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Future of Hero Honda Motors after the Joint Venture Breakup

(Interim Report Presentation)

Aadil Ahmed (01) Ashwini Kumar Jha (20) NitinBaranwal (55) Rituparna Das (71) SaketKumar Singh (74)

Presented by:

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 Motors 26% stake for around $1 billion, or a little less than half the current value of the stake in the stock market.

Reasons for Merger:

Hero Group: Market Knowledge(Custome rs) Distribution Reach Government Matters

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 contact with 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 and Dharuhera 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 ($233.7 million) 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 a break-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 launch and establish a New Brand for the company. Debt Equity suddenly increased from 0.01 to 0.5 ,this is because of increase in secured debt in FY 2011 i.e Rs.1458 crores for the acquisition of the 26% holding of the Company from HM Japan

Financing of funds during the breakup

(i) Bridge Financing: HIPL has pledged its entire shareholding of 17.33% in the Company in order to bridge finance its buyout of HM Japans 26% stake in the joint venture.

(ii) Funding from private equity investors: Preceding the pledge of shares of the Company by HIPL, HIPL had made an 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 Description Net Sales / Interest Earned / Operating Income Other Income Expenditure Interest Profit Before Depreciation and Tax

31-Mar-11

31-Dec-10

30-Sep-10

30-Jun-10 Amount(Rs. million)

53,909.30 743.4 -45,610.00 -81 8,961.70

51,616.60 620.3 -46,649.20 52.2 5,639.90

45,519.50 783.5 -39,440.10 20.7 6,883.60

42,966.10 534.2 -36,940.70 26.6 6,586.20

Depreciation
Profit before Tax Tax Net Profit Equity Capital Basic And Diluted EPS after Extraordinary item Nos. of Shares - Public Operating Profit Margin Net Profit Margin Cash EPS

-2,373.90
6,587.80 -1,571.70 5,016.10 399.4 25.12 90,457,144.00 16.77 9.3 37.01

-559.6
5,080.30 -790.3 4,290.00 399.4 21.48 95,428,010.00 10.83 8.31 24.28

-607.5
6,276.10 -1,220.10 5,056.00 399.4 25.32 95,428,010.00 15.08 11.11 28.36

-482.8
6,103.40 -1,186.50 4,916.90 399.4 24.62 95,428,010.00 15.27 11.44 27.04

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After Break-Up
SWOT ANALYSIS

Strengths:
Huge brand equity/reputation among customers Models/products in almost every bike segment 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 (contd)

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 Indian automobile 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

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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 Hero MotoCorp Ltd. The branding incorporates a fresh brand architecture, including a new name, logo and 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 to establish better connectivity with the youth.

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, and rubber-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

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 including technology 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 for money.

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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 generation BM Munjal family members.

Constant Training for existing employees.

Induction programmes for new joinees to get on board as smoothly as possible. Training to be imparted to the groups dealers. Proper career development plans for all employees to prevent stagnation and 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 the organization. Compliance to labour laws for avoiding labour unrest.