Tuesday, September 04, 2012

HERO & HONDA?: BREAK UP PLANS

Speculations abound on the probability of the Hero Honda JV heading for a sudden break up. B&E’s Pawan Chabra does a speed-check on the repercussions of such an event for both players

To both Honda and Hero’s credit, spokespersons from both groups have denied any such development repeatedly in the recent past. But industry analysts comment that’s not quite the case. It has been reported that the Hero Group has set up an SPV for buying Honda’s share and has also contacted a handful of PE players to pick up a stake in the company. However, there have been concerns on the valuations of the share of the company as it is expected that the share price of the company will fall once Honda moves out of the picture and the home-grown Hero group is facing difficulties in clutching a deal. At the current share price of `1,700, the valuation of Honda’s 26% stake comes close to `90 billion.

So what would Honda have to lose? The answer is quite straightforward – the maddeningly huge and extensive distribution, sales and service network that is one of the key differentiating factors for Hero Honda products. One has to note here that Honda has been separately operating in India with its 100% owned subsidiary Honda Motorcycles & Scooters India Limited (HMSI) since 2001. The company has gained ground in the scooter segment in no time with products like Activa, Eterno and Aviator and is also moving very aggressively into the motorcycle space.

“Honda is looking at the bigger picture here (by breaking up the JV, if that happens) and is eying the huge potential of the Indian two-wheeler industry,” said Vaishali Jajoo, auto analyst, Angel Broking. Not only will Honda have to compete with the market leader, the Hero group, but it will also not bank any share of profits from the JV, apart from foregoing royalty payments (in case Hero decides to have its own R&D). For the record, the Japanese auto major rakes in close to 2.5% of sales as royalty fees every year. It is to be mentioned here that the amount of royalty payment to Honda from the Hero Honda JV stood at `4.2 billion in fiscal 2010. In fact, it is expected to rise to around `5 billion in 2011. A report by IDFC Securities comments that after moving out of the JV, it would take at least 3-4 years for HMSI (Honda Motorcycle and Scooter India Ltd) to scale up to a level to challenge the two domestic market leaders. Our analysis is that given the huge odds among the minor evens, it appears impracticable for the duo to separate, at least for the short run. Differences of opinion over royalty payments can easily be sorted out, especially when the synergy between these two has been empirically evidenced and statistically proven. This time, staying married seems the better course...


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