Hero Honda Motors Limited (HHM), India’s largest manufacturer of motorcycles, has increased its market share in the two-wheeler segment significantly over the last five years. But given the fact that competition has increased and there are threats of cheaper imports, will the growth story sustain in the long term?
One of the biggest strengths of the company is the ability to foresee trends. It was the pioneer in launching India’s first 4-stroke motorcycle way back in the early 1990s when other manufacturers were happy with 2-stroke engines. One of the key brands of the company, ‘Splendor’, is the largest selling motorcycle in the world with yearly volumes of 6.9 m. Volumes have grown at a CAGR of 40% over the last five years and it accounted for as much as 32% of the industry sales in FY01. This speaks volume of the company itself. A slew of new launches including the likes of ‘Passion’ (a substitute for Splendor), ‘Joy’ (the low end segment) and ‘CBZ’ (the premium segment) have performed extremely well.
Having seen Hero Honda’s performance over the last five years, competitors finally woke up in the last couple of years. Bajaj Auto has emerged as one of the formidable players in the motorcycle segment and currently has around 25% market share. LML, Yamaha, Kinetic and TVS have also introduced an average two models last year. Of this only Bajaj Auto and TVS have seen a marked improvement in volumes because of tie-ups they have with other Japanese giants like Kawasaki and Suzuki respectively. Given the fact that HHM commands a significant premium in the market, the company might not able to sustain its premium pricing strategy in the coming years. Nevertheless, the brand equity coupled with the new launches in the lower end segment, should enable HHM to post higher volume growth.
Aggregate sales of motorcycles stood at 306,930 units in 1QFY02 as compared to 239,542 units in 1QFY01, a significant rise of 28.1%. The implementation of SAP and aggressive cost cutting exercise has enabled HHM to improve upon its margins by 100 basis points to 14% in 1QFY02. We expect the company to register a volume growth of 31% and a sales growth of 35% in FY02. Spare part sales is also expected to grow by 30% in FY02. Operating margins are expected to go up by 70 basis points for FY02 to 13.8%.
A negative hovering around the company is that Honda Motors has set up a 100% subsidiary in India for the manufacture of scooters. This company is free to manufacture motorcycles after 5 years (2005). Hence there is concern regarding the flow of technology from Honda Motor Company to Hero Honda in future. However considering the relations between Hero group and Honda Motors there should not be any adverse impact of this on Hero Honda, atleast in the medium term.
Though there are also apprehensions about cheaper imports, all the two-wheeler manufacturers are of the view that this would be a short-term phenomenon. Over the long term, manufacturers like HMM would differentiate in terms better service levels and superior new product introductions.
The scrip is currently trading at Rs 184 at a P/E multiple of 11.6x 1QFY02 earnings.
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