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The road ahead for Hero

 

Hero MotoCorp, Spledor iSmart, Auto Expo

  A subdued volume, smaller presence in the fast-growing scooter segment and rural slowdown woes has marked the recent performance of the country’s largest two-wheeler maker Hero MotoCorp. Its ace motorcycle Splendor is no longer the largest-selling two-wheeler brand and is overtaken by rival Honda’s scooter Activa. However, investors continue to bet big on the company, driving the company’s stock price to a new high early this week. It has gained 46% from its 52-week low in September last year.

 

Hero ended FY16 with a 39% share in the domestic two-wheeler market, against a 40% in FY15. In the April-June quarter this year, its share softened to 37.56%, against a 40.25% in same quarter last year. Rival and former partner Honda has improved its share from 25.51% in Q1 of last year to 27.24% this year, riding on the sustained high double digit growth in scooter sales. Hero, on the other hand, has had two years of setback in motorcycles due to weak rural sentiments. The gains in the stock may therefore seem puzzling.

One obvious trigger and upside in store for the company is a revival of rural market as the country is set to receive good rainfall after two consequent deficit years. Hero sells every second two wheeler in the rural market. The rural market benefits Hero and other two wheeler and small car makers as well. So, it is a common trigger across consumption-driven companies.

But Hero has other triggers. Last week, it launched its first in-house developed motorcycle, Splendor iSmart 110, five years after the split with Japanese partner Honda. Early this year, the company inaugurated its Rs 850-crore R&D centre in Jaipur. All along its journey, the company had been dependent on Honda for technology but that support ended with the split. Hero has been selling four products developed by Honda and still pays royalty for the same.

As it widens its in-house R&D, it will be phasing out the products on which it is incurring royalty burden. The first such product to get phased out was Maestro when the company launched its own Maestro Edge in September last year. “We will be phasing out the other three products on which we pay royalty by 2017,” Pawan Munjal, chairman, managing director and chief executive officer said last week. The three products are Impulse, Ignitor and Passion XPro. Royalty payment is down from Rs 120 crore in FY15 to Rs 80 crore in FY16. The company expects it to come down steeply this year.

The company has also benefitted from low commodity prices last year which reflects in the 15.5% margins and an all-time high profit of Rs 3,132 crore in FY16. In spite of anticipations of an upward movement in commodity prices, the company said it will make efforts to sustain margins in the range of 14-15%.

Analysts have a positive outlook. “Logically, the company should see a recovery this year and an improving market share in the second half of the year owing to a normal monsoon,” said Jinesh Gandhi, senior vice-president (research) at Motilal Oswal.

Hero’s rival Honda has been able to maintain its high market share of 58% in the domestic scooter market even as the market has expanded. Hero has marginally expanded its share from 13% in Q1 last year to 15% this year after it launched two new scooters in 2015. The company said the two scooters were available nationally from this year March and the share should move up further. “There is a huge amount of work going on at the centre and results will be seen over next several months,” Munjal said last week, hinting at roll out of several new products.

Overseas business has not been in line with expectations. Hero is in the process of reviewing its strategy for the global business. Hero had, after its split with Honda, set a target of selling 10 million units a year by 2016, with exports bringing a tenth of volumes. Later, the target date was advanced to 2020. Last year, exports were about 3% of the 6.63 million units sold.

                         

“The past two-three years did not go as per plans in the export market. A lot of markets are oil-based and a decline in oil prices, currency depreciation and high inflation has impacted demand. We have not changed the 2020 targets. But, it makes sense to sit down and review these numbers,” said Munjal. The company is entering new markets like Nigeria, Argentina and Mexico for exports.

In September last year, Hero’s first overseas manufacturing facility became operational in Colombia. This plant may be a hub for exports into the Andean countries. Closer home, the manufacturing facility in Bangladesh will commence operations later this year. With an installed capacity of 1,50,000 units, this facility is also likely to be used as an export base to other neighbouring countries.