Capstone-Interim Hero Honda Break-Up[1]

8/3/2019 Capstone-Interim Hero Honda Break-Up[1]

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Future of Hero Honda Motors

after the Joint VentureBreakup

(Interim Report Presentation)

Presented by:

Aadil Ahmed (01)

Ashwini Kumar Jha (20)NitinBaranwal (55)Rituparna Das (71)

SaketKumar Singh (74)

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Introduction

Hero-Honda Joint Venture:

• A joint venture between the Hero Group and Honda Motor Company was

established in 1984 as Hero Honda Motors Limited

• Both have 26% stake in the company

• The Hero Honda group went for a split at the end of 2010. After the split

the Munjal family will buy Honda Motor‟s 26% stake for around $1billion, or a little less than half the current value of the stake in thestock market.



Reasons for Merger:

Hero Group: •MarketKnowledge(Customers)•

Distribution Reach•GovernmentMatters

Honda Group:

•Brand Name•Technology(in engines)•Management Practices•Funds/Equity

Honda knew that it requires time and huge investment to

build-up distribution network to reach and service the

entire country. Therefore it decided to go for joint venture

with the Hero Group led by the Munjals.



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Pre-Breakup

Distribution front

Strong distribution network of over 4500 customer

touch points (comprising of dealers, service centers and stockists in

both rural and urban areas).

1st level channel: no middlemen involved. They have direct contactwith dealers.

Online Vendor Connectivity Program: by the end of 2008-2009,

72% vendors and their suppliers got connected online.

Manufacturing Plants

There are 3 plants for production. Two are based at Gurgaon andDharuhera in Haryana and latest is based at Haridwar in

Uttrakhand with a combined capacity of 3.9 million bikes a year.



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• Hero-Honda has followed JIT (Just in time) approach and thus Inventory levels

are kept low. The raw-material vendors get payment instantly.

• The “ Fill it – Shut it – Forget it” as well as “ Desh Ki Dhadkan” campaigns of

Hero Honda are probably some of the most famous ad campaigns in the

country.

• In 2001, it had toppled its competitor Bajaj and has been a market leader for the

last 10 years.

• During recession they found potential in rural areas, thus they formed a separate

sales division within the company with the mandate to reach “every village,every home”.

• Having observed that the scooter market is booming, in 2006 the company

started manufacturing scooters.



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• Hero Honda recorded revenues of INR167,806.2 million ($3,691.7 million) in

FY2010, an increase of 23.9% over FY2009.

• Hero Honda generates revenues through two product categories:

▫ two wheelers (93.7% of the total revenues in FY2010)

▫ spares (6.3%)

• The spares product category recorded revenues of INR10,621.7 million ($233.7million) in FY2010, an increase of 29% over FY2009.

• In FY2010, the company sold

▫ 4,600,130 two-wheelers

▫ 1.3 million entry segment motorcycles(100cc)

▫ 1.1 million premium segment motorcycles and

▫ 0.2 million scooters

• It also exported around 100,000 motorcycles to Sri Lanka, Bangladesh and

Columbia.



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REASONS FOR BREAK-UP

• In 1999, Honda established its subsidiary HMSI (Honda Motors and

Scooters India Pvt. Ltd.) which later has launched 2-wheelers like Unicorn,

Shine, twister, Activa etc.

• Hero-group was not allowed to enter as a separate entity in those countries

where Honda (2-wheelers) is present.

• The Munjals have refused to merge the company's spare parts business

with Honda's new fully owned subsidiary Honda Motors India.

• Honda Motors have understood the Indian market and have made a good

distribution channel via HMSI, so they do not need to continue the venture.



During Break-up

Just After the news

• Hero Honda's shares sank as much as 9 per cent on Wednesday on news that abreak-up agreement was imminent.

• 15.15% decline in the net profit to Rs.5056 million at the end of Dec – 2011 For Break -Up

• The Hero Group has to pay total Royalty of Rs.2479 crores to Honda Motors(which includes Rs.550 crores for export license) for the purpose of producing,selling and servicing current products.

• The company has roped Law and Kenneth (L&K) as a Creative partner to launchand establish a New Brand for the company.

• Debt Equity suddenly increased from 0.01 to 0.5 ,this is because of increase insecured debt in FY 2011 i.e Rs.1458 crores for the acquisition of the 26% holdingof the Company from HM Japan



Financing of funds during the break-

up

(i) Bridge Financing:

HIPL has pledged its entire shareholding of 17.33% in the Company in

order to bridge finance its buyout of HM Japan„s 26% stake in the jointventure.

(ii) Funding from private equity investors:

Preceding the pledge of shares of the Company by HIPL, HIPL had madean application to the Foreign Investment Promotion Board (―FIPB‖) in

respect to foreign investment in HIPL by certain private equity investors

for the purpose of acquisition of the stake of the Company held by HM

Japan.



