Hero Honda: Full throttle

The Japanese major's move is a big positive for Hero Honda

Honda Motor Corporation has renewed its technical collaboration agreement with Hero Honda Motors for another ten years, which is an obvious positive for the Indian two-wheeler major, since it almost entirely depends on the Japanese company for technical input.

This puts to rest all speculation that the tie-up may suffer because of Honda's plan to enter the motorcycles market in India through its 100 per cent subsidiary, Honda Motors Scooters India (HMSI), later this year.

Honda's plan to launch motorcycles is very much on. In fact, it will be present in the 100-150cc segments to start with, which also means that it will be in direct competition with Hero Honda.

So what's the rationale for Honda to continue supporting the joint venture with the Hero Group rather than concentrating fully on its 100 per cent subsidiary.

First, the joint venture has been hugely successful. Hero Honda is now among the largest two-wheeler manufactures in the world. In the lucrative 'executive' segment, the company is the leader with Splendor/Passion, and despite a slew of launches by competitors in the segment its growth has continued.

Hero Honda's good show translates into good money for Honda Motors, which has a 26 per cent stake in the company. Dividend in the last three years averaged Rs 100 crore every year. Add to that royalty and fees for technical know-how, which stood at close to Rs 80 crore in FY03.

There's more: Hero Honda sources some spares and components from the Japanese company, which would add to its income. In short, Honda Motors doesn't want to kill a golden goose. Meanwhile, it can pump in money in its own subsidiary, knowing that start-up costs would be offset by the money it makes from the joint venture.

Hero Honda, needless to say, will gain from the technical input. There hasn't been a new lunch by the company in quite a while (except variants of existing models) and analysts say this was due to the uncertainty of the tie-up post-2004.

Now that the collaboration will continue, Hero Honda is all set to launch two new models this fiscal, which will boost investor sentiment. The Hero Honda scrip did well on Wednesday, rising 3.5 per cent. Interestingly, the stock trades in the same 10-12 times valuation range as its competitors, which is intriguing now that it has been consistently outperforming them in terms of sales.

Last month, its sales grew around 30 per cent, even though Bajaj Auto managed only a single-digit growth and TVS Motors' sales fell heavily. Now that the fears of the tie-up with Honda have been allayed (at least for the next ten years), its stock may increase.

HPCL's profitability drop

As anticipated, HPCL reported a drop in its profitability for the March quarter, due to the political establishment's inability to raise retail fuel prices. HPCL's net profit dropped 16.9 per cent to Rs 527.05 crore last quarter, mainly because operating profit margin fell 185 basis points to 5.94 per cent.

Losses incurred by HPCL on diesel and petrol can be best understood by analysing the movement of Singapore gasoline prices. Singapore gasoline prices have moved up to approximately $39 a barrel in the first quarter of CY04 as compared to approximately $37 a barrel in the first fortnight of December '03.

With oil marketing companies like HPCL unable to raise the retail price of petrol and diesel after January 1, 2004, analysts estimate that the company would have had to bear a burden of approximately Rs 350 crore - Rs 400 crore in the March quarter.

Also, over the last quarter, global LPG prices have shot up by approximately $30 a tonne, resulting in HPCL's subsidy burden rising by approximately Rs 25 per cylinder of cooking gas to reach approximately Rs 130.

As a result, HPCL's loss on subsidy for LPG has been estimated by analysts at approximately Rs 150 crore in the March quarter '04. The only positive for the company was that gross refining margins rose around 53 per cent to reach approximately $4.3 a barrel in FY04, and it helped to partially overcome the losses incurred on retail fuel sales. Going forward, an improvement in HPCL's results would depend on how quickly and by how much the new government would increase retail fuel prices.

With contributions by Mobis Philipose and Amriteshwar Mathur