Hero Honda Motors: Sell now and re-enter at low levels

Recommendation: Sell now and re-enter at low levels

B. Krishnakumar

NOT too many companies have performed as consistently as the two-wheeler major, Hero Honda. Despite rising competitive pressure and new players, the company managed to hold its place in the motorcycle market.

However, now that the half-yearly earnings are out and the company has also announced the much awaited special dividend, there could be no fresh positive trigger to push the share price to higher levels. Moreover, the recent developments in the two-wheeler industry would add further pressure to the highly competitive business environment.

From an investment perspective, taking into account the recent run-up in share price, the scope for sustained rise in the Hero Honda stock appears limited. The hike in investment limit for FIIs to 40 per cent might result in a rally. Shareholders could use this price rally to trim exposures.

Fresh buying may be considered at lower levels as Hero Honda is still the preferred portfolio choice in the two-wheeler industry. As the share price has seen a steady run-up recently, it would be better to lock-in on the gains by booking profits in the company.

Hero Honda is the biggest motorcycle producer in the country. Until recently, `Splendor' was the primary engine of growth. However, the launch of CBZ, Passion and Joy has reduced the earnings concentration associated with `Splendor'.

The growing market acceptance of recent product introductions has resulted in an improvement in the product mix in favour of higher value product. The positive impact of the same is reflected in improved performance for the first half of this fiscal.

It remains to seen whether Hero Honda would manage to retain its eminent position and growth rates in the industry amid the recent developments _ Yamaha acquired controlling stake in the erstwhile Escorts Yamaha joint venture, and Suzuki pulled out of the joint venture with Sundaram Clayton.

For Hero Honda, the licensing agreement with Honda Motors, Japan, is valid till 2004. Though Hero Honda has reiterated that the agreement would continue in the post-2004 phase, it is possible that Honda might decide to launch motorcycles under its own brand name in India.

It would also be interesting to watch the course of action adopted by Japan's Suzuki Motors in the Indian market, once the ongoing agreement with TVS ends in about 30 months.

Apart from the implications of the future course of action of Honda and Suzuki, Hero Honda would also have to cope with competition from domestic players, such as Bajaj and TVS Suzuki, that have turned more aggressive in launching new models.

Fiero and Victor, along with Boxer and Caliber, have managed to pep up volume growth for the TVS Suzuki and Bajaj, respectively. For Hero Honda, `Splendor' continues to be the largest volume driver, accounting for about 50 per cent of the total volume. Passion is another major constituent in Hero Honda's product mix. Both these brands put together would account for over 65 per cent of the turnover.

Depending on a couple of brands is always risky as a drop in volume in one of the existing models could have major negative impact on volume growth. A few more successful products from Bajaj, TVS or Kinetic introduces, might affect the growth rate for Hero Honda.