SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

FUNDAMENTAL ANALYSIS OF HERO HONDA

SUBMITTED TO

Prof. AVIJAN DUTTA

Submitted by:

NAME: NISHANT LOMASH

ROLL NO: 07/MBA/45

DEPARTMENT OF MANAGEMENT STUDIES

NATIONAL INSTITUTE OF TECHNOLOGY
DURGAPUR
 INDEX

1. COMPANIE’S PROFILE……………………………………………………………..………………..3

2. INDIAN ECONOMIC GROWTH...…..……………………………………………………………4

3. EVOLUTION OF THE INDIAN TWO-WHEELER INDUSTRY ……………………..…..…5

4. HERO HONDA AS A COMPANY ………………………………………………………………..16

5. FORCASTS …………………………………………………………………………………………….…23

6. PROFATIBALITY.………………………………………………………………………………..…….27

7. RESULT………………………………………………………………………………………………..….31
Type Public company BSE:HEROHONDA M

Founded January 19, 1984 in Gurgaon, Haryana, India

Headquarters Haryana, India

Om Prakash Munjal, Founder

Mr. Brijmohan Lall Munjal, Chairman
Key people Mr. Toshiaki Nakagawa, Joint Managing
Director
Mr. Pawan Munjal, Managing Director

Industry Automotive

Products Motorcycles, Scooters

Revenue U$ 2.8 billion

Website http://www.herohonda.com

HERO HONDA HEADQUARTERS

INDIAN ECONOMIC GROWTH:
The growth forecast from fiscal year 2008-09 to 7 per cent from 7.2 per cent
earlier. India has been increasingly attracting the attention of the global economic
community due to its good record of achieving annual GDP growth of 9.3 percent
in the previous three financial years ending March 2008. Globally, the country is
now seen as part of a new axis of economic power in the world. The favorable
macro economic conditions, both in domestic and global markets, and the easy
flow of global funds into the emerging markets, including India, had contributed
to this buoyancy in the Indian economy. However, the rising oil and commodity
prices globally, the domestic supply-side constraints, and resultant high inflation
and interest rates are causing some deceleration in the growth momentum of the
Indian economy. According to the provisional data available for the first quarter
of the fiscal year 2008-09, the industry sector has grown by 5.2 percent as
compared to 10.3 percent in the corresponding period of 2007-08. During the
same period, the agriculture sector has grown by 3.0 percent (4.4 percent), and
services sector has reported marginal slowdown from the last year growth rate of
11.8 percent. The investment-led growth in the industrial field witnessed in the
last couple of years is presently reporting downward trend, which has also
contributed to economic slowdown. The external trade of India continues its path
of high growth, albeit not at a pace seen in the previous few years. During the first
four months of the current fiscal year, its export has grown by 24.6 percent, as
compared to the corresponding period of the previous fiscal year, reaching US$
59.19 billion and its import has risen by 34.2 percent reaching US$ 100.42 billion.
The recent exponential rise in the international oil prices did contribute to a high
jump in India’s import bill. Due to increasing trade deficit, coupled with the exit of
fairly large amount of capital of Foreign Institutional Investors (FIIs) from the
country, the Indian Rupee having remained strong against US dollar for more than
a year, has now started depreciating.

With public transport failing to keep pace with the growing demand of urban
commuters, there are high probabilities that this segment will continue to grow.
Current estimates forecast growth at about 10 to 16 percent for the next three
years.
EVOLUTION OF THE INDIAN TWO-WHEELER INDUSTRY:
The two-wheeler industry (henceforth TWI) in India has been in existence since
1955. It consists of three segments viz., scooters, motorcycles, and mopeds. The
increase in sales volume of this industry is proof of its high growth. In 1971, sales
were around 0.1 million units per annum. But by 1998, this figure had risen to 3
million units per annum. Similarly, capacities of production have also increased
from about 0.2 million units of annual capacity in the seventies to more than 4
million units in the late nineties.

The TWI in India began operations within the framework of the national industrial
policy as espoused by the Industrial Policy Resolution of 1956. This resolution
divided the entire industrial sector into three groups, of which one contained
industries whose development was the exclusive responsibility of the State,
another included those industries in which both the State and the private sector
could participate and the last set of industries that could be developed exclusively
under private initiative within the guidelines and objectives laid out by the Five
Year Plans (CMIE, 1990).

