Hero Honda found many takers in the market on Wednesday as Japanese collaborator Honda has renewed its technical pact with the company. The news provided the fuel for an initial spurt in the scrip of the world's largest motorcycle manufacturer, as it rose 1.36% to Rs 234 by 9:56 IST. It registered volumes of 8,356 shares on BSE by then.

This is the second successive day of gains for the scrip. It ended a solid 8.10% higher at 230.85 on BSE on Tuesday, soaring up from a low of Rs 208.25. And volumes reached over 405,000 shares on the same day.

The Hero Honda scrip has seen intense volatility of late, losing 6.33% to Rs 213.55 on 10 March 2003 from Rs 228 on 4 March 2003. It had earlier risen 11.2% from its 52-week low of Rs 205.05 on 14 February 2003. In the 10 prior sessions, Hero Honda lost 20.5% from Rs 257.90. Obviously, that Japanese automobile major Honda Motor Company has decided to renew its technical agreement with its Indian joint venture partner, the Hero Group, for Hero Honda Motors, is consolidating investor confidence in the company. However, the weakness in the overall market should prevent major gains today, in fact, bringing the scrip down from the higher levels.

The promoters - the Munjals (Hero 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%. The Hero Group had inked the technical agreement with Honda in 1984, which was renewed in 1994 and now comes up for renewal in June 2004. But according to the market, the technical agreement has already been signed and is extended till 2008. In any case, it's not all hunky dory for Hero Honda as doubts persist over the company's growth prospects.

Hero Honda derives over 80% of its revenues from the Splendor-Passion combine in the executive segment - the most crowded section of the motorcycle market. The company's inability to diversify away from this segment, through launches in the economy or power segments, is the core part of its problems. The company's Dawn and the Ambition models have failed to break Bajaj Auto's dominance in the economy and power segments, respectively.

Another worry is, that despite the renewal of the technical pact, the fact that Honda group subsidiary Honda Motorcycles and Scooters India will be allowed to sell motorcycles in India post April 2004. This casts doubt on the Honda group's actual commitment to Hero Honda. HMSI, in fact, has already put in place a reasonably wide network of dealers and channel agents.

Late last month, Morgan Stanley, a leading brokerage house, downgraded the Hero Honda stock from ‘overweight' to ‘underweight' citing the company's faltering earnings potential due to rising competition in the motorcycle segment and uncertainty about the company's alliance with Japan's Honda. The brokerage then 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 Motor with new motorcycle launches, especially in the executive segment, in which Hero Honda had a virtual monopoly untill FY 2002.

The brokerage has cut earnings estimate by 3% for FY 2003, 8% for FY 2004 and 15% for FY 2005 for Hero Honda. Similarly, the stock price has been projected to decline from Rs 310 to Rs 199. However, the brokerage is bullish about the country's two-wheeler industry, on the whole, 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%.

However, 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, analysts said there were fears that margins may be hit. The company has committed a 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. 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 1.45 lakh motorcycles in January 2003. In the April 2002-February 2003 period (11 months), the company's sales volumes rose by 21.08% to 1.56 million units from 1.28 million in the year-ago period. 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, it will have to sell 1,38,147 motorcycles in March 2003.

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).

BSE code: 500182

More Hot Pursuits