Hero Honda - Demerger

Hero cycle An introduction

Established in 1956 at Ludhiana. Production capacity has increased from the initial 15 bicycles per day to 18500 bicycles per day. In 1986 entered the Guinness oo!s of "orld #ecords as the lar$est bicycle manufacturer in the %orld.

Some Facts About Honda

&'( has been %orld lar$est motorcycle manufacturer since 1959 &'( is the %orlds lar$est manufacturer of internal combustion en$ine) 1* million units bein$ produced e+ery year. &'( spends most of their profits on #,- for better future

Needs for Merger (HONDA perspective)

Honda wanted to extend its business globally and saw a large market in ndia! "as restricted to enter t#e ndian markets due to $overnment policies! %o it needed an ndian company for a &' to enter ndian markets!

Needs for Merger (H()O perspective)

Hero w#ic# was manufacturing bicycles t#at time also wanted to expand to a #ig#er levels! t was looking for Advanced tec#nology and financial support!

Reasons for Honda selecting the Hero group

#ele+ance and salience of &E#. brand. -istribution net%or!. (ommitment to /uality. 0no%1ho% and e2perience in handlin$ lar$e +olume production and distribution. 3i$ht focus on financial and ra% material processes.

The Deal (June !"#$

&onda a$reed to pro+ide tech. !no%1ho% to &ero and settin$ up manufacturin$ facilities. 3his included the future # , - efforts. &onda a$reed for a lump sum fee of 45005000 , *6 royalty on 7P. oth Partners held 866 of the e9uity %ith other 866 sold to the public and the rest held to financial institutions.

Reasons for success

3he deep penetration net%or! of hero lar$ely benefited the sales. :bsence of ma;or competitors in initial years. 7ound and pro+en technical capabilities of &onda and the reliability of &ero. Increased mar!et for motorcycles<

etter =uel efficiency. (han$e in people>s perception. -ecrease in price difference %ith scooters

Demerger

#ela2ed $o+t. norms Enou$h !no%led$e of Indian mar!et for honda. Indian 8 %heeler mar!et soon to $ro% in double di$its and carryin$ a partner could be a burden. &onda %anted to $o on its o%n because the 9.? million t%o1%heeler mar!et %ill $ro% to 16 million by 8015. : minority sta!e in &ero &onda also yields limited profits for &onda compared %ith a fully consolidated 100 percent unit.

The process of Demerger

n December *+,+- t#e board of directors of t#e Hero Honda $roup decided to terminate t#e &' between Hero $roup and Honda in a p#ased manner! .o buy out Honda/s *0 percent s#are- first Hero #as to find out bankers w#o can finance t#is deal wort# )s 12++ crore! .#en it will create a special purpose ve#icle(%3') w#ere t#e s#ares will be sold to investors- w#o will indirectly get dividends from Hero- once it uses t#e funds to pay back loan! .#ese investors will get board seats in return! All t#e dividends will t#en be paid to t#ese investors and will flow into t#e %3'

The negati%e impact of demerger&

3he &ero $roup to lose mar!et share5 currently around *0150 percent5 in the lon$ term as &onda becomes more a$$ressi+e. 3ecnolo$y contract %ith &onda %ill end in 801*5 after %hich &ero has to ma!e the units %ith Inhouse technolo$y %hich mi$ht not be as $ood as &onda@s. 3he &ero &onda brand name %as a established brand name for 8A years.

t would take time for Hero to develop its own tec#nological capabilities- and it remains to be seen w#et#er t#e partners/ tec#nology licensing would continue t#roug# *+,4 as agreed under t#e current contract!

3ositive mpact of t#e demerger

)oyalty- 5icense fee payouts will decreased from t#e prior level of around ,46 to *726! As per t#e prior agreement Hero Honda was only allowed to export to 8anglades# and %ri 5anka- but now it can export to any part of t#e world!

%tock Market

Hero Moto corp earlier Hero Honda is an actively traded large cap stock! t is also among t#e top *9 stocks by trading volume! As a good divorce settlement can ensure only s#ort7term #appiness: it does not guarantee t#e proverbial #appily7ever7after! Hero Honda/s large s#are#older family was sweating over t#is concern but t#e stock performed well after t#e split even after seeing some dips!

;urrent 3rices

<esterdays 3rice *+4=!>9 'olume *4=2> 9* week #ig# *,*>!>+ 9* week low ,424!+9

mpact on Honda

For Honda, with a wholly owned unit already in place and expanding fast, a pull-out from the joint venture would be positive for its growth over the long term, although it would have to make sure its sales network is sufficiently robust to compete with Hero.

ndian automobile sector at a glance

*nd most populous country in t#e world *nd largest two w#eeler market 4t# largest commercial ve#icle market ?astest growing commercial ve#icle market Overall ndia is growing at a very fast rate in t#e automobile market!

)easons for growt#

$rowing working population ?ast paced urbanisation 5ack of good public transport ncreased access to loans (xpansion of middle class population at a very fast rate

Aftermat#s

Hero/s market s#are is constantly falling since t#e announcement of demerger! On t#e ot#er #and Honda is gaining significant amount of t#e market s#are by its aggresive strategies!

%"O. Analysis
Strenghth 8rand e@uity Aggresive Marketing %trong distribution network Deep penetration in ndian market %trong resale value

Weakness (stablis#ing t#e new brand i!e Hero Moto ;orp %etup )AD 5ess foreign trade know #ow Dependancy on Honda

Oppurtunities )apidly frowing sector (xport market yet to be exploited Most trusted brand in ndia %trong following of t#e brand

Threats (stablis#ing customer trust wit# t#e new brand 5ow cas# reserves ;ompetition from ot#er brands

New 5ogo

.#e new logo was launc#ed in August *+,, in 5ondon! .#is was purposely done to s#ow t#e company/s vision to enter t#e international market 5aunc# of t#e new logo is estimated at ,>9cr! 3erformances by t#e top ndian celebrities took place at t#e launc#