New Delhi: The two partners in Hero Honda Ltd have finally decided to ride off on their own in different directions. Their journey in the next few years will be closely watched as it could have a profound effect on the booming market for two wheelers, say industry experts.
The Hero Honda board met on Wednesday to give its stamp of approval on a deal to end a 26-year-old partnership that began when India was tentatively opening its doors to multinational investment and a growing middle class was coming into its own.
“This is the most important announcement I have made in the last 25 years,” said Pawan Munjal, Hero Honda’s managing director and chief executive officer.
The Munjals of the Hero group will buy out the 26% stake held by Honda Motor Co. Ltd for an undisclosed amount, in a deal that will likely be funded by debt. The purchase will be done in a “phased manner” in 2011 through two or more promoters, said senior Hero Honda officials. Financiers said this is an indication that the Munjals would first raise a bridge loan, and then go in for a term loan or bring in private equity firms at a later stage.
Hero Honda proved to be one of the most successful of a bunch of similar collaborations between Indian and Japanese automobile companies in the early 1980s, though the separation seemed to be on the cards ever since Honda set up a wholly owned unit, Honda Motorcycle and Scooter India Ltd, in 1999. It was the only one of three Honda joint ventures in India that endured a testimony to the success of the venture.
Photo by Bloomberg; graphic by Ahmed Raza Khan/Mint
The two companies will face unique challenges in the years ahead as they rebuild their strategies.
“The timing of the end of the joint venture is advantageous in terms of the fact that the overall market is expanding and specifically it has ended uncertainty within the two companies,” said Rakesh Batra, partner and national leader of the automotive practice at Ernst and Young. “The termination of the joint venture opens up the opportunity for Hero to become a global player which was a constraint during the joint venture.”
Hero will have to build reliable technology and show it can tap foreign markets, he said. Honda will need to focus on its product portfolio in India and boost market share, he said.
Also Read | Valuations hinge on future market presence
The fine print of the corporate divorce seems to keep some of these issues in mind.
The Hero Group has bought time to develop its own research and development capability by signing a fresh licensing agreement until 2014 with the Japanese company for both current models and new launches. The Indian company will also change the brand name of its products.
Contrary to speculation, the royalty that the Indian company will have to pay to Honda for every vehicle sold has not been raised, thus addressing at least one subject of investor worry.
“Royalty payments will remain in the current levels, as against 8% reported widely. Going forward, they will be even lower,” said Pawan Munjal. The royalty paid in 2009-10 was 2.6-3% of sales.
“There will be continuous flow of new models going forward. The fresh licensing provides us with new models and some of the models will be completely on the new platform,” Munjal said. “We will continue to produce the current models under Hero Honda brand till the agreement ends in 2014.”
Under the new agreement, Hero Honda will be free to develop its own products.
“This will allow us to go out and make our global presence felt in the international market, said Munjal. “We can now export to new territories.”
Hero Honda, which has a 52% domestic market share, is currently limited to exporting motorcycles to neighbouring countries.
“Our joint venture agreement will be dissolved. In order to assure service to the customers, Honda will grant the necessary licence to enable continued production and sales of current products as well as licence for new products,” said Honda managing director and chief operating officer, regional operations (Asia and Oceania) Fumihiko Ike. “We will now focus on our own subsidiary.”
The Hero Honda brand name will be changed over time, the company said. A definitive agreement will be signed within the next few weeks.
“We are acquiring the stake ourselves, possibly in one shot initially...or in a phased manner. We will take a call next month,” said Sunil Munjal, a Hero Honda board member. He also said profitability and margins won’t be affected.
Analysts said the announcement has come as a relief for the stock, which has been under pressure over the past few days. The unchanged royalty payment “will ensure there’s no impact on the earnings per share,” said Ajay Shethiya, analyst at Centrum Broking Pvt. Ltd.
Divya Guha and Malvika Chandan contributed to this story.