Mumbai: Ravi Sud, chief financial officer of Hero Honda Motors Ltd, talks about the company’s second-quarter results and his outlook for the remaining half of the year. Edited excerpts:
At a time when most automakers are faced with dented profit and margins, how has Hero Honda managed a double-digit growth in volumes and profit?
It hasn’t come as a surprise, effective July we have seen a 40% (volume) growth, even in August and September we have done better than the industry. There
are four to five things we have done in the recent past that are now paying us dividends. Number one, expansion of our distribution network. Between 2006-08, we have increased our distribution network by at least 35-40% We have tried expanding our distribution and spare parts network in smaller towns and cities — we had 2,200 sales touchpoints in March 2006, it has increased to 3,200 in March 2008. It has really helped us. This is not something we have done in the last quarter but are results of the strategy we undertook two to three-and-a-half years back. Secondly, we have been refreshing our models so that there is always something new for customers.
Mixed outlook: Ravi Sud sees some slackness in December.
But hasn’t garnering volumes from these smaller towns and cities been an issue? How have you managed to tide over financing issues in these regions?
We have been tying up with retail financiers and root-level financiers. We started tying up with regional financiers like Shriram Transport Finance Co. Ltd., which is very strong in south (India). We had an agreement with them in February 2008. We also tied up with Fullerton India Credit Company Ltd., which was only in consumer durables, in June 2008. Apart from that we also got into agreements with Grameen Bank and co-operative banks and micro finance companies which are present in smaller towns and villages and have very small loan portfolios.
How much is the volume growth for real considering companies resort to channel stuffing in anticipation of the demand during the festive season and how sustainable is the growth?
In the first half of (fiscal) 2007-08, the motorcycle industry had declined by 12%. So if the numbers in the first half in the current year are growing, it is mainly because of the lower base of last year. It was in October 2007 that the industry started recovering a bit. In the current year, with the industry having witnessed a healthy growth, sales in the second half will taper off. Also, the festival season will come to an end by October-end. There will hence be some slackness in sales in December because people then also wait for newer models to come. At the end of the year, we may land up with single digit growth.
What’s your outlook on the margins?
In our industry, input costs account for 70-75% of total production cost. We are talking at a time when pressure on commodity price is lower. It has started happening only in September. Going forward, the impact will percolate even to Indian commodities. Hence it should have a positive impact on Q3 and Q4.
Do we see it getting translated into sales?
As of now there are no plans of offering any discounts. It’s the first year since (seven to eight years that) I have been working in Hero Honda (that the company) has not offered discounts. We are using money to build brands, we are using it as a long term investment to have an impact on consumers’ mind.
As on 30 March, 2008 you had surplus cash of Rs2,700 crore. What do you plan to deploy it for?
Yes, it is true we are have surplus cash. We are partly using this to help our associates and dealers who have seen a very difficult liquidity situation in the last two months. For the vendors we have been releasing payment on the dot. All our dealers need temporary limits to stock up for the festive season. We had anticipated that banks will start asking for collaterals, which dealers will not be able to provide. So we have extended the temporary capital limit for our dealers to Rs425 crore. Some of it will be needed for (the) company to take care of expansion and inventory, etc. Apart from that we are left with surplus cash, it’s for the board of the company to decide and take an appropriate action at an appropriate time.