Private investment was canalized and regulated through the extensive use of
licensing giving the State comprehensive control over the direction and pattern of
investment. Entry of firms, capacity expansion, choice of product and capacity mix
and technology, were all effectively controlled by the State in a bid to prevent the
concentration of economic power. However due to lapses in the system, fresh
policies were brought in at the end of the sixties.

Recognition of the deleterious effects of these policies led to the initiation of

reforms in 1975 which took on a more pronounced shape and acquired wider
scope under the New Economic Policy (NEP) in 1985. As part of these reforms,
several groups of industries were deli-censed. Controls over capacity expansion
were relaxed through the specification of the MES of production for several
Industries. Foreign investment was allowed in select industries and norms under
the MRTP Act were relaxed.

These reforms led to a rise in the trend rate of growth of real GDP from 3.7% in
the seventies to 5.4% in the eighties. However the major set of reforms came in
1991 in response to a series of macroeconomic crises that hit the Indian economy
in 1990-911.Several industries were deregulated, the Indian rupee was devalued
and made convertible on the current account and tariffs replaced quantitative
restrictions in the area of trade. The initiation of reforms led to a drop in the
growth of real GDP between 1990 –1992, but this averaged at about 5.5% per
annum after 1992. The decline in GDP in the years after reforms was the outcome
of devaluation and the concretionary fiscal and monetary policies taken in 1991 to
address the foreign exchange crisis. Thus the Industrial Policy in India moved from
a position of regulation and tight control in the sixties and seventies, to a more
liberalized one in the eighties and nineties.

A description of the evolution of the two wheeler industry in India is usefully split
up into four ten year periods. This division traces significant changes in economic
policy making. The first time-period, 1960-1969, was one during which the growth
of the two-wheeler industry was fostered through means like permitting foreign
collaborations and phasing out of non-manufacturing firms in the industry. The
period 1970-1980 saw state controls, through the use of the licensing system and
certain regulatory acts over the economy, at their peak. During 1981-1990
significant reforms were initiated in the country. The final time-period covers the
period 1991-1999 during which the reform process was deepened. The reforms
encompassed several areas like finance, trade, tax, industrial policy etc. We now
discuss in somewhat greater detail the principal characteristics of each sub
period.

a) 1960 – 1969
The automobile industry being classified as one of importance under the
Industrial Policy resolution of 1948 was therefore controlled and regulated by the
Government. In order to encourage manufacturing, besides restricting import of
complete vehicles, automobile assembler firms were phased out by 1952 (Tariff
Commission, 1968), and only manufacturing firms allowed to continue.
Production of automobiles was licensed, which meant that a firm required a
licensing approval in order to open a plant. It also meant that a firm’s capacity of
production was determined by the Government. During this period,
collaborations with foreign firms were encouraged.

b) 1970 – 1980
This was a period during which the overall growth rate of the two-wheeler
industry was high (Around 15% per annum). Furthermore, the levels of restriction
and control over the industry 11 were also high. The former was the result of the
steep oil price hikes in 1974 following which two-wheelers became popular
modes of personal transport because they offered higher fuel efficiency over
cars/jeeps8. On the other hand, the introduction of regulatory polices such as
MRTP and FERA resulted in a controlled industry. The impact of MRTP was limited
as it affected only large firms like Bajaj Auto Ltd. whose growth rates were curbed
as they came under the purview of this Act. However, FERA had a more far-
reaching effect as it caused foreign investment in India to be restricted. In the
motorcycle segment FERA did not cause technological stagnation, as a
consequence of which, new products nor firms entered the market since this
segment depended almost entirely on foreign collaborations for technology. The
scooter and moped segments on the other hand were technologically more
Self-sufficient and thus there were two new entrants in the scooter segment and
three in the moped segment.

c) 1981 – 1990
The technological backwardness of the Indian two-wheeler industry was one of
the reasons for the initiation of reforms in 1981. Foreign collaborations were
allowed for all two-wheelers up to an engine capacity of 100 cc. This prompted a
spate of new entries into the industry the majority of which entered the
motorcycle segment, bringing with them new technology that resulted in more
efficient production processes and products10. The variety in products available
also improved after ‘broad banding’ was allowed in the industry in 1985 as a part
of NEP. This, coupled with the announcement of the MES of production for the
two-wheeler industry11, gave firms the flexibility to choose an optimal product
and capacity mix which could better incorporate market demand into their
production strategy and thereby improve their capacity utilization and efficiency.
These reforms had two major effects on the industry: First, licensed capacities
went up to 1.1 million units per annum overshooting the 0.675 million units per
annum target set in the Sixth Plan. Second, several existing but weaker players
died out giving way to new entrants and superior products12.

