Hero Honda witnessed sustained all-round pressure on Tuesday on rumours that the company may cut its production of bikes by 40% in the current month due to huge inventory levels.
By 15:15 IST, the Hero Honda stock was the biggest loser among the 30-share BSE Sensex stocks, shedding 5.13% to Rs 219.90, its new 52-week low, slipping from its intra-day high of Rs 234. A volume of over 265,000 shares was recorded on the counter. In the last eight sessions, the scrip lost 14.7% from Rs 257.90 on 30 January 2003.
As per market buzz, the sustained selling pressure on the Hero Honda counter was on rumours that the company will reduce its production by 40% in the current month due to the huge pile-up of inventory at the dealer-level.
Earlier, the company said it had a inventory of about three weeks. But players said the company, in order to achieve its full year sales target of 1.8 million motorcycles, may have a much higher inventory level.
As per market buzz, Life Insurance Corporation of India and Unit Trust of India were active sellers on the Hero Honda counter. There was also churning of portfolio by investors from Hero Honda to Bajaj Auto, following hopes that the latter may perform much better in the motorcycle segment. Also, there were reports of late, that competitors like Bajaj Auto and TVS Motor have eroded the company's market share in the bike segment.
Analysts, however, said that despite tough competition, Hero Honda was able to maintain its profit margins in the last three quarters of FY 2002-03. But in the current quarter, there are fears that its margin may be hit, which led to institutional sell-off on the counter.
Analysts said the margin may take a beating following huge expenditure on advertisements and dealer incentives. Hero Honda is the co-sponsor in the Cricket World Cup, which is being held in South Africa. Analysts also said that in the face of cut-throat competition, Hero Honda may not be in a position to hike bike prices.
Secondly, if the company has to achieve its sales target of 18 lakh motorcycles in FY 2002-03, it has to give incentives to dealers. Hero Honda will have to sell over 1.86 lakh vehicles by March 2003 to achieve the target.
Meanwhile, the company's competitors are going in for new launches and aggressive marketing strategies. According to data from the Society of Indian Automobile Manufacturers, Hero Honda's market share in motorcycles has steadily fallen to 45% in the April-December 2002 period from 49.6% in the year-ago period.
In the same period, Bajaj Auto's market share rose from 21.7% to 23% and TVS Motor's share improved from 14% to 19%.
Meanwhile, in January 2003, Hero Honda registered a small 6.3% rise in motorcycle sales to 1.45 lakh units. But compared to the December 2002 sales figure of 1.25 lakh units, the growth rate of 16% is redeeming. In the April 2002-January 2003 period (10 months), sales rose by 22.7% to 1.42 million units from 1.16 million in the year-ago period. Even as the motorcycle sales figure for January 2003 is being termed modest, players are disappointed that the company's own target of 173,000 units for the month has been missed.
There is also concern over the sustenance of the company's tie-up with Japanese auto giant Honda. The promoters - the Munjal group and Honda Motor Company - hold a 26% stake each in the company. There is a feeling that Honda may review its alliance with the Munjal group as the former already has a 100% subsidiary in India.
Earlier, on 10 January 2003, Hero Honda unveiled its third quarter (ended 31 December 2002) results. It registered a 14.7% rise in net profit to Rs 152.8 crore (Rs 1.52 billion), compared to Rs 133.22 crore (Rs 1.33 billion) in the corresponding period of the previous year. Net sales increased by 12.8% to Rs 1,376.04 crore (Rs 13.76 billion) from Rs 1,219.47 crore (Rs 12.19 billion).
Earlier, the Hero Honda scrip was included in the derivatives segment of BSE as well as NSE.
FIIs have a substantial holding of 23.23% in Hero Honda, while domestic funds have 5.68%. The public owns 17.32% and private corporate bodies and NRIs/OCBs 1.76%.
BSE Code: 500182
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