Hero Honda rides high on motorcycle sales - Views on News from Equitymaster

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Hero Honda rides high on motorcycle sales

May 3, 2000

Hero Honda has reported a net profit of Rs 1,922 m for FY2000 which is a growth of 51% YoY on the FY99 net of Rs 1,215 m. This growth came in from a higher turnover at Rs 22,700 m in FY2000, which was driven by a 44% volume growth in motorcycles. The company sold 7,61,000 motorcycle units during the year.Hero Honda is the market leader in the motorcycle industry having a share of 42% currently. Hero Honda is a joint venture between the Munjals and Honda, Japan. The strengths of the company include a strong brand name, fuel efficient and innovative products, leadership in technology and a wide distribution network. The company reported a turnover of Rs 22,700 m for FY2000.

(Rs m)FY99FY00Change
Turnover 15,050 22,700 50.8%
Expenditure 13,038 19,459 49.3%
Operating Profit (EBDIT) 2,013 3,241 61.1%
Operating Profit Margin (%)13.4%14.3% 
Interest 60 47 -21.6%
Depreciation 224 347 54.6%
Profit before Tax 1,728 2,848 64.8%
Other Adjustments - -  -
Tax 514 925 80.2%
Profit after Tax/(Loss) 1,215 1,922 58.2%
Net profit margin (%)8.1%8.5% 
Earnings per share* 30.44 48.17  
(annualised)   

Hero Honda continues to benefit from the increase in demand for the motorcycle industry. The motorcycle industry as a whole has reported a growth of 29% YoY in FY2000. Due to change in consumer preferences towards motorcycles from the scooter segment this industry continues to perform well.

The main reasons for this change in consumer preference can be attributed to higher rural incomes, higher demand for motorcycles in rural areas due to wider wheel base. In the last two years the rising agricultural incomes has lead to an increase in demand for motorcycles. The slowdown in industrial production has lead to a fall in demand for scooters as these are mainly sold in urban areas. The scooter industry saw a fall of 5.4% YoY in FY2000.

The improvement in operating margins from 13.4% in FY99 to 14.3% in FY2000 and lower interest costs added to the company's bottomline. During FY2000 the company launched CBZ (ee), a four stroke bike powered with a 156 cc engine and this is the only motorcycle available in India with a disc brake option.

Market View:
Analysts have rated Hero Honda as a "BUY" on the back of good demand for motorcycles. However a major concern that has made them cautious on the company is Honda's 100% subsidiary in India to manufacture scooters and motorcycles. This could lead to newer models being manufactured by the subsidiary.

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