Hero Honda: A SWOT analysis

Past 5 year performance...

As can be seen from the table below, the company the sales as well as the profits have increased enormously. The company net sales has shown a CAGR of 27% and net profits have shown a CAGR of 39% led by its motorcycle led dominance. The operating margin of the company has improved by 290 basis point to 16.8%.

(Rs m)	FY00	FY01	FY02	FY03	FY04
Motor Cycles sold (m)	0.76	1.03	1.43	1.68	2.07
Net sales	22,464	31,687	44,654	51,017	58,324
Other income	204	221	767	956	1,681
Total revenues	22,668	31,907	45,422	51,973	60,005
Operating profit	3,070	4,285	6,807	8,636	9,801
Depreciation	347	443	510	580	733
PBIT	2,724	3,843	6,297	8,056	9,068
Interest	47	25	15	17	17
PBT	2,880	4,038	7,049	8,995	10,732
Extraordinary Items	-34	-268	-105	(149)	(7)
Tax	925	1,301	2,315	3,038	3,441
Net Profit	1,921	2,469	4,629	5,808	7,283
Operating profit margin	13.7%	13.5%	15.2%	16.9%	16.8%
Net profit margin	8.6%	7.8%	10.4%	11.4%	12.5%
Number of shares (m)	39.9	199.7	199.7	199.7	199.7
Face Value (Rs)	10.0	2.0	2.0	2.0	2.0
DPS (Rs)	10.0	3.0	17.0	18.0	20.0
EPS (Rs)	48.1	12.4	23.2	29.1	36.5
Fully Diluted EPS (Rs)	9.6	12.4	23.2	29.1	36.5

Strong Fundamentals

As evident from the table company has a strong balance sheet. Further the company has a consistent record of paying dividend.

Ratios	FY00	FY01	FY02	FY03	FY04
RONW	20.0%	100.0%	100.0%	100.0%	100.0%
ROCE	37.8%	36.5%	58.5%	59.0%	55.5%
Debt Equity (x)	0.1	0.1	0.2	0.2	0.2
Interest coverage (x)	57.8	151.9	417.0	465.7	527.2
Dividend payout	0.9%	0.6%	0.4%	0.4%	0.3%
BVPS	111.1	30.5	33.8	42.5	57.0

The company has clarified about its intention of setting a third plant in addition to its existing two plants. The company has embarked upon a green field expansion plan and has earmarked Rs 2 bn for the same. It should be noted that the company has a strong cash flow position, it generated Rs 9 bn from operation in FY04 and is virtually a debt free company.

What to expect?

With liberalization take a strong hold in the country, the automobile sector has changed from a sellers' market to a buyers' market. The automobile sector is one of the most competitive sectors with competition on all fronts i.e. pricing, new launches, innovativeness, efficiency, network of dealers etc. Further, the market share of motorcycle in the two-wheeler industry at present 78%, presenting a limited further upside.

From Hero Honda's perspective, the effect of competition and the pricing pressure is evident from the fact that though the growth in sales volume in FY04 was 24% YoY, the same was only 14% in value terms. Further the operating profit is showing a decreasing trend, from 66% growth YoY in FY00 to 13.5% YoY in FY04, and is expected to continue. The rise in the cost of inputs like steel, rubber, plastics pose a significant problem due inability to aggressively price the product thereby adversely affecting the operating margins. Further publicity and advertisement expenses are expected to rise for aggressive marketing of new launches and existing products.

Among other concerns, the new agreement between Honda Japan and Hero Honda does not have 'no compete clause'. Secondly, The company is planning to foray into the scooter segment with a launch scheduled in mid-2006. The rational behind this seems to be obscure, as the share of the scooters in the two-wheeler industry has reduced to 16% from a high of more than 50%. Even the market leader, Bajaj Auto, is facing the industry pressure.

As per the NCAER report the demand for motorcycles in India is expected to be 10 times that of the scooters and moped by 2011-12. At the same time one has to bear in mind that Hero Motors (a Munjal group company) has entered into an agreement with 'Aprilla' to strengthen its presence in the ungeared scooter market. Thus in effect this would result in two companies of the same promoter group competing against each other. Further, Honda Motors, Japan through its 100% subsidiary has a significant presence in the scooter segment.