Pune/Mumbai: Hero Honda Motors Ltd (HHML) will pay at least Rs2,350 crore as royalty to Honda Motor Co. Ltd till June 2014 as a part of the fresh licensing agreement signed between the two firms after the Japanese firm decided to exit from the joint venture in December.
Royalty payments are set to rise in line with increasing sales, and this could have an impact on profits at the world’s largest selling two-wheeler company.
According to the Delhi-based company, there will be an increase in the total amount paid to Honda, but that will be in line with the existing royalty rate—2.7-2.8% of net sales. The increase will primarily be accounted for by the rise in revenue and volume.
“New products will attract royalty, but will not be more than what we were paying even in the earlier arrangement,” said Ravi Sud, chief financial officer at Hero Honda. “Our highest rate of royalty on any product is and will be 5%.”
Fresh products launched by the company will cannibalize sales of old models, thereby increasing the proportion of new vehicles in the overall mix, according to Vineet Hetamasaria, analyst at Mumbai-based brokerage Pinc Research.
This is liable to increase the royalty outgo from the current 2.7% to around 3-4%, which could have an impact of almost 45 basis points on the company’s profit, he said. A basis point is one-hundredth of a percentage point.
“What Honda said is that there is a compensation of 45 billion Japanese yen, in Indian rupees it works out to something like Rs2,350 crore to Rs2,400 crore,” Sud said. “This payment is payable for a period of 3.5 years, our agreement is valid from January 2011. This works out to Rs670 crore to Rs680 crore per annum.”
Sales in the 2011 fiscal were close to Rs19,000 crore, and Sud sees this rising at 15-20% in the three years after that.
“When my turnover grows, the Rs670 crore to Rs680 crore as a percentage of net sales will come down,” he said. “Hence, the payment to Honda will not exceed the current levels, which is 2.7-2.8%.”
The payments will be made in March of 2012, 2013, 2014 and June 2014. These won’t be equal instalments, but as far as a charge to the profit and loss account is concerned, the cost will be spread equally over 3.5 years, or 14 quarters.
“We paid Rs425 crore in 2009-10. Royalty is a function of volume and the product mix—if you sell more products that have higher royalty, the overall royalty will be higher,” Sud said. “Royalty in (the year ended) March 2011 will be in the vicinity of Rs520 crore. We have done 5.4 million units in 2010-11; volume has grown 17-18%.”
In 2009-10, the royalty payment was Rs416 crore, or 2.7% of net sales. Sud had said in a previous interview that the royalty for 2010-11 would be 2.8-2.85%.
Honda had made the announcement of the royalty payment earlier. “Honda and HHML have signed a new licensing agreement, which enables HHML to continue producing, selling and servicing its current products,” the Japanese firm said in its release. “Consideration for the licensing agreement was 45,000 million yen and becomes due through 2014.”
Last December, the Hero Group and Honda agreed to end their 26-year-old relationship, with the Indian promoters buying the Japanese firm’s 26% stake in Hero Honda at a discounted rate for Rs3,841.83 crore.
Hero Honda is expected to announce its full-year results next week.
Shares of Hero Honda rose 0.8% to Rs1,709.65 on the Bombay Stock Exchange compared with a 0.81% decline in the benchmark Sensex.