The motorcycle industry witnessed a thorough shake-up in the 1980s following

the arrival of the Japanese manufacturers. This coincided with the arrival of
Suzuki's passenger car venture with Maruti. In a few years, all four of the major
Japanese motorcycle makers were in India. In each case, a joint venture with a
local industry was established. In all cases, existing manufacturers of two-
wheelers in India were involved. Thus TVS joined with Suzuki, Bajaj with Kawasaki,
Escorts with Yamaha, and Hero with Honda. The products were very similar in the
100 cc two-stroke class, with the exception of the Hero-Honda CB-100 four-stroke
model.
d) 1991 – 1999
The reforms that began in the late seventies underwent their most significant
change in 1991 through the liberalization of the economy. The two-wheeler
industry was completely deregulated. In the area of trade, several reforms were
introduced with the goal of making Indian exports competitive. The two-wheeler
industry in the nineties was characterized by a) an increase in the number of
brands available in the market which caused firms to compete on the basis of
product features and b) increase in sales volumes in the motorcycle segment vis-
à-vis the scooter segment reversing the traditional trend.

It has been noticed that the Auto Industry has grown in clusters of inter-
connected companies which are linked by commonalities and complementarities.
The major clusters are in and around Manesar in North, Pune in West, Chennai in
South, Jamshedpur-Kolkata in East and Indore in Central India. The envisaging in
the Eleventh Five Year Plan period to create a National Level Specialized
Education and Training Institute for Automotive Sector and to enhance the
transportation, communication and export infrastructure facilities through
concerned Ministries in and around these clusters. The Government will make
attempts to eliminate all the barriers to local competition and organize the
relevant Government Department and Educational and Research Institution in
and around the clusters.

INDUSTRIAL OUTLOOK AFTER 2000:

Global motorcycle production has increased from 30 million units in 2003 to 40

million units in 2005. Asia is the major producer of motorcycles in the world with
90% share. Within Asia, China accounts for 17 million units whereas India is at
second position with 7.7 million units in 2005 .Whereas India is at second position
with areas of concern inhibiting the growth of the industry and those that impact
on the competitiveness of the industry. Automobile industry on a whole is grown
very fast in past few years and India has grown as a small car hub in past few
years. With companies like Hyundai and GM coming up with small cars and
economy growth being good with low personal loan rates, there was seen heavy
growth in sales of four wheelers. In the mean while many people changed there
target of buying a bike to car and huge increase in sales of car were seen. But as
condition change in 2008 the loans rates became higher and steel prices and raw
materials rates sky rocking, the companies had seen a great decline in
profitability.

In case of two-wheeler manufacturers, Hero Honda’s efforts to boost financing

available to its customers through increasing tie ups at regional level augmented
sales by almost 27 per cent in 2007-2008.

