Hero Honda may face supply problems

Multiple launches in the coming months and projected double-digit growth in sales this year would put pressure on the country’s largest seller of two-wheelers, Hero Honda, as its factories are already running close to full capacity.

Hero Honda controls nearly half of the domestic two-wheeler market and has three mega plants in North India. The company saw sales rise to a little more than 4.6 million units in 2009-10, a substantial bit of it coming from the rural and semi-rural market.

It now has limited room for expansion to cater to present-year demand, as total installed capacity at its three plants is five million units, lower than estimated demand for this year.

It is currently in talks with various state governments, including Tamil Nadu, Karnataka and Gujarat, to set up a new factory. However, a new one would not be operational before the end of 2011, at least; it is yet to finalise details about the new unit.

A spokesperson stated a final decision on location would be taken in a few months, as a feasibility study is underway.

A 12-15 per cent projected growth in sales would help it sell about 5.15-5.3 million units in the current financial year. The company might be able to manage supplies by stretching its facilities marginally beyond its capacity, but will face challenges next year.

Pawan Munjal, managing director and chief executive, had stated earlier that a double-digit growth in sales for the two-wheeler industry was expected this year.

Increased spending by the government on infrastructure and development of the rural sector, and change in income tax slabs would give more spending power to the consumer, believes the company.

Though Hero Honda posted more than 23 per cent rise in total sales in 2009-10, growth is expected to be slower this year, on the back of a high base of the previous year.

Its Haridwar plant in Uttarakhand is on the brink of hitting the peak capacity of 1.8 million units yearly, said a senior executive. This excise-free plant was opened for production only two years earlier. Its other two plants, in Dharuhera and Gurgaon, both in Haryana, produce 1.57 million units and 1.6 million units annually. In-demand models, such as CD Dawn and Splendor, are produced from these two plants.

Meanwhile, Honda Motorcycle and Scooter India (HMSI), the country’s fourth largest two-wheeler maker, finalised its plans to set up a new facility in Rajasthan, to be operational in the second half of 2011.

Until then, HMSI has arranged for expansion at its Manesar, Gurgaon, unit, where the capacity would rise by more than 33 per cent. This, according to company executives, will be adequate to manage demand for the stipulated period.

Both Hero Honda and HMSI have the same promoter, Honda Motor Company. While HMSI is a wholly-owned subsidiary of Honda Motor, Japan, Hero Honda is an affiliate company, where it holds a 26 per cent stake.