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Hero Honda: Has a new era Dawn(ed)? - Views on News from Equitymaster
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  • Mar 15, 2004

    Hero Honda: Has a new era Dawn(ed)?

    After languishing behind its peers like TVS Motors and Bajaj Auto for most part of the last year, motorcycles major, Hero Honda, seems to be back in the reckoning. While the company's entry level offering 'CD Dawn' has met with a favorable response, the volume sales for the month of January 2004 have also been impressive (35% growth on a YoY basis). With rural income likely to receive a boost on account of the good monsoons, the revival would not have come at a more opportune time for the company. In this article, let us analyse the company's recent performance.

    Hero Honda was the biggest beneficiary of a shift in trend from geared scooters to motorcycles. As a result, the company's topline grew at a much faster pace as compared to its rivals like Bajaj Auto and TVS during the period FY98 to FY02. The market share of the company reached the 50% mark in FY02, a great deal of improvement if one considers that its market share in FY98 was 45%. However, on account of lack of competent models and also introduction of better quality and fuel-efficient models by its rivals, the topline of the company grew at a much slower rate in FY03. Poor monsoons also affected the rural demand in FY03. As a result, the market share of the company declined and stood at the FY98 levels of 45%.

    The loss in market share was largely a result of the company's dwindling fortunes in the entry level and the power segment. While the volumes of the former fell 22%, the power segment suffered a 3% fall in volumes in FY03. Aware of this, the company launched a new model 'CD Dawn' in the entry-level segment, positioned at an extremely competitive price. The move seems to have paid off as the model contributed 26% of the total sales for 9mFY04 period and also took some pressure off its flagship brand 'Splendor'. As far as the power segment is concerned, the company has just strengthened its range for this segment with the launch of Ambition 135. Whether the bike will be able to eat into the market share of 'Pulsar', which is the market leader in this category remains to be seen.

    Motorcycle trends...
    ('000 units) Dec-02 Dec-03 Change 9mFY03 9mFY04 Change
    TVS 59.6 52.5 -11.9% 539.1 525.4 -2.5%
    Bajaj Auto 69.0 71.6 3.8% 641.7 760.6 18.5%
    Hero Honda 125.1 160.2 28.1% 1,281.3 1,477.4 15.3%
    Total 253.7 284.3 12.1% 2,462.1 2,763.5 12.2%

    On the operating performance front, we believe that intense competition on account of newer models being launched every year and higher raw material costs could cause a pressure on operating margins. However, on a relative basis, we believe that Hero Honda would command a higher margin on account of its concentrated business interest i.e. motorcycles.

    As far as the financial health is concerned, two wheeler companies on account of their strong cash flows are almost zero debt companies and Hero Honda is no different. With a substantial Rs 12 bn in the form of cash and liquid investments, the company is fully equipped to meet any challenge from its competitors in the form of newer models or a game of price wars.

    The stock is currently trading at Rs 475, implying a P/E of 14x annualised 9mFY04 earnings. Motorcycles currently account for almost 76% of the total two wheeler market in the country. It is believed that the market shares will stabilize at around the 80% levels. Therefore, the growth prospects look promising from a 2 to 3 year perspective. While the competition would only get more intense from here, the company's track record of continuously introducing successful fuel-efficient models and also its strong cash flows would ensure that it adequately rewards its shareholders. However, threat of cannibalization from motorcycles to be launched by Honda Motorcycles remains a key cause of concern.



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