Hero Honda Motors: Sell

Recommendation: Sell

B. Krishnakumar

AFTER robust growth in the recent past, Hero Honda will now have to face mounting competitive forces.

With the entry of TVS Suzuki, Escorts Yamaha and LML into the four-stroke motorcycle market, the company is likely to see a slowdown in the offtake of its four-stroke motorcycles. The rising competition in the industry would also exert pressure on margins. Existing investors could book profits in the Hero Honda.

By virtue of being a pioneer in the country's four-stroke motorcycle segment, Hero Honda has managed to occupy the market leader slot in the segment for quite some time. The company has effectively tapped the growing demand for four-stroke motorcycles. With Bajaj Auto being the only major competitor, the company managed to retain its market leader status in the market.

Financially, for the year ended March 2000, the company's turnover grew by about 56 per cent to Rs 2,395 crore, while the post-tax earnings increased 59 per cent to Rs 192.08 crore. On the equity base of Rs 39.94 crore, the per share earnings work out to Rs 48.02.

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Apart from the demand growth, the conscious thrust towards capacity expansion has also played a part in the steady improvement in earnings. This, coupled with the liberal approach towards distribution of earnings to shareholders, has made Hero Honda among the stocks fancied at the stock market.

However, the company is headed towards a more critical and testing phase. Earlier, Bajaj Auto was Hero Honda's sole competitor. Aided by relatively superior product design and the early-entry advantage, Hero Honda managed to stifle competition from Bajaj. However, the competitive dynamics in the four-stroke segment underwent a major change in the recent past.

Other two-wheeler majors such as TVS Suzuki, Escorts Yamaha and LML have now entered the market with their four-stroke model. The early success of TVS Suzuki's Fiero is an indication that Hero Honda's domination of the four-stroke segment could fade. Apart from TVS Suzuki, Bajaj Auto has turned extremely aggressive in the four-stroke motorcycle segment.

Caliber and the lower-end product Boxer have raked in huge volumes for Bajaj. The launch of Crux by Escorts Yamaha would also add to the industry's competitive pressure. In the meantime, LML has also launched its four-stroke motorcycle. Given this backdrop, Hero Honda is unlikely to replicate the kind of growth rate and margins achieved in the past.

Both the growth rate and profit margin would be under pressure in future. With the four-stroke segment being fragmented between various contenders, Hero Honda's domination would get diluted over a period of time. The recent spurt in volumes recorded by Bajaj Auto in the motorcycle market and the steady volume growth recorded by TVS Suzuki's Fiero is an indication that Hero Honda may find its market share under some stress.

The impact of the above factors is being reflected in the narrowing margin between the sales volume of Hero Honda and its closest competitor Bajaj. For December 2000, Hero Honda reported a 11.8 per cent drop in motorcycle sales compared to the previous month.

Given this backdrop, the Hero Honda could find its profitability under pressure. Though the company is unlikely to find itself completely out of the market fancy, it will definitely find its growth rate dented by recent entrants. Existing shareholders could look for opportunities to dilute holdings in the Hero Honda stock. Fresh purchases may be deferred for the time being.