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JV break-up a near-term pain for both

Ram Prasad Sahu  |  Mumbai 

The in general and auto stocks in particular may have seen some gains in the recent past. But the stock is down six per cent over the last one week and over 15 per cent down over the last one month. The Street is worried about reports that Honda, the Japanese joint venture (JV) partner, may sell its stake in the company and exit to focus on its 100 per cent owned Indian subsidiary, (HMSI).

While the stock is under pressure, both – the Hero group and Honda, which have 26 per cent each in the company – have denied that there is any break-up. Analysts believe there could be a split if irreconcilable differences crop up, but such a break-up will help neither Hero group nor Honda, in the medium term.

The Honda angle
Analysts say Honda will have its task cut out on advertising its brand and sprucing up its distribution network, which is a sixth of Hero Honda’s. Second, given the fact that the company has been earning royalty, technical fees, export revenues for supply of key components as well as regular dividends, analysts feel Honda would be better off staying within the JV rather than moving out.

In Rs crore  FY10 FY11E
Net sales 15,879 18,478
Royalty 416 554
% of sales 2.6 3.0
OP 2,780 2,772
Net profit 2,220 2,284
P/E (x) 15.4 15.0
E: Estimates, Source: BRICS Securities 

In 2009-10, for example, Honda earned Rs 1,000 crore from the JV, including royalty, technical fees and dividends. Honda will also be mindful — and have struggled to make inroads into a market which is dominated (90 per cent share) by three Indian players.

Brakes for Hero

Says an analyst: “If Honda exits, the Hero group will have to build their own expertise in research and development (R&D) and contend not only with such existing competition as but also future lower-end launches from Honda. Nothing stops Honda from launching its own version of the Splendor.” Honda, which launched higher end bikes in 2004, has already introduced a 100cc bike in the market this year.

Analysts say the Hero group may tie up with other players for technical support without which it will be very difficult to hold on to its 50 per cent share of India’s two wheeler market.

However, funding the R&D expenditure should not be an issue for Hero Honda, given its cash profit of almost Rs 3,000 crore as well as the saving on the royalty payment of over Rs 400 crore (should its technical agreement with Honda end in 2014). Positively, it also has sufficient time on its hand to establish an R&D set up. The fact that and have proved themselves on this front (though after some struggle) suggests that it should not be an impossible task for

Analysts say, given that the high growth phase in the motorcycles business is past us and with key urban saturated, both parties will have to think hard about going separate ways. If Honda decides to exit Hero Honda, the latter’s scrip is likely to tank and shareholders might be looking at large losses. However, if Honda were to buy Hero’s stake, it could see a major rerating, especially if HMSI is then integrated into the company, believes Umesh Karne of BRICS Securities. Given the uncertainties, analysts say investors are better off with Auto where there is a visibility in earnings, proven R&D capability and successful product launches in the recent past.

First Published: Thu, September 09 2010. 01:42 IST