The Hindu Business Line : Hero Honda: Sell and re-enter at lower levels

The 27 per cent jump in turnover, helped by a 24 per cent rise in sales volume, did not, however, translate into corresponding growth in post-tax earnings because of competitive pressures.

The sustained demand for motorcycles, including the entry-level CD-Dawn and Passion+ and Splendor Plus in the executive segment, pushed up volume growth as also the aggressive promotional scheme of free mobile phone and connection.

The promotional scheme appears to have taken its toll on profitability. The margin was also dented by rising input cost and advertisement costs.

A combination of these factors eroded the operating profit margin to 17.2 per cent from 19.3 per cent in the corresponding previous period.

The drop in profitability along with the higher provision for taxation resulted in a modest 8 per cent rise in post-tax earnings, at Rs 218.93 crore for the period under consideration.

The recent trend of improved turnover and pressure on profitability is likely to persist.

The recent entry of Honda Motorcycle and Scooters into the motorcycle market is a development fraught with implications for other bike majors, including Hero Honda.

Hero Honda is likely to face the pressure of competition in the entry level and executive bike segments. In the former, the popularity of Bajaj's CT 100 and the launch of TVS Motor's Star could aggravate the competitive pressure.

That Hero Honda is feeling the pressure is indicated by its recent announcement of a discount of Rs 1,001 for its bikes.It remains to be seen if Hero Honda's CD-Dawn manages to hold ground in the entry-level segment.

In the executive bike category, the launch of vehicles by Bajaj, TVS Motor and Yamaha would continue to exert pressure on Hero Honda's growth prospects.

Bajaj has launched the Discover, TVS Motor the Victor GLX, and Yamaha the Fazer. This has resulted in the emergence of a new product category of bikes with a 125 cc engine.

With marginal price difference between 100 cc and 125 cc bikes that are positioned in the executive segment, the demand for the latter could pick up.

Hero Honda is to come up with a 125 cc bike and a variant of the CD-Dawn before the end of this fiscal. The launch of these products would push up the advertisement and promotional spend. This, in turn, would strain profitability.

The financial performance and the swing in market share would be a function of the market acceptance of proposed model launches.

With the recent product introductions and the proposed launches from two-wheeler companies, the swing in market share would become more volatile.

Though it would take quite an effort to dislodge Hero Honda's leadership position, the scope for growth in earnings appears limited. Such a trend is evident in the performance over the recent quarters and is likely to continue.

Taking into account these factors, shareholders may reduce exposure and contemplate fresh buys on price weakness. Buying may also be considered on evidence of market acceptance of models to be launched by the company.

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