March and have paid as high as 1,967.65 in April and 1,709.70 this month. The rumour of Honda leaving the joint venture hit the stock hard. However both the parties – Honda and Hero Group – have denied the news. Though the effect of interest rate hike on the sales will be short lived, the intense competition from existing players like Bajaj and TVS and new entrants like Mahindra and Mahindra will be a real concern going forward. I will continue to hold what I already have for the time being, but will not be buying more until the cloud is cleared.

Honda leaving the Joint Venture

News of Honda offloading its 26 per cent stake in the joint venture Hero Honda Motors Ltd has been in the air for some time now. However the management of both the companies have denied it. Market analysts said Honda’s exit from the company is likely to drive down the valuation of the Hero Honda script on concerns that the company may not have access to the latest two-wheeler technology.

Hero Honda: Going it alone
Business Standard, Sep 4, 2010
The implications of Honda pulling out of the company are still being worked out and a possible re-rating is expected. Concerns exist over the fate of Hero Honda, especially with regard to Honda possibly selling its 26 per cent stake to the promoters and exiting the company. In fact, even as any such deal is yet to be announced, analysts have started to work out the implications.

Uncertainty over JV clouds Hero Honda
Livemint, Sep 6, 2010
Analysts say that despite its large vendor base and indigenization, HHML almost entirely depends on Honda for engine technology. Its power-packed brands—Splendor and Passion— that have catapulted the firm’s brand equity, have Honda’s engine technology. If HHML goes on its own, it would have to invest significant amounts into research and development (R&D) to keep pace in the marketplace. Another option will be to scout for a new technology partner. But this would warrant a brand relaunch, which, in turn, could mean marketing costs and risk of product acceptance.

JV break-up a near-term pain for both
Business Standard, Sep 9, 2010
Analysts say, given that the high growth phase in the motorcycles business is past us and with key urban markets saturated, both parties will have to think hard about going separate ways. If Honda decides to exit Hero Honda, the latter’s scrip is likely to tank and shareholders might be looking at large losses. However, if Honda were to buy Hero’s stake, it could see a major rerating, especially if HMSI is then integrated into the company, believes Umesh Karne of BRICS Securities.

Impact of Interest Rate Hike

Hero Honda Expects India Motorcycle Sales to Slow on Rising Interest Rates
Bloomberg, August 24, 2010
Hero Honda Motors Ltd., maker of about half the motorcycles sold in India, said demand will grow more slowly this year as the central bank raises interest rates to pare inflation. India may take further steps to damp rising prices, Sud said, after four interest-rate increases since March failed to bring inflation down from near 10 percent. Rising prices have stoked public protests and sap demand for motorcycles in India, the world’s second-biggest two-wheeler market. State Bank of India, the country’s biggest bank, raised its benchmark lending rate to 12.25 percent from 11.75 percent last week. ICICI Bank Ltd., the second largest, increased its prime lending rate to 16.25 percent from 15.75 percent.

Competition and Sales Growth

Hero Honda reported a slow 2% YoY increase in sales during the month of August 2010. This seems to be particularly low when compared to the sales volumes of other two-wheeler majors in the country. For instance, TVS Motor reported a 34% YoY rise in volumes, while Suzuki Motorcycle reported a 51% YoY increase in volumes during the month. India Yamaha Motor on the other hand reported a 30% YoY rise in volume sales during the month. Bajaj Auto saw its sales volumes improve by 55% YoY during the month. – Equity Master

Hero Honda on 2nd September launched the new model of Super Splendor that comes with ‘Honda intelligent ignition system’ (HIIS). Priced at Rs.45,950, the new bike features a newly designed carburettor for improved engine performance and five-step adjustable rear shock-absorber for smoother drive and comfort. – The Hindu

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