Hero Honda slipped on selling pressure on Friday, following reports that a leading research house has downgraded the stock.

The scrip of the leading motorcycle manufacturer was among the biggest losers in Sensex constituents, down by 1.91% to Rs 220.40. A volume of 78,250 shares was recorded on the counter by 12:20 IST. In the last four sessions, the scrip rose by 9.6% to Rs 224.70 on 20 February 2002 from its 52-week low of Rs 205.05.

Analysts said the fall on the Hero Honda counter was purely on profit-booking, after a huge rise in the last few sessions. They said that Morgan Stanley, a leading brokerage house, has downgraded the stock from ‘overweight' to ‘underweight'. However, they said that all negative developments have been factored in the current price of the stock.

As per reports, Morgan Stanley has downgraded the company's earnings potential due to rising competition in the motor cycle segment and the uncertainty about the company's alliance with Japan's Hero Honda. The brokerage has said that earnings growth may fall year-on-year in FY 2003-05 in the wake of great strides made by rivals like Bajaj Auto and TVS Motors in new motorcycle launches, especially in the executive segment, in which Hero Honda had a virtual monopoly until FY2002. It has cut earnings estimate by 3% for FY2003, 8% for FY2004 and 15% for FY2005. Similarly, the stock price has been projected to decline from Rs 310 to 199. However, the brokerage is bullish on the country's two-wheeler industry, especially the motorcycle segment.

Recently, Hero Honda clarified that it has no plans to cut production levels, and that there was no inventory pile-up at the dealers' end. Earlier, there were rumours that the company has cut its production of bikes by 40% in the current month due to the huge inventory pile-up at the dealers' end. As a result, in 10 sessions between 30 January and 12 February 2003, the scrip had shed 20.2% from Rs 257.90.

Now, there are rumours that the company has plans of increasing its production of motorcycles.

In January 2003, Hero Honda registered a small 6.3% rise in motorcycle sales to 145,000 units. But compared to the December 2002 sales figure of 125,000 units, the growth rate of 16% was redeeming. In the April 2002-January 2003 period (10 months), its sales rose by 22.7% to 1.42 million units from 1.16 million in the year-ago period. Even as the motorcycle sales figure for January 2003 was deemed modest, players were disappointed that the company's own target of 173,000 units for the month was missed.

On the flip side, analysts said that despite aggressive competition and falling market share Hero Honda has been able to maintain profit margins over the last three quarters of FY 2002-03. But, in the current quarter, there are fears that margins may be hit. The company has committed huge expenditure on advertisements and dealer incentives. Hero Honda is a co-sponsor in the Cricket World Cup, currently being held in South Africa. Analysts also said, that in the face of cut-throat competition, Hero Honda may not be in a position to hike bike prices.

Also, there were no indications so far that the company will achieve its full year (FY 2002-03) growth target of 1.8 million motorcycles, analysts said.

According to data from the Society of Indian Automobile Manufacturers, Hero Honda's market share in motorcycles has steadily fallen to 45% in the April-December 2002 period from 49.6% in the year-ago period. In the same period, Bajaj Auto's market share rose from 21.7% to 23% and TVS Motor's share improved from 14% to 19%.

For the third quarter ended 31 December 2002, Hero Honda registered a 14.7% rise in net profit to Rs 152.8 crore (Rs 1.52 billion), compared to Rs 133.22 crore (Rs 1.33 billion) in the corresponding period of the previous year. Net sales increased by 12.8% to Rs 1,376.04 crore (Rs 13.76 billion) from Rs 1,219.47 crore (Rs 12.19 billion).

Recently, the Hero Honda scrip was included in the derivatives segment of BSE as well as NSE.

The promoters - the Munjal group and Honda Motor Company – hold a 26% stake each in Hero Honda. FIIs have a substantial holding of 23.23% in the company, while domestic funds have 5.68%. The public owns 17.32% and private corporate bodies and NRIs/OCBs 1.76%.

BSE code: 500182