 "Honda sacrificing margins to gain market share in two-wheelers")
In less than 20 years since its inception, Hero Honda has become the country's largest two-wheeler maker and HMSI is now the second-largest two-wheeler seller in the domestic market and is steadily closing in on the market leader Hero MotoCorp and its erstwhile joint venture partner. Every fourth new two-wheeler on the road had a Honda badge last financial year against one-in-eight five years ago.
It sold 4.5 million scooters and motorcycles in FY15, up from 1.27 million units in FY10. In the period, the total two-wheeler market jumped to around 16 million units from 9.37 million units in FY10.
The success has, however, come at the cost of profitability. The Japanese automobile major has taken a hit on its margins in a bid to grow faster than the market. There has been a steady decline in HMSI operating margins in the last five years as it tried to grab market share from its rivals in the two-wheeler space.
Honda Motorcycle core operating margins (excluding other income) declined to 8.9 per cent of net sales in FY14 - latest year for which its finances were available, from 12 per cent in FY10. HMSI margins are now third best in the industry - better than TVS Motor, but lower than that of Hero MotoCorp and Bajaj Auto.
HMSI refused to answer an e-mail questionnaire sent by Business Standard.
Experts blame it on the rising competition in the low-margins entry-level segment, 100-110cc engine motorcycles, which is currently dominated by Hero. Three years ago, HMSI launched Yuga with an aim to expand its presence in the volume segment that accounts for over two-third of the market by volumes.
"The competition has heightened in the two-wheeler industry, thanks to demand slowdown in last few years. It is forcing manufacturers to absorb many cost increase besides increasing expenditure on marketing and brand promotion. This is hurting margins and profitability," says Jinesh Gandhi, auto analyst at Motilal Oswal Securities.
HMSI was also hit by depreciation in Japanese yen that pushed up its import bill in rupee-terms. Imports account for over 10 per cent of the company's operating expenses. "In normal course, the company should have been able to pass on the cost increases to consumers but cannot due to the competition," says Gandhi.
A volume push by Honda has proved costly for Hero. The country's top two-wheeler maker has reported a steady erosion in its margins as it fights to maintain its numero-uno spot. The company's core operating margins declined 288 basis points over five years to 14 per cent of the net sales in FY14. One basis point is one-hundredth of a per cent. In comparison, TVS Motors and Bajaj Auto reported improvement in their margins during the period. Analysts attribute it to the difference in the product portfolio and the company's growth strategies.
"Bajaj Auto gained from its focus on exports and high-margin premium motorcycles, while TVS Motors gained from a faster volume growth that provided it with operational leverage," says Jinesh. This cushion was not available for Hero, which dominates the highly competitive entry-level segment.
Competitors agree. "Most companies have two sets of products in their portfolio - a differentiated set that were first to market and a commoditised set that were laggards. The former yield high profitability whereas the latter usually lose money. The corporate performance is then the average of these two," says Rajiv Bajaj.
When quizzed about the large diffrences in operating margins of various players in the industry.
He says that if companies focused on growing their profitable segment and shed the latter every company would return a strong double digit operating margin consistently. This may however translate into market share loss, something the world's largest two-wheeler maker may not like.