Hero Honda managed small gains on Monday despite belying sales volumes expectations for February 2003.

The scrip of the leading motorcycle manufacturer was trading marginally higher by 0.72% at Rs 224.80. A volume of 27,303 Hero Honda shares was recorded by 11:16 IST.

The scrip has seen contrasting trends of late, rising 8.85% to Rs 223.20 on 28 February 2002 from its 52-week low of Rs 205.05 on 14 February 2003 and falling in the 10 sessions prior to that by 20.5% from Rs 257.90.

For February 2003, Hero Honda registered a 6.46% rise in motorcycle sales to 1,34,801 units compared to 1,26,617 motorcycles in the corresponding period last year. Vehicle sales for February 2003 have been below analysts' expectations. On a month-on-month basis, in fact, Hero Honda reported a 7.6% fall in motorcycle sales from 145,000 motorcycles in January 2003.

In the April 2002-February 2003 period (11 months), the company's sales volumes rose 21.08% to 1.56 million units from 1.28 million in the year-ago period.

Bargain hunting seems to be the trigger behind the scrip today after the stock had been hammered down badly over the last few sessions. Earlier, there were reports that the company had revised its full year (FY 2002-03) motorcycle sales from 1.8 million to 1.7 million vehicle sales. If the company has to achieve its sales target of 1.7 million motorcycle for FY 2002-03, the company will have to sell 1,38,147 motorcycles in March 2003, which players feel is possible.

Meanwhile, 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.

Late last month, Morgan Stanley, a leading brokerage house, downgraded the stock from ‘overweight' to ‘underweight'. 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. The brokerage has cut earnings estimate by 3% for FY2003, 8% for FY2004 and 15% for FY2005 for Hero Honda. 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.

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).

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%.