Hero Honda delays opening of Uttarakhand facility

Hero Honda Motors, India's biggest motorcycle maker, delayed opening its third factory as interest rates at a five-year high cramped demand in the world's second-largest motorcycle market.

Hero Honda postponed beginning production at the factory in Uttarakhand to the financial year starting April 1, from a planned October start, Ravi Sud, chief financial officer, said in a phone interview today.

Demand for motorcycles, the main mode of personal transport in India, will slow this year and hurt earnings, rivals Bajaj Auto and TVS Motor Co said separately. India's central bank has raised the benchmark overnight lending rates six times in the past 1 1/2 years to cool inflation making it costlier to buy consumer goods on credit.

"This pain will last for at least another quarter or two for the automobile segment that's facing high interest rates and fierce competition,'' said Navneet Munot, who helps to manage over $5 billion in debt and equity at Birla Sun Life Asset Management Co in Mumbai.

Commercial banks have increased lending rates by between 200 basis points and 250 basis points since December. State Bank of India, India's biggest commercial bank, said on April 7 it will charge its best borrowers 12.75 per cent, the highest since April 1999.

GE Money, the consumer finance division of General Electric Co, stopped advancing new loans for purchasing motorcycles and scooters as it wants to "concentrate resources on high growth and high profitability businesses" in India, it said last month. Hero Honda's decision to postpone the opening of the new factory follows a cut in output last month.

"There is no point in adding to the cost when the industry is declining," Sud said in a phone interview today from New Delhi, where the company is based. "Our sales will remain largely flat this financial year. At the most it will grow by 3-4 per cent."

Hero Honda's sales fell 8.4 per cent last month, a second straight drop for the company, which controls almost half of the nation's motorcycle market. Sales at rivals Bajaj and TVS, which are also building new factories, also declined last month.

TVS, India's third biggest motorcycle maker, expects "no big growth" in the six months ending September 30, its President K N Radhakrishnan, said in Bangalore today. Hero Honda, Bajaj and TVS, the top three Indian motorcycle makers, all reported a decline in profit in the three months ended March 31.

"Lower volumes are going to have some impact on earnings," Rajiv Bajaj, managing director of Bajaj Auto, told reporters in New Delhi today. "I hope the impact is not as significant as most people would expect it to be."

Indian motorcycle makers are building new factories to expand capacity in anticipation of growth in demand. Motorcycle sales had increased in India as rising incomes and creation of more jobs enabled Indians to buy more two-wheelers and shun public transportation.

Shares of Hero Honda gained 0.3 per cent to Rs 687.8 at 12:55 p.m. on the Bombay Stock Exchange. Japan's Honda Motor Co, the world's largest motorcycle maker, and Hero Group, India's largest bicycle maker, both have stakes of about 26 per cent in the company.

Hero Honda has capacity to produce about 3.9 million motorcycles and scooters from its two factories near New Delhi, Sud said.

That's "enough to take care of current demand."