The Hindu Business Line : Hero Honda Motors: Hold

CHARACTERISED by erosion in market share, drop in share price and a virtual glut in model launches, things have not quite gone the Hero Honda way in the past couple of years. The investor community was also apprehensive about the renewal of technological tie-up with the Japanese collaborator, Honda Motor.

In a recent development, the company has announced the renewal of technological tie-up with its Japanese partner.

Is this announcement sufficient enough to infuse positive market sentiment to push the scrip anywhere near the high of Rs 400 is the moot question? Taking into account the recent developments in the two-wheeler industry and the plethora of product launches in recent months, it would take quite some time and effort for Hero Honda to recoup the lost market share and arrest the dwindling stock market sentiment.

Dependence on Honda

Unlike its competitors, Hero Honda is yet to prove its capabilities in terms of developing an indigenous product devoid of any major support from the technological partner. This probably could have been a critical factor in getting the timing wrong in terms of launching models.

Even the drop in market share in the past year or so has not prompted Hero Honda to turn aggressive on model introductions. Except for Ambition, there has been no major product launch since Passion in 2001. This could probably be explained by the huge dependence on Honda for technological support.

The existing agreement with Honda comes up for renewal in 2004. Both the partners indicated a few days ago that the technological agreement would be renewed after its expiry in June 2004. This is a welcome development from both the company and stock market perspective.

However, according to the terms of the agreement, Honda can venture into the motorcycle market and Hero Honda can legally make a foray into the scooter segment after renewal of the agreement. This particular clause does throw open a possible conflict of interest situation. Though only in the realms of possibility, it remains to be seen how Honda and Hero Honda sort out the issues pertaining to conflict between mutual brands, especially in the motorcycle market.The immediate and more pertinent question is if this renewal in agreement is good enough to regain the recent loss in market share. At this point, the odds do not appear to be in the company's favour. Reports indicate that Hero Honda is to come up with a new entry-level motorcycle, followed by a more powerful bike positioned at the premium segment. The problem again is that Hero Honda could turn out to be a late entrant, especially in terms of targeting the entry-level motorcycle market segment.

TVS Motor's Max 100 and Bajaj's Boxer now dominate this particular market segment. Bajaj has also recently launched Byk at Rs 32,000 (on the road), besides Caliber 115, variant of its existing 110 cc Caliber model.

Loss in market share

Hero Honda has been a victim of its own market leadership position. Just like market leaders in other industries, the company did not keep pace with the overall market growth, leading thereby to a loss in market share.

Hero Honda's market share dropped from about 48 per cent in January 2002 to the current 43 per cent in the motorcycle market. Much of the erosion in market share is explained by Hero Honda's poor run in the model launches front.

For quite some time, Splendor was the dominant model in the company's product portfolio. The other launches — Street, Joy, Dawn and CBZ — did not quite make it big in the popularity chart. After Splendor, only Passion turned out to be a successful brand for Hero Honda.

The importance of success in model launches is borne out by the robust growth recorded by competitors such as Bajaj and TVS Motor which have managed to come up with popular models such as Boxer, Pulsar and Victor. The runaway success of these models has helped Bajaj and TVS Motor grab market share at Hero Honda's expense.

Poor record in new products

Though Hero Honda did launch new motorcycles, it has failed to attract consumer attention. The company appears to have gone wrong in terms of timing of launch, product pricing and positioning. For instance, the company pioneered the concept of market segmentation by launching CBZ, which had a premium price tag to match the higher engine power of the model. On hindsight, it appears as though the company was probably just ahead of its time when it launched CBZ in 1999. A couple of years later, Bajaj came up with Pulsar, which has features almost similar to that of CBZ. However, CBZ does not quite match Pulsar in terms of popularity.

Even in the case of the recently-launched model, Dawn, Hero Honda was probably a touch late. The company came up with this model when TVS' Max 100 and Boxer were well-established as entry-level models. In the case of Dawn, Hero Honda also appears to have faltered on the pricing and product-positioning front. With a price tag in upwards Rs 35,000, Dawn did not fit the bill as an entry-level four-stroke motorcycle. Moreover, Hero Honda already had models such as CD 100 and CD 100 SS that were in the same price bracket as Dawn.

Only in the case of Passion did Hero Honda achieve a reasonable degree of success. But being more or less a cosmetic variant of Splendor, Passion's volumes, to some extent, was at the expense of Splendor.

This is reflected by the fact that the market share of Hero Honda in 2002 did not improve significantly even after the launch of the Passion model in 2001.

Ambition is the latest offering of Hero Honda. After a lull, this model managed to record some sort of growth the last couple of months, aided by aggressive advertisement campaign and endorsement by top Indian cricketers.

However, competitors such as Bajaj, TVS Motor and Yamaha have already managed to exploit the market space for powerful bikes, which will probably leave Hero Honda gasping. The company continues to trail the overall market growth rate and it remains to be seen if the recent pick up in Ambition's sales volume and proposed model launches would propel volume growth for Hero Honda.

The ability to improve the operating profit margin even amidst tight competitive market environment is the only positive feature from an investment perspective.

Shareholders could remain invested and use intermittent price up moves to reduce exposures. Evidence of sustained improvement in motorcycle sales volume could be used to add to exposures at a later date.

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