Concerns exist over the fate of Hero Honda, especially with regard to Honda possibly selling its 26 per cent stake to the promoters and exiting the company. In fact, even as any such deal is yet to be announced, analysts have started to work out the implications.
The good news for Hero is that it would save on royalty payments of 2.5-3 per cent of sales — estimated at around Rs 5,500 crore for the financial year 2011. But it would lose out on the Honda expertise and brand, even though it is expected that Honda would provide technical support for a few more years.
Due to its dependence on Honda for research and development, Hero would have to start building new facilities on its own. There are concerns about the ability of Hero to build product development facilities – like Bajaj Auto and TVS – in a short span of time. The savings in royalty could well be directed towards these efforts.
Honda, on the other hand, would be keen on expanding its negligible presence in the 125cc-plus segment in India – that accounts for 58 per cent of the country's two-wheeler market – through Honda Motorcycle and Scooters India (HMSI). Right now, scooters (which account for 16 per cent of the two-wheeler market) is the mainstay for HMSI, which has a 48 per cent market share. Also, HMSI would have to spruce up its distribution as it has around 285 dealers compared to the 700 dealers that Hero Honda has and 580 of Bajaj Auto.
Hero Honda, in the meanwhile, is looking to regain market share in the two-wheeler segment – which has slipped to 44 per cent from 49 per cent in the past two financial years – through some aggressive product launches. However, analysts expect the launch process to slow down in case Honda does not remain with Hero.
The gainer could then be Bajaj Auto. According to Morgan Stanley analysts: "Bajaj might benefit as the market leader (Hero Honda) may slow down on product launches and Honda will take time to scale up."
The Hero Honda share trades at around 15 times its forward earnings and is above the 12 times median. In case the Hero Honda brand loses the Honda part, a price earnings re-rating would be on the cards.