Honda Motor Co. (7267) is selling more of its motorcycles and scooters in India, gaining on former partner Hero MotoCorp Ltd. (HMCL) ahead of the festive season starting this month in the world’s second-largest two-wheeler market.
Honda, the world’s biggest motorcycle maker, aims to boost sales by 30 percent to 2.75 million units in the year ending March 31, Yadvinder Guleria, vice president for sales at the company’s India unit, said in an interview. Hero is banking on festival-season demand to reduce “high” inventories, Managing Director Pawan Kant Munjal said in New Delhi yesterday.
Shipments of the local unit of Honda have surged 49 percent in the five months through Aug. 30 from a year earlier, compared with a 1.8 percent rise in deliveries at Hero, India’s biggest motorcycle maker. Revenue at Hero may increase at the slowest pace in five years in the 12 months to March, according to the median estimate of 63 analysts compiled by Bloomberg, as competition between the former partners intensifies.
“Hero has not been able to upgrade its customers from its budget motorcycles to its more expensive offerings -- a void that is being filled by Honda,” said Ronak Sarda, an analyst at MSFL Research in Mumbai, who recommends selling the stock. “The catalyst Hero is looking for is the festival demand.”
Hero has dropped 18 percent in the past year making it the third-worst performer in the 26-company MSCI Emerging Markets Automobiles & Components Index. (MXEF0AC) Hero fell 0.2 percent to 1,786.35 rupees at 9:59 a.m. in Mumbai trading.
Companies in India including Hero and Honda count on demand during the festival season, which starts with homage to Ganesh, the elephant-headed god of prosperity, on Sept. 19 and runs through Nov. 13 with Diwali, the festival of lights. That’s followed by the wedding season from November to December and from late March through early May.
“We will ensure there is sufficient stock available at the dealerships to leverage the high retail opportunity that comes with the festive season,” Anil Dua, senior vice president for marketing and sales at Hero, said in an e-mail. “We have a robust communication plan leading up to the festive season.”
Since the start of the year, both Honda and Hero have unveiled two new models each. Hero began selling its 125-cc Ignitor motorcycle in July starting from 55,990 rupees ($1,000), and unveiled its Maestro scooter in March. It will unveil a new variant of the Passion motorcycle before Diwali, Munjal said yesterday.
Honda, which in 2010 exited a 26-year partnership with Hero, introduced the 110-cc Dream Yuga motorcycle in June and the 150-cc CBR150 went on sale from March. Honda also unveiled a refreshed version of its Dio scooter in February and 125-cc Shine motorcycle in January.
The Japanese company’s second plant in Rajasthan state doubled output from March, with a capacity to make 1.2 million units annually. Its first factory at Manesar, near capital New Delhi, has a capacity to make 1.6 million units a year.
“Since our factory in Rajasthan became fully operational, we have been able to increase production to meet demand,” Guleria said. “With the reduction of waiting lists, more customers are coming for our products.”
Honda’s third factory in India is being built in the southern Karnataka state and will boost its total annual capacity to 4 million units in the first half of next year.
Hero, which started with production of the CD 100 model in 1985, in June said it will spend more than 25 billion rupees to increase production capacity and on a research and development center. The company aims to increase its capacity to more than 9 million units a year by 2014 from about 7 million units.
Hero’s distribution network is estimated to have an inventory of about 40 days, up from 21-28 days, Rohan Korde and Nirav Bhatt, analysts at Anand Rathi Financial Services Ltd. in Mumbai, wrote in a note dated Sept. 3.
“Apart from the impact in branding after the split from Honda, there is also the additional impact of Honda’s raised capacity,” Korde and Bhatt, who recommend selling the stock, said. “Keener competition from peers via fresh launches would lead to short-term demand pressures in second and third quarters.”
Honda has about two weeks of inventory currently, Guleria said.
Hero says it has got good response from customers to products it has introduced under its new brand identity after parting ways with Honda, Dua said.
“We have been expeditiously moving from the erstwhile joint brand to Hero,” said Dua. “We gained market share in the very first year of our solo journey.”
Hero’s net income margin narrowed to 9.9 percent in the three months ended June 30, the lowest in four quarters, according to data compiled by Bloomberg. Revenue in the first quarter increased 10 percent, the slowest pace since the three months ended Dec. 31 2008, according to the data.
Revenue in the year ending March 31 is estimated to rise 12 percent to 260.5 billion rupees, the slowest pace since the same period in 2008.
Both Honda and Hero are trying to win customers in Asia’s third-biggest economy where gross domestic product is expanding at a slower pace and inflation is close to 7 percent, a level the central bank has said limits room for interest-rate cuts. The nation’s GDP expanded 5.5 percent in the three months ended June from a year earlier, a pace close to the three-year low of 5.3 percent in the first quarter.
Hero with its wider offerings may be better placed than its competitors to win buyers, according to Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai.
“In the current economic scenario, customers may opt for lower end motorcycles rather than more premium bikes,” said Karne. “Given Hero has a wide range of products in the lower segment, it may benefit from this growth at the entry level.”
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. Of the industrywide sales of 13.4 million units in the year ended March 31, the months of September and October accounted for 18 percent of the total.
Honda in June said it expects to more than double India’s share in its global two-wheeler sales as the company adds small- engined motorcycles and opens outlets to widen reach. It’s increasing outlets and service centers to 2,000 by the end of March 2013 from 1,600 in August, Guleria said.
“When we started, we targeted urban and semi-urban customers, now we are going to smaller towns and villages,” said Guleria. “Adding new models has helped extend the market.”
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