Hero Honda, India's largest motorcycle manufacturer continues to surge ahead full steam. Its volumes for April-December 2000 are up 41 percent year on year (YoY); this is significantly higher than the overall motorcycle industry, which grew by 28 percent over this period. As the strong growth in the motorcycle segment has continued into the current year, Hero Honda has made the most of this favourable scenario. Its market share has risen to 48 percent currently, as compared to 42 percent in fiscal year 2000. Its aggressive new product launches and upgradation of models besides its marketing efforts have made it a dominant market leader.
Its recent 3rd quarter fiscal year 2001 (3QFY01) results are also a pointer to this. Its sales in 3QFY01 grew by a robust 44 percent and net profit soared by 45 percent, as a result of higher volumes and realisations. As the company had offered higher incentives in 3QFY01 to maintain its market leadership, its margins were expected to fall. Much to the surprise of analysts, its operating margins rose by 90 basis points to 6.8 percent year on year. This was a result of the company's strict cost control measures. Let's not forget, this performance came in the wake of growing competition.
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The company has staged an impressive performance in the last few years. As a result of economies of scale and conservative financing policies, the company has managed to achieve the highest gross margins and returns in the two-wheeler industry.
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Its capital expenditure in the past few years has been funded mainly by its internal accruals. As a result its debt to equity ratio declined from 0.9x in fiscal year 1997 (FY97) to 0.1x in fiscal year 2000 (FY2000) resulting in a fall in interest costs. For the next three years, the company has envisaged a capital expenditure of Rs 3 billion (US$ 64 million) and this will take the company's motorcycle capacity to 2 million units from the current 0.95 million units.
Hero Honda's products are market leaders in their respective categories. Its largest selling brand the 'Splendor' has made its mark in the four stroke 100 cc segment. It enjoys much higher volumes than its nearest competitor, Bajaj Auto's Boxer and it continues to enjoy the highest market share in this segment. In the over 100 cc bikes its competitor's are TVS Suzuki's 'Fiero' and some Yamaha models. However, the 'Fiero' lags behind the Splendor in terms of market presence and sells a meager 5,000-6,000 bikes per month, only a tenth of Hero Honda's 'Splendor'. To keep ahead in the race, Hero Honda is planning to launch a superior version of 'Splendor' in 2001. The company is proactive and is not complacent on its past laurels.
In FY2000, the company launched its model CBZ (ee) in the 156 cc segment, despite knowing that the market for higher-powered bikes in India is not that large. This model again is a winner in its category. The company has planned a spate of launches in 2001 to counter the increasing competition. It has recently launched a new four-stroke bike 'Passion' in the 100 cc segment.
Besides displaying its financial and marketing acumen, Hero Honda has managed to allay investor fears regarding Honda's 100 percent subsidiary to manufacture scooters. Investors were concerned regarding the flow of technology from Honda to Hero Honda in future. However, the company's recent new product launches along with Honda Motors have taken away some of the fears. Hero Honda is also upgrading its own research and development facilities.
All the above good news is reflected in Hero Honda's share price. However, the next year could be worrisome for the prospects of the company. For one, agricultural growth is expected to be lacklustre (1 percent in the current fiscal year). The lag effect of this on rural incomes is likely to be felt in fiscal year 2002 (FY02). As 60 percent of motorcycle demand is from rural areas, Hero Honda could see a slowdown in demand.
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In terms of domestic competition, Bajaj Auto, LML and TVS Suzuki are getting set to come out with new models in 100 cc segment in the current year. Besides cheaper imports from China too are expected to pick up in the current year. This is likely to put pressure on the company's margins in FY02.
In the past few years' scooter sales have declined rapidly, as consumers turned in favour of motorcycles. Hence the scope of taking over the market share of the scooter segment is now comparatively reduced, as they account for only 25 percent of the two-wheeler market currently. All these factors could slowdown motorcycle demand, and hence Hero Honda's growth.
Hero Honda will continue to remain a market leader due to its vast experience, technological support from Honda and aggressive marketing strategies, but its future does not look as bright. Its latest volumes for December 2000, which grew by 25 percent YoY, suggest a slowdown as compared to previous months.
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