Hero Honda hits pothole

Hero Honda could not withstand the negative current generated by its sales numbers for April 2003, after rallying in the last few sessions.

As a result, the scrip of the largest Indian maker of motorcycles slipped 1.2% to Rs 200.95 on BSE in mid-morning trades. The scrip hit a low of Rs 200, earlier. Volumes of nearly 100,000 Hero Honda shares were notched up on BSE in one-and-a-half hours of trading on Friday.

The stock was the subject of immense volatility over the last few sessions since the announcement of Q4 results on 10 April 2003. The results turned out better than market expectations. The market was also stimulated by the company's liberal dividend announcement of Rs 18 per share.

This set the scrip racing 11.7% in two trading sessions to Rs 205.90 on 11 April 2003 from its close of Rs 184.30 on 9 April 2003. The rally soon fizzled out as the scrip tumbled to Rs 182.95 on 21 April 2003. The scrip, rallied again, to Rs 203.80 on 29 April 2003.

Hero Honda has registered a fall in vehicle sales for April 2003 to 1,34,318 units compared to 1,34,801 units in April 2002. Yet compared to the 1,15,722 units in March 2003, Hero Honda's vehicle sales registered a 16% month-on-month growth. Hero Honda's March 2003 sales had tumbled due to the World Cup fixtures and uncertainty over VAT among others.

Analysts are not too optimistic about the HHML stock. Hero Honda, which has a 45% share of the domestic market for motorcycles, has been witnessing sluggish demand and intense competition in recent months and analysts expect an earnings de-growth due to pressure on margins by HHML in FY 2003-04.

The company derives nearly 80% of its sales volumes from the Splendor and Passion models. The executive segment being over crowded, pricing pressure will continue to increase in the coming months, according to analysts. Hero Honda plans to reduce this risk by launching two new upgraded versions and one new model each in the entry level and premium segments respectively.

Hero Honda recently launched its cheapest 100cc motorbike. The new model, CD-Dawn, carries a showroom price of Rs 31,899 in Delhi. The company expects to sell 7,000-8,000 units of the bike in the initial months and hopes that sales will soar to 20,000 a month in six months.

After 2004, both Honda Motor Company of Japan and Hero Honda have agreed to carry on their prosperous co-existence. Honda Motorcycles and Scooters India, which is a 100% subsidiary of Honda Motor Company of Japan, will launch motorbikes in India from its parent company and Hero Honda will venture into scooters and scooterettes.

For the quarter ended 31 March 2003, the motorcycle major posted a net profit of Rs 148.96 crore (Rs 148 billion) on total income of Rs 1,248.20 crore (Rs 12.48 billion). For the year ended 31 March 2003, the company's net profit stood at Rs 580.76 crore (Rs 5.8 billion) on total income of Rs 5,194.55 crore (Rs 51.94 billion).

Hero Honda's quarterly results have turned out better than expectations. According to a capitalmarket.com analysts poll, for the quarter ended 31 March 2003, the motorcycle major was estimated to record a fall of 7% to 16.2% in net profit, in the range of Rs 128 crore (Rs 1.28 billion) and Rs 142 crore (Rs 1.42 billion). Sales for the quarter were estimated at between Rs 1,202 crore (Rs 12.02 billion) and Rs 1,280 crore (Rs 12.8 billion).

BSE code: 500182