The Hero Honda is a joint venture between the Honda Motors Co., Japan and India’s Hero Group. Honda Motors Co., Japan is among the pioneers of the global motorcycle industry. The Hero Group has a long track record of mass manufacturing and distribution from the days of Hero Cycles.
Hero Honda has been the largest two wheeler company in the world for eight consecutive years. The company crossed the ten million unit milestone over a 19-year span. In the new millennium, Hero Honda has scaled this to 15 million units in just five years! As one of the world’s technology leaders in the automotive sector, Honda has been able to consistently provide technical know-how, design specifications and R&D innovations. This has led to the development of world class, value – for- money motorcycles and scooters for the Indian market. Hero Honda is recognized today as one of the most successful joint ventures in the world.
Two positive indicators for Hero Honda are the company is efficient in managing capital and it has an excellent track record of rewarding shareholders by paying out dividends. Its management is shareholder friendly though largely a family managed entity. It enjoys strong brand equity and distribution network. The brand Hero Honda is associated with fuel efficiency.
The company also has a strong distribution system. Hero Honda’s bikes are sold and serviced through a network of over 3500 customer touch points, comprising a mix of dealers, service centres and stockists located across rural and urban India. Hero Honda has world-class manufacturing facilities at Dharuhera and Gurgaon in Haryana and a most sophisticated plant at Haridwar. The company is able to introduce a variety of models cutting across the entry (100 cc), deluxe (100 to 125 cc) and premium (125 to 250 cc) segments.
Competition is strong and it has no pricing power. It may be noted that Indian motorcycle industry has become extremely competitive. Undoubtedly, the new competitors pose a formidable challenge in the premium segment with dazzling models, which will attract the affluent metro crowd. However it is difficult to beat Hero Honda in the entry and deluxe segments. These segments cater to India’s value conscious smaller centers where the company’s distribution network, service capabilities and goodwill are unmatched.
Hero Honda has been consistently generating returns on equity well above 35% in the last 10 years. Over the past 5 years, the company has posted returns of around 41% on an average. Importantly, the rapid increase in return on equity has not been fuelled by debt. During this entire time, it has utilised little or no debt. The company is able to generate funds from the internal accruals for the capital expenditure. Same time it has a good track record of paying handsome dividends to its shareholders.