The Hindu Business Line : `No plan to hike prices despite pressure on margins'

THE Indian motorcycle market has been one of the major growth drivers for the domestic automotive industry. Hero Honda, the leader in the segment with a market share of 50 per cent, has been able to maintain a high double-digit growth rate in the current year. The company's operating margins, however, have come under pressure with soaring raw material prices.

Mr Ravi Sud, Vice-President (Finance) of Hero Honda, discusses the company's performance as well as its strategies to maintain its growth momentum. He also talks about the trends and dynamics of the industry, in which margins are coming increasingly under pressure.

What growth is Hero Honda expecting to end the current fiscal with? Sales of motorcycles have been robust in the current year, what are the major factors driving this growth?

The company is looking at a growth of about 25 per cent in the current financial year, with a sale of about 2.6 million units. While the average growth for the industry has been about 10 per cent over the last 10 years, the current year has shown very high growth at 15 per cent. While there are basic reasons for this growth, including lack of a developed public transport network and a growing number of people shifting to satellite towns, a major factor has been the dip in interest rates in financing schemes. Financing has permeated to smaller towns as well. Going forward, we expect the industry to maintain a growth of about 10-12 per cent for the next 2-3 years.

While Hero Honda had strong topline growth in the third quarter, your operating margins were under pressure in the quarter primarily due to higher input costs. Do you expect the pressure on margins to continue?

Operating margins for almost all players in the automotive industry have come under pressure due to higher input costs and increasing competition in the market. However, one would find that the drop in margins is the least for us when compared to other players in the industry. Our focus on cost management is very high, and we have been able to absorb the costs. However, we feel that the pressure on margins would continue for the next 4-5 quarters.

Even though industry margins are likely to compress further, we will not be increasing prices. Not even with new emission norms coming in. In fact, our last price hike was in April 2000.

What impact will the coming value-added tax (VAT) regime have on you?

VAT will not impact us significantly as both our plants are located in Haryana, where VAT is already in place. Further, about 70-75 per cent of our component suppliers are also based in Haryana.

Sales of Hero Honda have been impacted due to capacity constraints. What is the current capacity? When is the company likely to decide on the setting up of its third plant and what kind of capital expenditure do you envisage in the next year?

We have been making investments to increase capacity at regular intervals. We will have a capacity of 2.9 million units on April 1, after which we will make efforts to increase capacity further. Our production capacity should cross 3 million units in the next 4-5 months. The company has spent Rs 90-120 crore annually on capex during the last 5-6 years. We will be spending the same amount next year. In case we do decide to set up the third plant next year, it would mean an additional investment of about Rs 250-275 crore. However, no decision has been taken on the third plant yet.

Are sales of the newly launched 125 cc Super Splendor likely to be affected due to capacity constraints and what targets have you set? Do you feel the bike may cannibalise sales of your 100 cc models (such as the CD Dawn and Splendor) as there is only a marginal difference in price between the two?

We will be producing 40,000 units of the Super Splendor in the first month and are targeting to sell as many. In fact, we had originally planned to launch this bike in January but had to postpone the launch to March as our vendors asked for some time to supply components for 50,000 new bikes. Yes, there may be some cannibalisation in sales as the market is shifting to the 125 cc segment. But we feel that the shift in market is a slow, gradual process and the clientele for the 100 cc bikes will remain. In fact, we stopped production of the CD 100 SS, which was launched many years ago, only last month.

What are the new product launches planned for the next year and when is the foray into scooters? What growth are you looking at in the next fiscal?

We are looking to launch a minimum of two products in the next year. In addition, we will be rolling out new-look variants of our existing products, as we had done in the last year. We have already finalised our new product line-up till 2010 with Honda. We do have a plan to foray into scooters sometime in 2006. Overall, we are looking at growth in sales by about 12-13 per cent in the next fiscal to 2.9 million bikes.

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