In full throttle

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: For many years now, Hero Honda has proved sceptics wrong time and again by achieving robust growth in volume sales, revenues and most importantly, profits. The company has maintained its leadership in the motorcycle industry despite the presence of Bajaj Auto, TVS and Yamaha Motor.

Sales showed a cumulative growth of 44 per cent over the past five years against the industry growth of a little over 22 per cent. This helped the company to raise its market share from around 28 per cent in 1996-97 to 49 per cent in the nine-month period ended December 2001.

During the third quarter of 2001-02, volume sales grew 42.7 per cent while value growth was 43.6 per cent. It sold 10,26,102 motorcycles during April-December 2001, a growth of 36 per cent over the corresponding period last year. The company’s share in the motorcycle market today stands at 49 per cent.

Revenue during the third quarter ended December 2001 rose from Rs 849.22 crore to Rs 1,219.47 crore. The 89.7 per cent growth in net profit to Rs 133.22 crore was partially driven by other income of Rs 25.71 crore (Rs 1.67 crore) during the quarter.

Says Atul Sobti, senior vice-president, marketing and sales, "Since we are the biggest player in the two-wheeler industry today, we will be the obvious target. But it also has an advantage. If we are strong, then the number two, three or four get more affected with entry of new competition."

There has been a steady rise in profit margins for Hero Honda. Its operating profit over the past five years has grown from around 6.67 per cent in 1996-97 to 11.8 per cent in 1999-2000. However, the operating margins slipped marginally to 11.7 per cent in 2000-01 but the company has managed to maintain the absolute profit figures riding on the back of higher volumes.

But will Hero Honda’s dream run continue? Though growth in sales may not be a problem as the Indian market is estimated to easily absorb upto 70 million two-wheelers compared to today’s two-wheeler population of 40 million. However, profit margins could come under pressure in the future due to stiff competition resulting in higher costs on account of marketing, promotional activities and customer loyalty programmes.

The company projected an improvement in operating margins at the start of the current financial year. It has achieved that in the first nine months. But company officials do not want to jump the gun for the year 2002-03. Says vice-president Ravi Sud, "We are confident of maintaining the 2001-02 operating margin levels in 2002-03."

Hero Honda has also been a cash-rich company and its free cash flows from operation have grown by 51.8 per cent (CAGR) over the past five years.

In spite of a doubling of equity over the last five years, the return on capital employed and earning per share has improved. Hero Honda’s earning per share has shot up from Rs 2.5 per share to Rs 12.40 (adjusted for 5:1 split in face value of Rs 10).

The fourth quarter profit after tax is expected to be around the third quarter figure of Rs 133 crore. That would mean a PAT of around Rs 440-450 crore for the full year ended March 2002, yielding an earnings per share of around Rs 22 per share.

The company has consistently met consumer expectations by introducing newer and efficient products. There has been a steady fall in the long-term debt to equity ratio for the company and over the past five years, the debt has dropped consistently and the ratio has dropped from 0.6:1 to almost 0:1.

As a result, profit before interest to interest ratio has improved from 9.5 times to over 156 times. It may not be possible to maintain the current growth rates with increased competition from existing players and expected entry of high technology companies (like its own joint venture partner Honda as an independent player).