Hero MotoCorp made two important announcements on June 4, 2012 – the first one is likely to impact market sentiment while the second will affect its fundamentals in the long run.
The Hero MotoCorp board approved the merger of its investment arm Hero Investment Private Ltd with itself. Though the merger will not result in its equity base expanding, the move has the potential of impacting investor sentiment. This is because promoter holding in the company comes down sharply from 52.21 per cent to 31.04 per cent while at the same time, investors of Hero Investment Private Ltd, will be getting proportionate number of shares in Hero MotoCorp.
Bain Capital and General Insurance Corporation will now hold 8.58 per cent and 3.71 per cent respectively in Hero MotoCorp, but they will have the option of selling their shares in the secondary markets, which was not a route open to them when they were holding shares of Hero Investment. As a result of this restructuring, the free float will increase by 12.29 per cent. This liquidity overhang in the stock can act as a sentiment dampener.
Apart from the capital restructuring, Hero MotoCorp announced plans to invest Rs 2,575 crore on two factories, which will be operational by September 2013. Further, the company proposes to utilise Rs 400 crore for setting up an R&D centre near Jaipur. The new plants will take Hero’s annual capacity to 9 million vehicles from 7 million presently.
Hero’s investment in R&D gains significance from the fact that it has been criticised for its lack of investment in R&D and innovation after it broke ties with Honda.
Honda, in fact, with its recent launch has hit Hero MotoCorp where it hurts the most. Honda has launched Dream Yuga, a 109 cc bike to attack Hero’s dominance in the 75-110 cc space. Hero has a market share of 76 per cent in this category, which also accounts from 64 per cent of motorcycles sold in the country.
If Hero needs to take the fight to its competitor, it will have to invest heavily in R&D. Though the returns of this investment will take time, the largest manufacturer of two-wheeler in the world will need to demonstrate its technological competence and innovation skills. Worldwide, all automobile companies have thrived and survived on technological advancement, its Hero’s turn now to prove it. Till then its erstwhile partner, Honda will keep on chipping away market share from it.