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Gearing for the future - Views on News from Equitymaster
 
 
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  • Jul 20, 1999

    Gearing for the future

      Background

    • Hero Honda is India's largest manufacturer of motorcycles with 41% market share. Over the period FY93-FY99, it's sales have grown at a compounded annual growth rate (CAGR) of 25%.

    • Hero Honda has been riding the motorcycle boom over the past 2 years. The Munjal family - the chief promoters with its focussed approach to the business have ensured that HHML has benefited most from the motorcycle surge as compared to its competitors - TVS Suzuki and Bajaj Auto,who also have their fingers in mopeds and scooters. The company currently has production capacity of 500,000 units.

    • The company's main strengths include its impeccable brand equity - its products have a waiting list, and technology - its JV partner Honda is a global leader in two wheelers, especially in four-stroke technology. It is little wonder then, that its monthly sales are nearly 1.8 times Bajaj Auto's motorcycle sales.

    • Riding the first mover advantage in four-stroke technology, Hero Honda has come to dominate the fuel-economy sub-segment of motorcycles. This segment has grown large mainly due to consumer preference for a fuel-efficient two wheeler given high petrol prices in India. Over the years, the Hero Honda brand has got associated with four-stroke motorcycles.

    • Hero Honda's brands already comply with Year 2000 emission norms. Therefore, it will have to incur negligible expenditure in meeting these norms, when compared to Bajaj Auto and TVS Suzuki.

    • The company has consistently outperformed the motorcycle segment over the past 2 years. In FY99, while the motorcycle segment posted volume growth of 23.4%, Hero Honda clocked growth in excess of 30%.

      Products

    • Hero Honda has consistently offered products with superior quality, good aesthetics and high fuel efficiency. With its four-stroke technology, the company has initiated a revolution in the motorcycle segment and has redefined the concept of fuel-efficiency.

    • Some of its popular products include:
      • The Splendor - a 100 cc motorcycle in the premium motorcycle categort. This product however is now facing the heat from Bajaj Auto's Caliber (a 110-cc motorcycle). The latter has eaten into Splendor's market share, but June 1999 figures reveal that the Splendor has recouped some of the lost market share, and HHML's motorcycle market share currently stands at 41%.

      • The CBZ (read as Cee Bee Zee) - Hero Honda's latest offering. The CBZ hit the streets in June. A 150-cc motorcycle, it is the first of its kind from a domestic company, in what is still a niche category. But it is priced on the higher side and offers lower mileage than what is expected from a four-stroke engine.

      Latest results

    • Hero Honda's FY99 results indicate that the company has continued from where it left off in FY98. While sales improved by 33% in FY99 to Rs 15.3 bn, net profit zoomed by 60% to Rs 1.2 bn.

    • From FY99, Hero Honda has become a net cash-flow positive company, and its net interest is expected to decline. It will become net cash positive in FY2000. In FY2000, its gross debt is expected to be approximately Rs 680 m, and total cash will be about Rs 1.1 bn. The company would like to repay its entire debt, but as its borrowings are in foreign currency (Yen and US$), it has not yet received government approval to do so.

      Future

    • Hero Honda's management has revealed plans to launch a new model every year. This will enable the company to effectively counter competition from competitors (Bajaj Auto and TVS Suzuki).

    • It plans to double its capacity to 1 m units at its existing location. It anticipates an incremental capex of Rs 1-1.25 bn p.a., which will be met through internal accruals.

    • The company may make a foray into niche scooter segments if market research reveals some untapped potential. Honda's (Hero Honda's JV partner) break-up with the Kinetic group is another reason that may make the company consider the diversification move.

    • The motorcycle segment is expected continue to grow at blistering pace over the next 2-3 years. Analysts forecast a demand growth of close to 20%, much of which will be accounted for by the rural segment. If Hero Honda continues with the past trend of outperforming the motorcycle segment, it shall grow in excess of 20% at least until FY02-03. By FY03, it could well account for close to 50% of the motorcycle segment.

    • Within the motorcycle segment, the fuel economy sub-segment will continue to grow at a furious pace, as international crude price firms up, affecting local prices. With Hero Honda's inherent strengths in the fuel economy sub-segment, it will not have to look over its shoulder for a long time.

     

     

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