Challenges to growth - Terms of Reference (TOR)- 3

In present scenario world over, it is an accepted view that competitiveness is no
longer totally dependent on variables like availability of cheap labour and
materials, low interest rates and fiscal incentives. The sustained competitiveness
in industry can come only through improvement in productivity both of labour as
well as capital. This calls for continuous efforts for innovation by the companies.
There is also a need to improve the cost competitiveness in the auto sector.
Global auto companies are increasingly sourcing components and vehicles from
low cost countries. Outsourcing is also being extended to services like engineering
design and other business processes. The globally competitive OEMs (Original
Equipment Manufacturers) and auto makers will make their base in places which
are high on productivity factor and low on costs, so that their competitive
advantage can be sustained. If India has to take advantage of this, its cost
competitiveness has to improve. The industry has identified certain factors which
are inhibiting the growth of automotive sector.
1. Availability – Fuel Price, Fuel quality and Alternative Fuel
Fuel Price a rapidly growing economy demands more supply of energy. As the UN
Agenda 21 states “Transportation is the major driving force for the growing
demand for energy. It is the largest end-user for energy in developed countries,
and the fastest growing one in developing countries”. Crude oil prices have been
increasing and may continue so for a long time due to the speculation (“fear
premium”) on continuing geopolitical instability. So there is an urgent need to
think of an alternate fuel policy. In the above back drop the development of
‘alternative fuel’ has gained greater importance. The Ministry of Non-
Conventional Energy Sources is working on the usage of Hydrogen as a fuel. The
work in this area need to be strengthened and expedited. The policies which
promote the commercial production, distribution and usage of such alternative
fuel and the automobiles using this alternative fuel need to be put in place.
Besides the emphasis on commercialization of the alternative fuel, ensuring the
availability of the fuel meeting the standards of Bharat Stage III and IV in time as
envisaged in the Auto Fuel Policy is equally important. It will be of great help to
the industry if the availability of Euro IV fuel can be ensured across the country
prior to the implementation of the emission norms.
This is important as there is a drastic change in the emission requirements of the
above two standards and vehicles designed for Bharat Stage IV will find it difficult
to run on fuel suitable for BS III norms. The Ministry of Petroleum and Natural Gas
has indicated
that as per the roadmap provided in the Auto Fuel Policy, progressive fuel up
gradation to Euro-IV equivalent and Bharat Stage-III are being planned from April,
2010 onwards, to be implemented based on the source-apportionment studies
currently under way. The present Auto Fuel Policy gives a road map till Euro IV
stage and 2010, It is felt that the Auto Fuel Policy beyond 2010 be also drawn
now.

2. Affordability – Taxation and related Issues

The industry feels an immediate need to bring down total tax to reduce cost of
ownership; to make input prices more competitive; to incentivize innovation for
low cost products - that are aimed at consumers at the lower income end and to
eliminate the incidence of embedded taxes/duties Internal taxes Currently the
taxes are levied at the city level (octroi), state level (sales tax, registration) and
the central level (excise). Depending on the location of manufacturing and the
suppliers, these taxes total to a substantive figure, even though excise duty on
vehicles have reduced from a high of 66% in the early 90s to 25% and 16% now.
The following table provides an idea of the amount of tax element today in a
vehicle. It shows that tax amounts to 36-40% of the cost of a vehicle on an
average. Cases where octroi is levied could increase it to 40-45%. Clearly this is a
very large figure and hampers the growth of the industry.
The move towards VAT has helped in reducing the cascading impact of state
taxes. However, even if VAT were to be implemented uniformly by all states
(which is not yet 16 the case) there would still be elements of unabsorbed taxes
which impact manufacturing competitiveness. These cascading taxes also impact
export competitiveness since the duty drawback or exemption schemes do not
account for all of the taxes that add up in manufacturing automobiles.
The draft National Manufacturing Strategy also recommends that there should be
an all India combined Goods and Service Tax (GST), with service sector taxation
integrated into the VAT framework instead of being a tax on turnover. This should
be accompanied by a withdrawal of all other taxes like central excise, central sales
tax, octroi, State-level sales tax, entry tax, stamp duties, transportation taxes and
other similar levies. A combined goods and service tax which is fully VAT able
replacing all other taxes except the registration tax to simplify administration and
reducing the tax incidence on a vehicle will help the industry. This will also
remove a major factor of locational competitive disadvantage based on differing
state and city level taxes it is perhaps time now to consider a uniform road tax
across the country.
3. Accessibility – Procedural delays, Transportation and Infrastructural
bottlenecks
Rationalization of documentation for interstate and inter-city movement of
vehicles and goods; Creation of simple, comprehensive and non-overlapping
system of procedures and regulations would improve the efficiency and
productivity of the transportation sector
and thus also create demand for automobiles. Regulations
One of the reasons that is used to explain our country’s poor FDI performance is
the high degree of administrative procedures and clearances. It is not the
clearances themselves which are the issue, but the time and effort taken to get
them. Of course some of the
clearances overlap and are now outdated. There is a need to streamline its
regulations to do away with unnecessary regulations and combine and merge
others to simplify them.

