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S. Krishnakumar

Mr. Pawan Kumar Munjal (right), Managing Director, and Mr Brijmohan Munjal, Chairman, Hero Honda, at the launch of Ambition... The company's product launches have not set the market afire.

THE motorcycle major, Hero Honda's third quarter performance, has been rather lacklustre. For the three months ended December 2002, the company reported a 13 per cent rise in turnover to Rs 1,376.1 crore and a 15 per cent increase in post-tax earnings to Rs 152.8 crore.

Growing competitive pressure and muted success in product launches have taken a toll on the company's sales volume. Except for Passion, other launches such as Dawn and Ambition have enjoyed a relatively modest presence at the market place.

Even during the festive season (October and November) when the demand for two wheelers tends to peak, the company's volume growth was not all that impressive vis-à-vis the overall industry growth rates.

The company has consistently under-performed the overall growth trend in motorcycle sales, which indicates erosion in market share. During April-December 2002, Hero Honda's motorycle sales grew 24 per cent while competitors such as Bajaj and TVS Motor came up with much better growth rates.

For the quarter ended December 2002, Hero Honda's sales volume rose 16 per cent to 4.5 lakh units.

On the other hand, in value terms, the turnover growth at 15 per cent during this period did not keep pace with the growth in sales volume. This is explained by the discount scheme offered by the company leading to a drop in average realisation.

Despite the net decline in realisation, the company managed to maintain its operating profit margin at around 16 per cent mark. The thrust towards cost control coupled with savings in raw material cost has helped.

On the positive side, there appears to be some relief with the company managing to record better growth volume growth in the last couple of months.

On a sequential basis, the company's motorcycle sales for the quarter ended December 2002 increased to 4.52 lakh units from 4.07 lakh units sold in the preceding quarter ended September 2002.

The important aspect to watch would be the success or otherwise of the company in lifting its growth rate above industry levels and recouping the drop in market share.

However, there are quite a few worrying factors such as the fate of the current joint-venture agreement with Honda Motor Company, uninspiring new product pipeline and slowdown in sales growth. The company's present technological agreement with Honda Motor Company, Japan, would expire shortly. It remains to be seen if this will get renewed. Further, on the product launch front, the competitors have been more aggressive compared to Hero Honda.

Bajaj has recently introduced an entry-level model called Byk, priced at around Rs 30,000. For TVS, Victor continues to rule steady, while the company plans to introduce variants of Fiero and Victor. Yamaha has come up with Enticer and Libero recently, which have been fairly successful, if the recent trends are any indication.

Taking into account these factors, the growth prospects for Hero Honda do not appear all that encouraging, unless it manages to come up with successful new models. Shareholders can reduce exposure. Evidence of sustained improvement in sales volume could be used to pick up equity exposure at a later date and at lower levels.

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