At Hero Honda, the pace never slows down. Although the motorcycle-maker has seen keen competition last year from peer Bajaj Auto, the Gurgaon-based firm has romped home with good numbers. Indeed, the company has maintained its share in the 100cc space on a high base. The Rs 15, 860-crore firm has ended 2009-10 with a 59% market share in the motorcycles market. About four years back, that share was hovering around 45-47%. ?We?ll be looking to strengthen our leadership,? says Anil Dua, senior VP, marketing and sales. He said that this year motorcycle sales at his firm would grow in line with the estimated industry growth of between 11% and 15%.
Of course, there are more optimistic estimates; it?s possible, say experts, volumes may grow by as much as 25%, posting strong growth in two consecutive years, though that hasn?t happened after 1995-96. The segment now offers no discounts, but industry watchers say that could change as the competition intensifies and volume growth slows. Dua is certain that HH will not get into a price war; last year it improved average price realisations by about 4% to just over Rs 33,000 and reported a 24% growth in volumes, as the urban markets bounced back.
However, brokerages like Morgan Stanley believe HH?s volume growth could taper to a mere 10% in 2010-11, given the competition. Bajaj Auto?s Discovery 100 has done extremely well in the 100cc segment and is reporting a high run rate of 70,000 vehicles. The segment accounts for 65% of the market and has been an HH stronghold. For a time, Bajaj Auto was talking of moving out of the segment but has come right back, probably realising that the segment is the fastest growing; last year volumes in the segment were up about 24%. Also, TVS? 110 cc Jive could get to volumes of 20,000 units a month while Honda Motors and Scooters India (HMSI) could intensify rivalry with its Twister, which could also ramp up to around 20,000 units a month.
As such the executive segment is seeing some keen competition and Hero Honda, according to brokerage SSKI, may find it difficult to maintain its current volume momentum, given the large base of 3.8 lakh units a month. HH is not too perturbed about Bajaj Auto?s remarkable success. ?We are used to the competition, even in the past other players have had some good models,? he says.
Bajaj?s Pulsar is also the market leader in the premium segment, but in the last four years HH has managed to treble its market share in that segment with models like the Hunk, Karizma and CBZ Extreme. The premium space makes up 15% of the total market. The 125cc segment has actually de-grown last year, though Dua says that HH has grown. Hero Honda?s sustained volume momentum over the last eight to ten quarters has partly been driven by the launch of nine new models, including the ZMR, the new Hunk, the new Passion Pro, the new Pleasure and the new Splendor NXG. Dua says marketing and adspend as a share of sales will be maintained.
HH could sell fairly large volumes even in the downturn because of its fairly extensive rural reach. Strong farm incomes just when urban demand flagged for about nine months between late 2008 and mid-2009 helped Hero Honda sustain volumes. As Dua explains, a very small fraction of the sales in rural markets is driven with finance schemes; much of the buying happens during the wedding seasons. Today, about 42% of HH?s sales come from rural markets and Dua says this share could grow given that its rural penetration is still just around 10%.
Meanwhile, HH kept up the momentum in scooter sales. Though the scooter market grew by about 25% last year, Dua says, HH managed 40% growth. The Pleasure, launched in 2006 and targetted at women, now has a monthly run rate of around 20,000. HH has also been trying to export motorcycles to a few neighbouring countries in Asia and a couple of markets in Latin America. Analysts, however, point out that with joint venture partner Honda Motors present in almost all the big markets, HH would be left with access to smaller markets. As such, exports cannot be stepped up beyond a point.
With sales estimated at 5.3 million units this year, HH could run out of capacity unless its fourth plant, coming up at Hubli in Karnataka, is up and running by the next financial year. Since the company?s available capacity across three plants is 5.4 million, even if it manages to stretch that to 5.7 million, it would prove inadequate given the kind of volumes it?s looking at. Production from its Haridwar unit should increase to 1.8 million units this year from 1.4 million units last year and would account for just over a third of the company?s volumes. The management, of course, is aware of the problem that capacity could fall short and says the location for a new plant will be finalised soon.
The higher ancillarisation at the Haridwar plant in the past few months has helped the company bring down raw material costs by about Rs 200 per bike, sequentially between the December 2009 and the March 2010 quarters, according to IndiaInfoline. That?s despite the fact that prices of some commodities have risen. Indeed, India Infoline estimates that over the past year, the level of ancillarisation has gone up from 45% to around 70%. While the company will benefit from higher operating margins at the Haridwar plant, the higher cost of raw materials, especially aluminium, could pinch. Despite that profits could hit Rs 2,500 crore this year.