4. Internal trade barriers –movement restrictions, octroi, checking, etc

Even though we are a single country, there are a lot of restrictions on inter-city or
inter state movement of goods. Apart from the cost of octroi there is another
element of cost that is incurred due to the long queue at check posts which delay
shipments and increase logistics costs. The same is the case when goods cross
state borders.

5. Infrastructure Bottlenecks
Continued investment in infrastructure is essential. Infrastructure should keep
pace with growth in the trade. The delays in road and rail network need to be
immediately arrested. Power and fuel account for about 6% of manufacturing cost
and power cost in India is quite high. Similarly capacity addition in roads has
lagged behind traffic growth. Last mile road connectivity is a major bottleneck and
needs to be addressed on priority at all ports, especially for, Chennai, Mumbai
and JNPT.
Analysis of cost structure of Indian automotive sector and that of Malaysia,
Thailand and China reveal that deficiencies in logistics infrastructure contributes
to 1.1% to 2% difference in the cost structure.

4. Emission Norms:

The Auto Fuel Policy has recommended introduction of Euro IV equivalent

emission norms in 2010 in 11 cities and Euro III equivalent in rest of the country.
Industry can comply with this roadmap subject to the availability of the required
fuel in all retail outlets at least one year ahead of the introduction of emission
norms. The industry should gear up for complete alignment with ECE regulations
on emission and safety by 2015.
HERO HONDA AS A COMPANY:
Company Profile:

Two-wheelers in India are a synonymous to the brand Hero Honda, a unit of Hero
Group. Established in 1984 as a joint venture of The Hero Group (India) and
Honda Motor Co. Ltd. (Japan), Hero Honda is the 'world's No. 1' two-wheeler
company.
Driven by the trust of over 5 million customers, the product range of Hero Honda
commands a market share of approximately 50%. Starting with a sale figure of
only 43,000 units in 1985-86, the company has reached a high of 26, 21,400 units
in 2004-05. According to Pawan Munjal, Managing Director and CEO of Hero
Honda, the gap with its nearest rival, Bajaj Auto, is over a million units in 2004-05.

“Hero”, is the brand name used by the Munjal brothers in the year 1956 with the
flagship company Hero Cycles. The two-wheeler manufacturing business of
bicycle components had originally started in the 1940’s and turned into the
world’s largest bicycle manufacturer today. Hero, is a name synonymous with
two-wheelers in India today. The Munjals roll their own steel, make free wheel
bicycle critical components and have diversified into different ventures like
product design. The Hero Group philosophy is: “To provide excellent
transportation to the common man at easily affordable prices and to provide total
satisfaction in all its spheres of activity”. The Hero group vision is to build long
lasting relationships with everyone (customers, workers, dealers and vendors).
The Hero Group has a passion for setting higher standards and “Engineering
Satisfaction” is the prime motivation, way of life and work culture of the Group.
In the year 1984, Mr. Brijmohan Lal Munjal, the Chairman and Managing Director
of Hero Honda Motors (HHM), headed an alliance between the Munjal family and
Honda Motor Company Ltd. (HMC). HHM Mission Statement is: “We, at Hero
Honda, are continuously striving for synergy between technology, systems, and
human resources to provide products and services that meet the quality,
performance, and price aspirations of our customers. While doing so, we maintain
the highest standards of ethics and societal responsibilities, constantly innovate
products and processes, and develop teams that keep the momentum going to
take the company to excellence in the new millennium”. This alliance became one
of the most successful joint ventures in India, until the year 1999 when HMC had
announced a 100% subsidiary, Honda Motorcycle & Scooter India (HMSI). This
announcement caused the HHM stock price to decrease by 30 percent that same
day. Munjal had to come up with some new strategic decisions as, HMSI and
other foreign new entry companies were causing increased intensity of rivalry for
HHM.
Hero-Honda's l00cc motorcycle has been very successful in the domestic market
and also in several export markets. Consequently, an expansion of capacity is
planned to 160,000 units in 1993- 1994 and up to 300,000 units by 1995-1996.
Hero Honda is the World's No.1 two-wheeler manufacturing company having the
trust of more than 5 million customers. The company is a joint venture of Hero
 Cycles of India and Honda Motor of Japan. Achiever, CBZ, CD Dawn, Karizma,
Passion, Pleasure and Splendor are its famous brands on Indian.
Hero Honda Motorcycles Limited is an Indian manufacturer of motorcycles and
scooters. Hero Honda is a joint venture that began in 1984 between the Hero
group of India and Honda from Japan. It has been the world's biggest
manufacturer of 2-wheeled motorized vehicles since 2001, when it produced
1.3 million motorbikes in a single year. Hero Honda's Splendor is the world's
largest selling motorcycle. Its 2 plants are in Dharuhera and Gurgaon, both in
Haryana, India. It specializes in dual use motorcycles that are low powered but
very fuel efficient.

