Hero Honda falls on royalty worries

Shares in Hero Hond Motors, India's largest motorcycle maker, fell more than 3 per cent on Tuesday on concerns royalty payments to the firm's Japanese collaborator may rise sharply.

The Economic Times reported on Tuesday the founder of Hero Group, the Munjal family, is set to buy Honda Motor's 26 per cent stake in joint venture for about $1 billion -- or half the current market value.

Traders said any deal struck at a deep discount ran the risk of a possible hefty increase in royalty payments as Hero Honda would continue to use the Japanese company's technology even after the break up of the joint venture.

"People know this risk, and the overhang on the stock will continue till there is clarity on the deal structure which does not exist today," said Arun Kejriwal, strategist at research firm KRIS.

At 11:25 a.m. (0555 GMT), Hero Honda shares were trading down 3.1 per cent at 1,717.40 rupees, after having fallen as much as 3.8 per cent earlier, while the main Mumbai market was up 0.1 per cent.

The Hero Honda stock has risen 0.1 per cent so far this year, lagging the automobile sector index that has rallied by a third and the main index that is up 13 per cent.

Citing persons familiar with the development, the Economic Times said the Honda stake sale deal was likely to be announced before Christmas.

"We have no comment and nothing to announce at this time," Honda spokeswoman Natsuo Asanuma said in Tokyo.

The Economic Times said the Munjal family would first buy Honda's stake through a special purpose vehicle (SPV) by raising a bridge loan.

The Munjals will then divest 60-70 per cent stake in the SPV to a group of two to three private equity firms to pay back the loan, it said, adding Carlyle, Kohlberg Kravis Roberts & Co, TPG, Bain Capital and Warburg Pincus were in the fray.

Officials at the Hero Group, and the private equity firms could not immediately be reached by Reuters for comment.