Hero Motos Gujarat plant faces delay on land issues

Written by Roudra Bhattacharya | New Delhi | Updated: Jan 21 2013, 06:50am hrs
Hero MotoCorp has pushed back its plans to start production at its fifth plant in Gujarat by a year to the second quarter of 2014-15, as it faces delays in land acquisition. Only about half of the 250-acre plot has been acquired so far for the factory, where the two-wheeler market leader is investing around R1,100 crore for a total capacity of 1.2 million units a year.

We are still acquiring land in Gujarat. Around 130 acres have been acquired from the government while another 120 acres are still in the acquisition process. The delay was because the state went to the polls towards the end of 2012. The Rajasthan plant would start in the second half of FY14, while the Gujarat plant should start in Q2, FY15, CFO Ravi Sud said at an investor call following the announcement of Q3 results last week.

The plant was to start in the second quarter of FY14, according to the plan announced last June by MD & CEO Pawan Munjal after signing the state support agreement with Gujarat. The Gujarat plant was to start right after the fourth plant in Rajasthan began operations in the first quarter of the same fiscal. Combined with the three existing plants at Dharuhera, Gurgaon and Haridwar, these two new plants would take Heros totalcapacity to around 10 million units, from just under 7 million.

"The Rajasthan plant should take annual capacity to 7.7 million units in FY14, which should go up to 8.4 million units in FY15," Sud added while highlighting the production plans.

Plans to rapidly expand capacity come as Hero looks to guard its leadership position 43% market share in two-wheelers (December 2012) from erstwhile partner Honda and long-time rival Bajaj Auto. In fact, Honda has already staked its claim to the number one spot by 2020, with around eight plants (five new) and a domestic annual capacity of 10 million units being planned.

Being the market leader, Hero will look to be faster than Honda in ramping capacity to the 10-million mark, by reaching the target by FY17 itself. Out of the total capacity, about 1 million units have been earmarked for the new international markets in Latin America, Africa and Southeast Asia. In all, Hero is investing Rs 2,575 crore over the next two to three years in the two new plants, an R&D centre in Jaipur and a global parts distribution centre, also in Rajasthan.

"The delay in new plants may be seen as a blessing for Hero, especially with sluggish demand in the market. It is true that they have to guard market share against Honda's rapidly increasing presence, but overcapacity would also present new problems," a sector analyst said.

According to Siam, total two-wheeler sales in April-December period of the current fiscal rose 4% to 10.37 million units, compared with the year-ago period. While bikes sales, which account for 80% of two-wheeler volumes, were flat, the growth was largely on the back of an 18% growth in the scooter segment. Hero's sales in April-December FY13 were down 2% to 4.42 million, compared with a 15% growth in volumes to 6.06 million it saw in FY12.

"After three high-growth years, we are seeing a correction in the two-wheeler industry for the last one and a half years. This (sluggish sales) may continue till the first quarter of FY14, but growth will come back as I feel two-wheelers are a necessity," said Anil Dua, Hero's senior vice-president for marketing and sales.