GROWTH:
The business growth of Hero Honda has been phenomenal throughout its early
days. The Munjal family started a modest business of bicycle components. Hero
Group expanded so big that by 2002 they had sold 86 million bicycles producing
16000 bicycles a day. Today Hero Honda has an assembly line of 9 different
models of motorcycles available. It holds the record for most popular bike in the
world by sales for Its Splendor model. Hero Honda Motors Limited was
established in joint venture with Honda Motors of Japan in 1984, to manufacture
motorcycles. It is currently the largest producer of Two Wheelers in the world. It
sold 3 million bikes in the year 2005-2006. Recently it has also entered in scooter
manufacturing, with its model PLEASURE mainly aimed at girls. The Hero Group
has done business differently right from the start and that is what has helped
them to achieve break-through in the competitive two-wheeler market. The
Group's low key, but focused, style of management has earned the company
plaudits amidst investors, employees, vendors and dealers, as also worldwide
recognition.
The growth of the Group through the years has been influenced by a number of
factors:
JUST-IN-TIME:
The Hero Group through the Hero Cycles Division was the first to introduce the
concept of just-in-time inventory. The Group boasts of superb operational
efficiencies. Every assembly line worker operates two machines simultaneously to
save time and improve productivity. The fact that most of the machines are either
developed or fabricated in-house, has resulted in low inventory levels. In Hero
Cycles Limited, the just-in-time inventory principle has been working since the
beginning of production in the unit and is functional even till date. This is the
Japanese style of production and in India; Hero is probably the only company to
have mastered the art of the just-in-time inventory principle.
ANCILLARISATION:
An integral part of the Group strategy of doing business differently was providing
support to ancillary units. There are over 300 ancillary units today, whose
production is dedicated to Hero's requirements and also a large number of other
vendors, which include some of the better known companies in the automotive
segment.
EMPLOYEE POLICY:
Another Striking feature within the Hero Group is the commitment and dedication
of its workers. There is no organized labor union and family members of
employees find ready employment within Hero. The philosophy with regard to
labor management is "Hero is growing, grow with Hero." When it comes to
workers' benefits, the Hero Group is known for providing facilities, further ahead
of the industry norms. Long before other companies did so, Hero was giving its
employees a uniform allowance, as well as House Rent Allowance (HRA) and
Leave Travel Allowance (LTA). Extra benefits took the form of medical check-ups,
not just for workers, but also for the immediate family members.
DEALER NETWORK:
The relationship of Hero Group with their dealers is unique in its closeness. The
dealers are considered a part of the Hero family. A nation-wide dealer network
comprising of over 5,000 outlets, and have a formidable distribution system in
place. Sales agents from Hero travels to all the corners of the country, visiting
dealers and send back daily postcards with information on the stock position that
day, turnover, fresh purchases, anticipated demand and also competitor action in
the region. The manufacturing units have a separate department to handle dealer
complaints and problems and the first response is always given in 24 hours.
FINANCIAL PLANNING:
The Hero Group benefits from the Group Chairman's financial acumen and his
grasp on technology, manufacturing and marketing. Group Company, Hero Cycles
Limited has one of the highest labor productivity rates in the world. In Hero
Honda Motors Limited, the focus is on financial and raw material management
and a low employee turnover.
QUALITY:
Quality at Hero is attained not just by modern plants and equipment and through
latest technology, but by enforcing a strict discipline. At the Group factories,
attaining quality standards is an everyday practice - a strictly pursued discipline. It
comes from an amalgamation of the latest technology with deep-rooted
experience derived from nearly four decades of hard labor. It is an attitude that
masters the challenge of growth and change - change in consumers' perceptions
about products and new aspirations arising from a new generation of buyers.
Constant technology up gradation ensures that the Group stays in the global
mainstream and maintains its competitive edge. With each of its foreign
collaborations, the Group goes onto strengthen its quality measures as per the
book. The Group also employs the services of independent experts from around
the world to assist in new design and production processes.
DIVERSIFICATION:
Throughout the years of enormous growth, the Group Chairman, Mr. Lall has
actively looked at diversification. A considerable level of backward integration in
its manufacturing activities has been ample in the Group's growth and led to the
establishment of the Hero Cycles Cold Rolling Division, Munjal and Sunbeam
Castings, Munjal Auto Components and Munjal Showa Limited amongst other
component-manufacturing units.
Then there were the expansion into the automotive segment with the setting up
of Majestic Auto Limited, where the first indigenously designed moped, Hero
Majestic, went into commercial production in 1978. Then came Hero Motors
which introduced Hero Puch, in collaboration with global technology leader Steyr
Daimler Puch of Austria. Hero Honda Motors was established in 1984 to
manufacture 100 cc motorcycles.
The Hero Group also took a venture into other segments like exports, financial
services, information technology, which includes customer response services and
software development. Further expansion is expected in the areas of Insurance
and Telecommunication.
The Hero Group's phenomenal growth is the result of constant innovations, a
close watch on costs and the dynamic leadership of the Group Chairman,
characterized by a culture of entrepreneurship, of right attitudes and building
stronger relationships with investors, partners, vendors and dealers and
customers.
DEBT STRUCTURE:
Hero Honda has been a debt free company for the last 7 years. The unsecured
loan of Rs.132 crore from the state government of Haryana on account of sales
tax deferment is interest free and has no holding costs. Net interest payment by
the company has been negative during the last few years.
FORCASTS:

