Munjals set to break with Honda; royalty to increase

Munjals set to break with Honda; royalty to increase

New Delhi: The Munjals of the Hero group and Honda Motor Co. Ltd are set to part ways amicably, with the Indian partners close to a deal to buy out the Japanese automobile company in Hero Honda Motors Ltd, a joint venture set up in 1984, said two people familiar with the issue. The Hero Honda board is due to meet on Thursday to approve the deal.

However, Hero Honda will have the right to use the Honda brand for another year and source technology from its erstwhile partner till 2014, though after paying higher royalties on every vehicle sold.

“The Munjals will have to pay the money to Honda within 40 days after the deal is signed," said one of the two persons familiar with the development. “They will pay nearly 1,000 per share to Honda, a heavy discount to the current market price."

The separation will test the ability of the Hero group to hold ground in the competitive market for motorcycles without technological support from Honda.

Hero Honda shares fell 5.4% to 1,621.30 on the Bombay Stock Exchange on Wednesday. The benchmark Sensex fell 0.76% to 19,647.77 points.

At that closing price, the value of Honda Motors’ 26% stake in Hero Honda works out to about 8,417.5 crore, or close to $2 billion. At 1,000 a share, the Munjals will have to pay 5,190 crore to their partner.

The discount to market price will be balanced out by an increase in royalty paid to the Honda group from the current 2.5% to 5.25%.

“They have agreed to an increase of three percentage points in royalty to be paid for at least five new models to be launched by the end of next fiscal," said another person with direct knowledge of the development.

Analysts fear the higher royalties will be a drag on earnings. “As per our calculation, with every 1% change in the royalty percentage point, the earnings get impacted by 5-6%," Sorabh Talwar, an analyst at HDFC Securities Ltd, wrote in a research report on 8 December.

Honda will offer the Indian company products under development for the next three years, giving the Hero group a window to build its own research and development capability.

The increased royalty payments would continue till 2014, when the current technology sharing agreement is due to expire. Both the companies review the agreement after every 10 years.

The Indian company will also be allowed to use the Honda brand name for one year. “The Hero group can use the Honda brand name for one year for their motorcycles," said the first person cited.

The separation comes at a time when Hero Honda has been fighting a declining market share in motorcycles, which dropped to 52.9% at the end of the September quarter from 60.4% a year earlier, according to the data provided by Society of Indian Automobile Manufacturers.

Experts say Hero Honda is losing ground to Bajaj Auto Ltd, which re-entered the 100cc motorcycle segment in July 2009. Bajaj’s market share increased to 34% at the end of the second quarter from 29% a year earlier.

An analyst said the company has not been able to keep pace with the spurt in demand because of capacity constraints.

“With new launches from HMSI (Honda Motorcycle and Scooter India), TVS (TVS Motor Co. Ltd) and Yamaha (India Yamaha Motor Pvt. Ltd) available for sale, Hero Honda’s market share could decline further. Until this happens, we see Bajaj outperforming Hero Honda on the volume and profit fronts in FY11," said Vaishali Jajoo, sector analyst at Angel Broking Ltd.

“Honda’s decision to withdraw would deprive Hero of the technological inputs once the agreement term expires," said Prayesh Jain, a sector analyst with India Infoline. “There is not much information on whether Hero would be able to manufacture bikes on its own."