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Sunday, Apr 17, 2005

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Hero Honda Motors: Book profits

B. Krishnakumar

Mr Brijmohan Lall Munjal, Chairman... Growth prospects hinge on the ride for the Super Splendor.

REFLECTIVE of the competitive environment in the two-wheeler industry, motorcycle major Hero Honda has reported a relatively lacklustre performance for the quarter ended March 2005. Though the turnover rose 16 per cent, the post-tax earnings fell 2 per cent during this period.

Helped by the sustained demand for existing models such as Splendor+, Passion Plus and CD-Dawn, the company managed to record a 15.6 per cent sales volume growth to 6.8 lakh motorcycles. This translated into a similar growth in the turnover value, which rose to Rs 1,940.3 crore.

The profitability was, however, strained on account of the firm trend in input cost. Besides, the increased advertisement and promotional outgo, along with discounts, did not help the cause either. The prices of key inputs, steel in particular, have been moving up steadily. This has an inflationary impact on the raw material cost.

While the production cost increased, the competitive environment in the industry inhibited the company from revising motorcycle prices to accommodate higher costs. The launch of Super Splendor and the increased ad spend for existing models pushed up the total sales and promotional outgo bill. This is reflected in the 30 per cent increase in "other expenditure" to Rs 210.7 crore.

Until recently, the company was offering a discount of Rs 1,001 across all models. This also affected profitability during the quarter-ended March 2005. With the price of steel and other inputs showing no signs of easing, the company recently hiked motorcycle prices. It also withdrew the discount of Rs 1,001. These initiatives should ease the strain on profitability. However, the launch of two models would result in an increased outgo towards promotional campaigns.

Though profitability is a key issue, the two-wheeler industry is looking at a scenario where volume growth, rather than expansion of profitability, would be the critical driver of earnings. In this context, the success of recent launches — the 125cc model "Super Splendor" and the 100cc "CD Deluxe" — would assume significance.

Hero Honda is a late entrant into the 125 cc motorcycle segment. Competitors such as TVS Motor, Yamaha and Bajaj have entered the market with their offerings in this segment. Moreover, the price differential between Super Splendor and Passion Plus is so marginal that the growth of the former could be at the expense of the latter. It, therefore, remains to be seen if Super Splendor manages to contribute significantly in terms of increased market share.

The other model, CD Deluxe, will have to contend with CT 100, which has turned out to be a successful model for Bajaj. TVS Motor recently launched StaR and also has Centra in the similar league. Given this backdrop, CD Deluxe could again face competitive pressure.

The entry of Honda Motorcycles and Scooters into the motorcycle market will be another significant factor that could alter the market share pie. Considering that Hero Honda enjoys the market leadership status, the market share gained by competitors would be at the expense of the company, unless there is an overwhelming growth in the two-wheeler offtake as such.

From an investment perspective, shareholders may reduce exposure at the prevailing market price of Rs 513, as there appears to be no tangible factors to push up valuation in the near term. Fresh buying may be considered on evidence of sustained growth in sales volume.

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