Road blocks ahead for largest two-wheeler maker

Rising raw material prices and a drop in market share are the key downsides in the current financial year for India’s largest two-wheeler maker, Hero Honda. While the company, which has had a stellar March quarter, has been able to maintain operating profit margins on the back of lower raw material costs and higher volumes, its gains going ahead are limited. Moreover, analysts expect the company to shed market share this financial year to rival Bajaj Auto.

Volume growth to continue
Higher volumes and an improving product mix have helped Hero Honda maintain profitability. For the fiscal, the auto maker saw a 24 per cent year-on-year (y-o-y) growth in volumes and its realisations improved to Rs 34,000 from Rs 33,000 a year ago. Lower tax rates and sourcing of raw materials from the tax free zone at Haridwar helped bring down the raw material cost as a percentage of sales by about 60 basis points (bps) to 67.4 per cent for the March quarter.

This is much lower than the peak of 72.7 per cent in the September quarter of FY09. For FY11, the company has guided for a volume growth of 12-15 per cent which, considering it touched 4.6 million vehicles in FY10, translates to 5.2 million vehicles for FY11. While the company cannot be expected to replicate the growth in FY10, which was achieved on a lower base, the million-plus target for each quarter in the fiscal would be a good achievement. The ongoing wedding season, prospects of a good monsoon and two new launches should help Hero Honda meet its projected targets. The bigger challenge for the company will be to counter the competition from Bajaj Auto and maintain market share. Losing share
Bajaj Auto has been eating into Hero Honda’s bread-and-butter executive segment (Rs 40,000-Rs 55,000) with its Discover 95cc, 135 cc and Pulsar 135cc launches. Hero Honda will have to hold its own through its current range (Passion, Splendor, Glamour, Achiever) and by a new launch in the Rs 45,000-50,000 range. The executive segment accounts for 65 per cent of domestic motorcycle volumes and 80 per cent of Hero Honda’s sales.

Analysts estimate Hero Honda will lose market share by 4-5 percentage points and its share of the overall motorcycle market is likely to come down to about 55 per cent in FY11.

Conclusion
What has differentiated the market leader from competition thus far have been its rural reach, consistent volume growth and positioning in the executive segment. While these strengths continue, the company’s new launches will play a critical role in ensuring its dominance.

Though growth rates will start to taper off due to the partial roll back of stimulus and a higher base, the Hero Honda management is confident of achieving its targets.

Analysts say most of the upsides – be it the benefits from the Haridwar plant as well as its volume growth – has already been factored into the price and there are no major upsides in the near term.