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Hero Honda: From cruise to canter?

Jun 24, 2004

Over the last one-month, 20 out of 30 BSE-Sensex stocks have seen considerable erosion in their prices. Auto stocks, in particular, have seen significant profit booking. However, one company that has managed to beat the slump and keep investor interest intact is the world's largest two-wheeler manufacturer Hero Honda. Although it had received a battering on the now notorious 'Black Monday', a couple of positive developments helped company not only to recoup its losses but also post gains in the process. In this article, let us have a look at what those developments were and how would they help shore up company's future growth prospects. The company has always been known for its fuel-efficient bikes and their longevity, thus making it a clear leader in the executive segment, where these attributes are given a priority by the consumers. Suffice it to say that despite repeated efforts, competitors have not been able to make significant inroads into this segment. This has helped the company to notch up good volume growth year after year, as this segment accounts for close to 55% of all motorcycles sold in the country. A lot of credit for this goes to the technical inputs provided by Honda, its joint venture partner.

However, with the technical agreement expected to end in FY04, there was a big question mark over the company's ability to come out with competent models and sustain growth. But the fear seems to have been more than allayed, as Honda has agreed to extend the technical co-operation for another 10 years. This, we believe, is a win-win situation for both. While Hero Honda will benefit in terms of continued technical support, Honda by virtue of its 26% stake in the company, will get a significant chunk of the company's profit pie.

Other development on the company front is its proposed entry into the scooters segment. While it is still not clear whether the company would launch scooters in the geared or ungeared segment, it should in all likelihood be an ungeared one. This segment has grown at a CAGR of 15% for the five years leading up to year FY03, thus making it the second most attractive segment after motorcycles. While there are apprehensions, it should be remembered that the capex is likely to be met from internal accruals.

At the same time, one has to bear in mind that Hero Motors (another Munjal Group company) entered into an agreement with Aprilla to strengthen its presence in the ungeared market. In effect, two companies from the same group could be competing along with two different technical collaborators. Added to this, Honda Scooters and Motorcycles is a 100% subsidiary of Honda Motors, Japan. This company is one of the market leaders in the scooter segment. So, the rationale for venturing into the ungeared scooter market is not clear.

For the current year, the company has earmarked Rs 2 bn as capex and is expected to launch two new models in the motorcycles segment, besides of course, the maiden entry into the scooter segment. The stock is currently trading at Rs 471 implying a P/E of 13x annualised FY04 earnings. Although it would be difficult for the company to replicate the commendable growth story of the late 90s and early 2000, we believe the company is in a strong position to capitalize on the growth opportunity. Besides, the company also has a track record of giving consistently high dividends. Amidst concerns, the historical track record of the company is a comforting factor.


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