New Delhi: Hero Honda Motors Ltd, India’s biggest motorcycle maker, has delayed opening its third factory as interest rates at a five-year high crimp demand.
The start of production at the factory in Uttarakhand has been postponed to the fiscal year starting 1 April 2008, Ravi Sud, chief financial officer, said in a phone interview on Thursday. The Indian affiliate of Honda Motor Co. had earlier planned to open the factory in October. “There is no point in adding to cost when the industry is declining,” Sud said. “Our sales will remain largely flat this fiscal year—at the most, it will grow by 3-4%.”
The decision follows a cut in output last month as the State Bank of India and other lenders began charging borrowers more for loans in the world’s second-largest motorcycle market. The central bank has raised the benchmark overnight lending rates six times in the past 18 months to crimp demand and cool inflation.
Commercial banks have increased lending rates by between 200 basis points and 250 basis points since December. State Bank, India’s biggest commercial bank, said on 7 April it will charge its best borrowers 12.75%, the highest since April 1999. GE Money, the consumer finance division of General Electric Co., stopped advancing new loans for purchasing motorcycles and scooters as it wants to “concentrate resources on high growth and high profitability businesses” in India, the company said last month.
Hero Honda’s sales fell 8.4 % last month, a second straight drop for the company, which controls almost half of the nation’s motorcycle market. Sales at rivals Bajaj Auto Ltd. and TVS Motor Co., which are also building new factories, also declined last month.
Indian motorcycle makers have been building new factories to expand capacity in anticipation of a growth in demand. Motorcycle sales have been increasing in India as rising incomes and creation of more jobs enable Indians to buy more two-wheelers, the main mode of personal transport in the country.
The company has a capacity to produce about 3.9 million motorcycles and scootersfrom its two factories near New Delhi, Sud said. That’s “enough to take care of current demand.”
On Thursday, shares of Hero Honda closed at Rs689.35, up 0.55% or Rs3.75, on the Bombay Stock Exchange on a day when the Sensex closed at 14861.89 points, down 0.12% or 18.35 points. bloomberg
Sam Nagarajan in New Delhi contributed to this story.