Period Ending 31-Mar-11 31-Dec-10 30-Sep-10 30-Jun-10

Description Amount(Rs. million)

Net Sales / InterestEarned / Operating

Income 53,909.30 51,616.60 45,519.50 42,966.10

Other Income 743.4 620.3 783.5 534.2

Expenditure -45,610.00 -46,649.20 -39,440.10 -36,940.70

Interest -81 52.2 20.7 26.6

Profit BeforeDepreciation and Tax 8,961.70 5,639.90 6,883.60 6,586.20

Depreciation -2,373.90 -559.6 -607.5 -482.8

Profit before Tax 6,587.80 5,080.30 6,276.10 6,103.40

Tax -1,571.70 -790.3 -1,220.10 -1,186.50

Net Profit 5,016.10 4,290.00 5,056.00 4,916.90

Equity Capital 399.4 399.4 399.4 399.4

Basic And Diluted EPS

after Extraordinary item 25.12 21.48 25.32 24.62

Nos. of Shares - Public 90,457,144.00 95,428,010.00 95,428,010.00 95,428,010.00

Operating Profit Margin 16.77 10.83 15.08 15.27

Net Profit Margin 9.3 8.31 11.11 11.44

Cash EPS 37.01 24.28 28.36 27.04



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After Break-Up

Strengths:

•Huge brand equity/reputation among

customers

•Models/products in almost every bikesegment

•Brilliant relations with customers and

dealers

•Strong Resale Value

•3 world class advanced manufacturing

plants (Haridwar, Darukhera& Gurgaon)•Quality product for each category

•Dedicated Human Resource

•Highly competitive features

•Robust supply chain

•Strong distribution network

•Leading domestic market position

Weaknesses:

•Hero is very much dependent on Honda

•Imports >31% of its spare parts

requirements

•Too much dependence on few models

•Lower exports compared to its peers

•

Research and development void

SWOT ANALYSIS



Opportunities:

•Bikes Segment is still a fast growing

sector

•Exports market is yet to be properly

exploited

•

Cruiser bike segment is unexplored•Variants can be launched to increase the

market share

•Most reliable bike manufacturer in

India

•Strong brand followers

•Poised to benefit from growing Indianautomobile market

•Increasing its footprint in the rural

market

•Establishing strategic joint ventures

with automotive part makers

Threats:

•Honda after break up is a major

competitor

•All major bike makers in the world are

lining up for India

•Low cash reserves

•Losing a foothold in the exports market

which is now dominated by Bajaj

•Intense competition in the two wheeler

market

•Risks concerning labour issues at

suppliers‟ end

SWOT ANALYSIS (contd…)



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After Break-up

• Hero MotoCorp has announced to open a Manufacturing& Assembly Plant in Gujarat to increase its manufacturing capacity.

• Hero Honda Motors Ltd. (HHML) has formally been renamed as HeroMotoCorp Ltd.

• The branding incorporates a fresh brand architecture, including a new name, logoand positioning.

• The dhak dhak go partnership of Hero Honda has now changed to the “ Hum men hai Hero” slogan for Hero Motocorp which has been composed by A.R Rehman.

• Hero MotoCorp has roped in Ranbir Kapoor as its brand ambassador toestablish better connectivity with the youth.



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• The company has posted a decline in Net Profit – in percentage terms

(Quarter-4 ended March 2011). This is because of two reasons:

▫

Because of rising Input cost, as raw materials like steel, non-ferrous, andrubber-based components are not showing any signs of easing and

▫ Higher advertising spending during the World Cup Cricket.

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Future Roadmap of Hero

Honda Motors

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Future of Hero Group

• Hero MotoCorp can use the technology of Honda Motors till 2014. So,

in the mean time they should look for alternatives:

▫ Hero Group can enter into a new joint venture or technical tie-up with

another suitable partner like Kawasaki.

▫ Hero Group can setup their own R&D centre.

▫ Can forge technical alliances with various design schools and

engineering institutions across Europe for critical support includingtechnology partners.

▫ It can outsource its engines for the initial few years and till that time, it

can develop its R&D facility and can manufacture engines in-house.



New Branding and Positioning Strategy

• Hero Motocorp has the challenge to position itself separately from

its previous partner.

• With intensive advertisement campaigns over different channels, Hero Motocorp

also has to devise new ways to maintain there customer base.

•

Follow a strong branding and positioning strategy.• They should position themselves as such which ensures that customers perceive

them as the original Hero-Honda Motors .

New Marketing Perspective

• Further penetration into markets by targeting untapped areas. Also, revising the

segmentation and positioning approach can help target more number of customers.

• To focus on line extensions or launching new products.

• Maintaining the current levels of after sales services and the “service and repair”

centres.



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Pricing Strategies

• A pricing strategy that suits the level of products has to be adopted so that

in the customers‟ mind, a value perception can be maintained.

• A pricing strategy should be such that the customer gets the value formoney.

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Attracting New Talent & Retaining Talent

• Building credibility in the minds of prospective employees seeking

employment in the organization.

• Proper Human Resources Planning (HRP) to ensure an uninterrupted

source of human capital.

• Building an Employer Brand.

• Total Rewards Framework.

• Employee Value Proposition.

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Succession Planning, Training & Development

• Slow transition and proper Succession Planning for the second generationBM Munjal family members.

• Constant Training for existing employees.

• Induction programmes for new joinees to get on board as smoothly aspossible.

• Training to be imparted to the group‟s dealers.

• Proper career development plans for all employees to prevent stagnationand retain star performers.

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Cultural Issues

• Alignment of HR policies and business strategy.

• Culturally diverse workforce.

Other Issues

• Proper mandates for cross-functional teams (CFTs) to function successfully.

• Focus on communication between the top management and lower levels in theorganization.

• Compliance to labour laws for avoiding labour unrest.

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Capstone-Interim Hero Honda Break-Up[1]

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