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Hero Honda: A SWOT analysis

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Today if one talks about Indian two-wheeler industry, reference to Hero Honda Motors Limited is
by default. It is not only the market leader in the two wheeler segment in India but also is the
number one two wheeler company in the world by volumes. The company’s name is synonymous
with fuel-efficient bikes and longevity. The company has a presence in all bike segments viz.
economy (CD 100SS, CD Dawn) executive (Super Splendor, Splendor+) and premium (Karizma,
CBZ). Splendor is the most successful product of the company and accounts for almost 50% of
the company’s turnover.

Background

Hero Honda is a two-decade-old story. It came into existence as a joint venture agreement
between the Munjal family’s Hero Group and Honda Motor Company (HMC) of Japan, each
having 26% stake in the company. A ten year agreement was first entered in the year 1984,
whereby HMC brought in technical expertise and Hero Honda brought in local talent to manage
all other functions including marketing, finance, and human resources. The agreement was once
again renewed in 2004 and has been extended till 2014.

Performance vis-à-vis Industry

The Indian two wheeler industry has seen a paradigm shift from being a regime of regulation and
tight control in the 1980s to a more liberalised and a competitive present day era. After missing
out on the initial boom in two wheeler segment during the period of 1993-1996, Hero Honda has
emerged as a world leader. The gap between motorcycles sold by Hero Honda and its closest
rival is approximately 1 m units (23% of industry size). One of the reasons for the tremendous
performance of Hero Honda is the significant increase of share of motorcycles in the two-wheeler
segment, from 42% in FY99 to 77% in FY04. No doubt, that the shift in preference of Indian
populace from scooters and mopeds towards motorcycles has facilitated the growth of Hero
Honda. However its performance vis-à-vis industry indicates that the performance of Hero Honda
was better than the industry peers, barring two years. In the seven-year period ending FY04, it
has achieved a CAGR of 30% in two-wheeler volumes against 11% of the industry.
Past 5 year performance…

As can be seen from the table below, the company the sales as well as the profits have increased
enormously. The company net sales has shown a CAGR of 27% and net profits have shown a
CAGR of 39% led by its motorcycle led dominance. The operating margin of the company has
improved by 290 basis point to 16.8%.

(Rs m) FY00 FY01 FY02 FY03 FY04


Motor Cycles sold (m) 0.76 1.03 1.43 1.68 2.07
Net sales 22,464 31,687 44,654 51,017 58,324
Other income 204 221 767 956 1,681
Total revenues 22,668 31,907 45,422 51,973 60,005
Operating profit 3,070 4,285 6,807 8,636 9,801
Depreciation 347 443 510 580 733
PBIT 2,724 3,843 6,297 8,056 9,068
Interest 47 25 15 17 17
PBT 2,880 4,038 7,049 8,995 10,732
Extraordinary Items -34 -268 -105 (149) (7)
Tax 925 1,301 2,315 3,038 3,441
Net Profit 1,921 2,469 4,629 5,808 7,283
Operating profit margin 13.7% 13.5% 15.2% 16.9% 16.8%
Net profit margin 8.6% 7.8% 10.4% 11.4% 12.5%
Number of shares (m) 39.9 199.7 199.7 199.7 199.7
Face Value (Rs) 10.0 2.0 2.0 2.0 2.0
DPS (Rs) 10.0 3.0 17.0 18.0 20.0
EPS (Rs) 48.1 12.4 23.2 29.1 36.5
Fully Diluted EPS (Rs) 9.6 12.4 23.2 29.1 36.5

Strong Fundamentals

As evident from the table company has a strong balance sheet. Further the company has a
consistent record of paying dividend.
Ratios FY00 FY01 FY02 FY03 FY04
RONW 20.0% 100.0% 100.0% 100.0% 100.0%
ROCE 37.8% 36.5% 58.5% 59.0% 55.5%
Debt Equity (x) 0.1 0.1 0.2 0.2 0.2
Interest coverage (x) 57.8 151.9 417.0 465.7 527.2
Dividend payout 0.9% 0.6% 0.4% 0.4% 0.3%
BVPS 111.1 30.5 33.8 42.5 57.0

The company has clarified about its intention of setting a third plant in addition to its existing two
plants. The company has embarked upon a green field expansion plan and has earmarked Rs 2
bn for the same. It should be noted that the company has a strong cash flow position, it generated
Rs 9 bn from operation in FY04 and is virtually a debt free company.

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