Bloomberg News

Hero MotoCorp Expects Sales to Rise 27% as It Boosts R&D Spend

November 02, 2011

Nov. 2 (Bloomberg) -- Hero MotoCorp Ltd., the maker of almost half the motorcycles sold in India, forecasts net sales to rise 27 percent as growth in rural areas drives demand in the world’s second biggest two-wheeler market.

The New Delhi-based company expects net sales to increase to as much as 250 billion rupees ($5.07 billion) in the year ending March 31, from 196.7 billion rupees a year earlier, according to Ravi Sud, Hero’s chief financial officer. That compares with the 231.3 billion rupee median of 61 analysts’ expectations.

Hero plans to increase research and development expenditure sevenfold and is considering buying design houses and engine manufacturers as it develops new models to compete with former partner Honda Motor Co., Sud said. Honda will continue to provide support and models to Hero until 2014, he said.

“Our main focus is to build our own capabilities,” Sud said in an interview at his New Delhi office on Oct. 31. “All the options, including an acquisition, are open.”

Hero, which aims to double both annual revenue and unit sales in five to six years, is seeking to fend off competition from Bajaj Auto Ltd., the nation’s second-largest motorcycle maker, and TVS Motor Ltd., as well as Honda, Yamaha Motor Co. and Suzuki Motor Co.’s local motorcycle unit.

Honda plans to expand its dealer and service outlets by 25 percent to sell 2.1 million two wheelers this year, Naresh Kumar Rattan, vice president for sales at Honda Motorcycle & Scooter India Pvt., said in an interview in August.

‘On Their Own’

“Hero is covered for technology until 2014, beyond that, they will have to survive on their own,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd., in Mumbai. “Hero will have to step up because the competition is not just Bajaj and TVS but also their former partner Honda, which can be a potentially large competitor.”

Hero will increase capacity of its existing factories to 7 million units by March from 5.4 million last year, Sud said. It will also have a fourth factory ready by the first quarter of 2013, he said. The investment in the new factory, the location of which is still to be decided, will be as much as 6 billion rupees.

Carmakers in India, Asia’s third-largest automobile market, last month cut their sales forecasts for a second time this year after high interest rates reduced demand. The Reserve Bank of India has raised rates 13 times since mid-March 2010 in a country where about 80 percent of car purchases are funded by loans.

Hero ‘Insulated’

“We’ve been insulated as the worst affected is the passenger-car market where the dependence on loans and the ticket price is high,” Sud said. “In two wheelers, the rate hikes haven’t had any impact on sales as only about 30 percent of buyers buy a motorcycle with a loan.”

The company, formerly known as Hero Honda Motors Ltd., developed a new name after Honda exited the venture to expand its fully owned subsidiary. Hero Group, the New Delhi-based founders of Hero Honda, acquired Honda’s 26 percent stake in the venture in March.

Hero shares fell 2 percent to 2,137.35 rupees at close in Mumbai yesterday. They have gained 7.5 percent this year, compared with a 15 percent decline in the benchmark Sensitive Index.

The company is targeting annual sales of 10 million units and revenue of $10 billion in five to six years, according to a statement dated Aug. 9, from 5.4 million units and $4 billion in the year ended March 31. Its research and development budget may rise to as much as 1.2 percent of sales from 0.14 percent at present, Sud said, without specifying a period.

The manufacturer has identified Africa as the first market to sell its products overseas, he said. It is also exploring markets such as Latin America. The company may rebadge all its models within six to nine months as Hero from Hero Honda, Sud said. It expects to deliver more than 6 million units this fiscal year, the company said in July.

--Editors: Garry Smith, Abhay Singh

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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