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Hero Honda: Lacklustre volumes - Views on News from Equitymaster
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  • May 3, 2001

    Hero Honda: Lacklustre volumes

    Hero Honda, India's largest manufacturer of motorcycles, has reported a sales volume of 96,672 units for April 2001. This is a growth of 25.5% YoY as compared to 76,981 units sold in April 2000. However, as compared to the month of March 2001 its sales were lower by 138 units at 96,810 units.

    Since January 2001, Hero Honda's month on month volume numbers are indicating a slowdown as rural demand seems to be tapering off. The reason being poor agricultural growth since the past two years, which could have resulted in lower rural incomes. Over 60% of motorcycle demand comes from rural areas

    For 4QFY01, Hero Honda's volumes grew by 22% YoY to 274,716 units. This was lower as compared to the growth reported by the company for the first nine months of FY01. From April to December 2000 the company sold 754,794 units a growth of 41% YoY. Considering that sales are normally higher in the last quarter of the year due to the seasonal factor, these numbers do indicate an overall slowdown in volumes. In FY00, 4Q volumes accounted for 30% of the total year's sales volumes while for FY01 volumes accounted for only 26.6% of total volumes sold during the same period.

    Besides weak agriculture, Hero Honda is faced with higher domestic competition from TVS Suzuki, LML and Bajaj Auto. As all these companies are bringing out four stroke models in the 100 cc and above range, Hero Honda is bound to feel the pressure on pricing as well as on increasing its market share. In FY01, the company's market share went upto 47% as compared to 42% in FY00.

    Its largest selling bike the Splendor in the 100 cc segment is bound to face more competition in terms of features and pricing. Hero Honda's CBZ in the 156 cc range is already facing tough competition from TVS's Suzuki's Fiero (175 cc).

    Models sold Apr-01
    Splendor 53,607
    CBZ 2,695
    Joy 4,604
    Passion 21,986
    CD 100 6,184
    CD 100 ss 6,373
    Street Smart 1,223
    Total 96,672
    With the lifting of quantitative restrictions, the threat of imports from China looms large. Even though the customs duty on new CBU's has been hiked from 35% to 60%, the fear still exists as CKDs can still be imported at lower import duties.

    Hero Honda, continues to report higher returns and is fundamentally stronger than its peer companies. However, the increasing competition and lower rural demand are going to continue to act as a negative for the company, unless the market grows at a higher pace than seen currently.

    The only silver lining for Hero Honda will be a normal monsoon, as then the prospects for agriculture growth will look brighter. Hopefully then demand will once again perk up, resulting in better volumes for the company. A hike in customs duty for CKDs, will also be positive for the company.

    The company's margins will continue to remain under pressure in FY02 as a result of higher competition due to new model launches. On the current price of Rs 140.5 it is trading at 11.3x FY01 EPS of Rs 12.4.



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