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Hero Seeks Ethanol Engine Partners to Tap Brazil, Kenya

June 06, 2012

Hero Seeks Ethanol Engine Partners for Brazil

Hero has declined 2.1 percent in Mumbai trading this year, the third-worst performer on the 10-company BSE India Auto Index. Photographer: Prashanth Vishwanathan/Bloomberg

Hero MotoCorp Ltd. (HMCL), India’s biggest motorcycle maker, is seeking partners for products such as blended-fuel compatible engines as it prepares to tap customers in Brazil and Kenya to combat sliding sales growth at home.

“We continue to look for more tie-ups,” Managing Director Pawan Kant Munjal said in an interview in New Delhi June 4. “We are trying to build our own technology, our own capability through partnerships.”

Hero, which in 2010 decided to exit a 26-year partnership with Honda Motor Co. (7267), aims to more than triple exports by 2017 as sales growth slows in its home market amid intensifying competition from Honda, Yamaha Motor Co. and Suzuki Motor Corp. The Indian motorcycle maker plans to start selling vehicles in Latin America and Africa by September, Munjal said.

Tuning engines to run on gasoline combined with ethanol will enable Hero to benefit from rising demand in overseas markets including Brazil, Latin America’s largest economy, and Kenya, East Africa’s biggest, two countries where local requirements mandate the use of the blended fuel. Hero posted its slowest sales growth in 13 quarters in the three months through March, as Asia’s third-largest economy decelerated, expanding 5.3 percent, the least since 2003.

Hero will also set up assembly plants in overseas markets either on its own or through local ventures, Munjal said.

‘Saturation Point’

“Targeting exports would be the next line of growth for Hero as the Indian market reaches a saturation point,” said Ronak Sarda, an analyst at MSFL Institutional Research in Mumbai. “It will be a gradual process but if they get a good distribution network, they can be successful.”

Hero, which had declined 2.1 percent to yesterday’s close in Mumbai trading this year, climbed 4.8 percent to 1,955.05 rupees at the close in Mumbai, its biggest gain since Sept. 5. The benchmark Sensitive Index rose 2.7 percent.

Munjal plans to raise the share of overseas sales volume to 10 percent from 2.7 percent in the 12 months ended March in line with his ambition to make Hero one of the biggest global two- wheeler manufacturers. The 57-year-old mechanical engineering graduate said he will seek more partnerships after Hero struck tie-ups with U.S.-based Erik Buell Racing and Austria-based AVL for motorcycle design and engine knowhow.

The motorcycle maker last month reported fourth-quarter profit that missed analysts’ estimates as rising raw material costs damped gains from record sales.

Net income rose 20 percent to 6.04 billion rupees ($109 million) in the quarter ended March 31, from 5.02 billion rupees a year earlier, Hero said May 2. Profit trailed the 6.2 billion- rupee median of 48 analysts’ estimates compiled by Bloomberg. Sales rose 11 percent to 59.6 billion rupees.

Following Bajaj

New Delhi-based Hero also plans to offer its vehicles in Argentina and Nigeria this year, Chief Financial Officer Ravi Sud said in January as the motorcycle maker tries to mimic the strategy of its nearest domestic competitor, Bajaj Auto Ltd.

In August, Hero said that it would target sales of 10 million units a year in five to six years, with 10 percent of that volume coming from overseas. It took Bajaj almost 10 years to build its overseas business, according to Basudeb Banerjee, an analyst with Quant Broking Pvt.

“I don’t see exports being a big game changer for Hero,” Banerjee, an analyst with a reduce recommendation on Hero, said. “Hero will also begin to lose market share to rising competition, and margins will also be under pressure” at home.

Bajaj, which already sells more than 35 percent of its products overseas, has set itself a goal of winning 70 percent of sales from exports as it challenges global industry leader Honda in Latin America, Africa and Asia.

New Factories

“Exports should have better margins due to export incentives,” MSFL’s Sarda said. “Further, the depreciating currency also supports” exports, he said, referring to the rupee’s decline against the dollar.

The Indian currency has slumped 19.5 percent against the dollar in the past year making it the worst performer among the 11 most-traded Asian currencies. The rupee’s drop makes the nation’s exports less expensive and boosts the value of repatriated sales.

Bayerische Motoren Werke AG last month said growth in demand from Brazil, the U.S. and Germany had helped offset declines in other European markets and boosted first-quarter motorcycle sales by almost 8 percent.

Hero, which had been interested in Ducati Motor Holding SpA before the Italian luxury-bike maker’s acquisition by Volkswagen AG’s Audi, is stepping up capital spending to add capacity and will invest 25.8 billion rupees to build two new plants and expand existing factories, the company said June 4. Hero, which has internal cash reserves of about 40 billion rupees, seeks to expand annual capacity to more than 9 million units by 2014, from about 7 million units at present.

Two-wheeler sales in India, the world’s biggest market after China, may climb by as much as 13 percent in the 12 months ending March 31, slowing from a 14 percent pace a year earlier, according to the Society of Indian Automobile Manufacturers. Industrywide sales was 13.4 million units in the year ended March 31, according to the industry group.

To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net; Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net


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