Home / Companies / Hero to stop paying fixed royalty to Honda in boost to profits

New Delhi: Hero MotoCorp. Ltd will stop paying royalties to Honda Motor Co. Ltd in June on products that it inherited from their erstwhile partnership, resulting in a saving of 415 crore that will provide a sizeable boost to the current year’s net profit at India’s largest maker of scooters and motorcycles.

Under the separation agreement announced on 16 December 2010, Hero was to pay the Japanese company 45 billion yen ( 2,350 crore then) in four instalments by June 2014. The amount was amortized over 14 quarters starting in January 2011 and ending in June 2014, which roughly translated into about 180 crore per quarter, excluding the impact of exchange rate swings. This amount was in line with its 2010 rate of royalty payment, which was 2.7-2.8% of net sales.

“So post June 2014, with the payment period getting over, this is going to reflect positively on financials of Hero MotoCorp. As an immediate result, the net impact on PAT (profit after tax) in the remaining three quarters (July-March) of FY 15 will be in the region of about 415 crore," said a person with direct knowledge of estimates made by the company, who spoke on condition of anonymity.

Honda and Hero MotoCorp, then known as Hero Honda Motors Ltd, ended a 26-year-old partnership when the Munjal family bought out the Japanese company’s 26% stake in their joint venture, Hero Honda Motors Ltd, for 3,842 crore at the end of 2010. In July 2011, the Hero Honda Motors Ltd renamed itself Hero MotoCorp.

After June, Hero will only need to pay royalty to Honda on the products for which it sourced technology from Honda following the separation— the Maestro scooter, and the Impulse, Ignitor and Passion X Pro bikes. As per its annual report for 2013-14, Hero MotoCorp paid 50 crore as royalty on new products to Honda that fiscal year.

“With sales of Maestro and Passion X Pro picking up, this (the royalty payment on new models) is likely to be around 100 crore this year," the person cited above said.

Hero also expects the end of royalty payments to improve earnings per share (EPS), which is likely to increase by about 20 over the current fiscal year and by 28 in the three quarters starting in June-September, the person cited above said.

EPS provides investors and potential investors a clue to profitability. A higher EPS generally signals a more robust company, profitability-wise.

Hero MotoCorp is a debt-free company and has a cash pile of 4,000 crore. The company sold 6.11 million two-wheelers during the fiscal ended 31 March 2014, an increase of 3.43% year on year, lagging the two-wheeler industry’s 7.31% to 14.8 million units in the face of an economic downturn and high borrowing costs that have deterred buyers.

A Hero MotoCorp spokesperson declined to comment for this story, citing the so-called silent period that companies are required to observe before they announce the financial results.

Hero’s earnings announcement is expected on 28 May.

Net profit at the two-wheeler firm will surge by at least 38% in the current fiscal year, said Surjit Arora, sector analyst at brokerage Prabhudas Lilladher Pvt. Ltd. He estimates the company’s net profit for the year at 2,834 crore.

“They will clearly save a lot of money for the firm but all of it will not go into profits and will be invested into R&D (research and development) and expansion plans," Arora said.

“My estimate of EPS for the year will increase from 103 per share to 141, which is a 38% increase and similar to my estimate of net profit growth during the fiscal," Arora said.

“Operationally, they will see a growth of 17-18% and the end of amortized royalty payment will bring in another 20% growth to the net profit," Arora added.

The company will look to utilize the net profit gain for setting up factories in overseas markets and expanding its assembly unit in Colombia, which will cater to markets in the neighbourhood such as Argentina and Brazil, another person familiar with the company’s plans said.

“So the end of the amortized payments to Honda will accrue in huge financial benefits for Hero which will come in handy for its ongoing investments," this person said, requesting anonymity.

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