Positives

Hero Honda continues its dominance in the motorcycle segment with its strong brand and rural
reach. With increase in rural income and production from the new Haridwar plant, it continues
to see a growth in sales, though there is pressure building on the margins. The recent price
hikes have helped them to keep ahead in the EBITDA and margin levels. The demand side has
no pressure as the segment is seeing an increase of around 10-12% growth every fiscal. The
good agricultural output and employment levels are keeping the rural incomes growing which
in turn is driving the volumes up. The non-existence of public transport in tier-II, tier-III and
rural areas will drive the demand for personal vehicles. The urban demand will also remain
stable due to positive sentiment and increase in incomes. Increasing model launches, attractive
financing options and price points will aid increase in penetration levels in the urban
addressable market. The company already has a R&D team of 300 which will manage the
requirements till 2014. We clearly see all the product platforms updated, hence there won’t be
much of a concern on the R&D side.

Negatives

The company will see a lot of money going into its R&D and brand building post the exit of
Honda from the 26-old-year joint venture. It might also see some money going into the export
market penetration and capacity expansion as the demand is constantly increasing at a rate of
10-12%. The royalty to be paid to Honda is about 2480crores will also cut into its revenue. The
whole industry has been hit with surging cost of raw materials like metals and tyre rubber for
the past few quarters. We expect a strong competition to follow post the exit of Honda from
the competitors like Bajaj auto and Honda. As the company operates in an economy segment
with limited operating leverage, the company will face a lot of margin contraction problems.