Solo rider Hero to face many hurdles

News Analysis

On Thursday two groups announced the split up in one of the most successful Indian joint ventures — a symbol of economic reform and opening up of the economy.

As a part of the arrangement, the Munjals of Hero group along with Private Equity (PE) partners will buy Honda’s 26 per cent stake to take raise its stake to 52 per cent.

Though neither party disclosed the amount of money to be paid, people in merchant banking circles estimated the total deal value at around $2 billion or Rs 9,200 crore. It is expected that by creating a special purpose vehicle Hero will initially pay around $1.2 billion to buy Honda’s stake. The balance will be paid by way royalty for technology in four years till 2014.

Despite the high value of the deal, financing it is the least of the problem. With 53 per cent market share, Hero Honda is the market leader in the 9 million or Rs 35,400 crore motorcycle industry in the country. It is highly profitable and has a cash reserve of Rs 4,400 crore.  But the real fight for Hero group, post-split the company will drop Honda from its new name, will be at the market place.

Biggest challenge

The biggest challenge, experts believe, will be brand building. For a quarter of century Hero Honda remained market leader in bikes because of Honda name and technology. The Munjals now will have the uphill task of building own brand name though as per the agreement it is allowed to use Honda name till 2014. Experts estimate the brand- building expenses at Rs 500 crore for a national brand. Anticipating poor profitability, investors have already hammered Hero Honda’s share price down by 16 per cent in the last 10 days to Rs 1680.

Tougher market

Separated from the JV, Honda through its 100 per cent-owned company Honda Motorcycles & Scooters India (HMSI) is now expected to launch a large number of bikes in the market. Industry insiders believe that to enlarge its small 7 per cent market share, HMSI will soon launch a large number of new bikes, mostly in the 100 cc segment. Started five years ago, HMSI has already established itself as largest seller of scooters with a market share of 44 per cent in the April-November 2010. (See chart). Together with bikes HMSI in the current financial is expected to sell 1.5 million two wheelers.

Competition hotting up

Anticipating Honda becoming very aggressive in the bike market, other major players like Bajaj Auto (no 2 in market share), TVS, Yamaha and Suzuki are all gearing up to launch new models from the first quarter of 2011. In the next two years market experts are anticipating a sudden surge of new models, fiercer competition and a price war in the bike market. Naturally, the Hero group, without the backing of Honda will have to fight it alone.

Non-availability of new bike technology is likely to be the other challenge for Hero. In fact, many believe that Honda's reluctance to part with cutting edge technology and newer models to Hero Honda was one of the reasons for the split. Hero will now have to set up a full fledged research and development facility at an estimated cost of Rs 500 crore to survive and compete. On the positive side, Hero will now be able to export its bikes to many countries where Honda earlier did not allow it to do so.