New Delhi: India’s largest two-wheeler maker by sales, Hero MotoCorp Ltd, plans to invest Rs2,575 crore in the next two years—its highest ever investment in the country—to safeguard its dominant position in the world’s second largest two-wheeler market from rivals such as Honda Motorcycle and Scooter India Pvt. Ltd (HMSI) and Bajaj Auto Ltd.
The investments include substantial capacity expansion and setting up a research and development (R&D) centre, perceived by experts as areas of concern for the firm following its break-up with Honda Motor Co.
The plan is central to boosting exports, which are key to its expansion strategy. The partnership with Honda, which ended early last year, had prevented the New Delhi-based company from aggressively tapping overseas markets.
Chalking out plans: Pawan Munjal, Hero MotoCorp’s chief executive and managing director. Photo: Ramesh Pathania/Mint
Hero, which sells one in every two motorcycles sold in India, plans to set up two new plants, one each in Rajasthan and Gujarat, with an investment of Rs400 crore and Rs1,100 crore, respectively. Mintreported this on 2 September. Besides this, it will spend Rs500 crore in expanding capacity at three plants— two in Haryana (Dharuhera, Gurgaon) and one in Uttarakhand (Haridwar).
“With this expansion, our total capacity will be nine million units in two years’ time,” said Pawan Munjal, chief executive and managing director of Hero MotoCorp. “This is in line with the stated objective of reaching 10 million units in the next five years.”
Hero’s plant in Rajasthan will be operational by the first quarter (Q1) of fiscal 2014 and the one in Gujarat will start production from Q2 of the same fiscal year. The firm has signed a state support agreement with the Gujarat government to set up the plant there.
Munjal said the company will also be installing capacity in foreign markets and may look at south India for another facility in the country.
An expert said Hero’s announcements were on expected lines as it had been in talks with the governments for a long time.
“They were scouting for new plants for a while. It is in line with the market expansion,” said Mahantesh Sabarad, senior vice-president (equity and research), Fortune Equity Brokers (India) Ltd. “But investments could have been lower by at least Rs200 crore as the amount stated by the company is massive for a two-wheeler company.”
The move comes almost a year after former partner Honda Motor’s Indian subsidiary HMSI announced a massive expansion plan and its intent to compete directly with Hero in the mass-bike segment, which makes up 80% of the total two-wheeler market.
Hero also said on Monday that it will set up a full-fledged R&D centre at Kukas near Jaipur in Rajasthan with an investment of Rs400 crore. Built over 250 acres, the centre will be the largest two-wheeler R&D set-up in the country and will have 500 engineers. Mint reported this in September 2011.
“With this R&D centre, we will be able to do complete manufacturing of bikes on our own,” Munjal said. “We have already tied up with EBR and AVL for technology. This centre would help us to strengthen our technological expertise and experts from these two firms (AVL and EBR) will help us in training our people and building our capabilities.” AVL LIST GmbH is an Austria-based company that develops powertrain systems and engines. Erik Buell Racing (EBR) is a Wisconsin, US-based motorcycle maker.
The first phase of the R&D centre is also expected to be ready by Q2 of 2013-14.
Munjal said the company was expecting double-digit growth in the current fiscal despite unfavourable market conditions. “My expectation from the two-wheeler industry is very bullish,” he said. “We have years and years of growth available to us.”
The Indian two-wheeler industry will post annual growth of 11-12% in the current fiscal, according to the Society of Indian Automobile Manufacturers, an industry lobby. At this rate, the market is expected to double every four years till 2020. The industry sold 13.2 million units in 2011-12, posting growth of 14.16% over the previous year.
With Monday’s announcement, the company will have a capacity to produce nine million units a year by 2014, compared with Bajaj Auto’s current capacity of 5.5 million units. HMSI will have a four-million-unit capacity by 2014.
Munjal said the firm will enter markets in Central America and Africa in the near term as it has identified local distributors.
The firm has started switching to Hero branding (from Hero Honda) and the process will be completed by the end of the September quarter. The company will venture into new markets under its own brand name.
“We are expecting a growth of 25% in exports for this fiscal,” Munjal said.
Hero had earlier said it would export its products to Latin American markets, including the largest market there—Brazil. But on Monday, Munjal cited the company’s inability to export to markets such as Brazil because its bikes can’t run on the fuel used there. “Brazil uses ethanol-blended fuel and we are still in the process of upgrading our engines to that. It will require some time,” he said.
Munjal also said Hero will look to set up a manufacturing plant in Brazil as and when it decides to start operations in that country. “In Brazil, we will have to put up a plant because of the tax structure there and also due to logistics cost,” he said.
The firm had said it is looking at a $10 billion (Rs55,500 crore) turnover in the next five years and sales of 10 million units with exports at about 10% of its total sales. It expects to sell one million units overseas by 2016-17.
Munjal also said the company will launch the 125cc motorcycle Ignitor in a few days. However, Sabarad of Fortune Equity doubts the bike will be as big a hit as some of its other models. “It may or may not bring in volumes as Hero’s stronghold is the rural market, which is primarily a 100cc market,” he said. “In tier III cities, it will face direct competition from a Suzuki Hayate or Honda’s Dream Yuga.”
Hero MotoCorp said its board approved a proposal to absorb Hero Investments Pvt. Ltd (HIPL), the investment arm of Hero Group, into Hero MotoCorp. The merger will be subject to approval by the Delhi high court, shareholders and creditors of the respective firms, and other statutory authorities as applicable. “The merger of HIPL into HMCL (Hero MotoCorp) is going to benefit the public shareholders of Hero MotoCorp, as this will result in an increase in the public float of HMCL by approximately 12.29%,” it said.