EXPECTED SALES:
The predicted sales for various years have been given below.

Year Two
Wheelers
2006 - 07 8629809
2007 - 08 9931260
2008 – 09(E) 11009643
2009 – 10 (E) 12955455
2010 – 11(E) 15366462
2011 – 12(E) 17849003

IMPLICATIONS OF BUDGUT 2008-2009:

 Reduction in excise duties on hybrid cars:

Excise duty reduced to 14% from 24% on hybrid cars manufactured by auto
manufacturers effective from 01 April 2008.

Impact on Auto-mobile manufacturers: Very positive for manufacturer companies

of hybrid cars.

• Reduction of excise duty on small cars.

Excise duty reduced to 12% from 16% on small cars manufactured by small car
manufacturers effective from 01 April 2008.

Impact on small car manufacturers:

Very positive for small car manufacturers like Maruti, Hyundai, etc. Small car
manufacturers may cut their prices due to their savings on lower excise duty.
Generally, manufacturing companies transfer most of this type of benefit to the
end customers by cutting its market price for car.
• Reduction in excise duty on two-wheelers:

Excise duty reduced to 12% from 16% on two-wheeler manufacturer companies.

Impact on two wheeler manufacturer: Positive for two-wheeler manufacturer
companies like Bajaj Auto, Hero Honda, etc. generally, manufacturing companies
transfer this type of benefit to the customers by making available cheaper two-
wheelers in the market.

• The corpus of rural infrastructure development fund to be raised to Rs.14, 000cr

more corpuses provided for rural infrastructure development fund will ultimately
become beneficial to Auto-mobile industry as improved infrastructure activities
like developed roads, bridges, etc will benefit to Auto-mobile industry.

OTHER ASSUMPTIONS:
INFLATION:
In the year 2008-2009 the assumptions on inflation on an average can be 7.5% -
8.75% on an average. For the year 2009-2010 inflation can be 5- 6.5 % on an
average.
EFFECT ON COST OF RAW MATERIAL:
It depends on inflation of steel and commodities market. The input cost of steel
has increased heavily this year. In year 2008-2009 the prices of steel are expected
to rise by 25-30% on an average. And average price hike in 2009-2010 may be 18-
22%.
EFFECT ON EXPORT:
Due to financial crisis the export on two wheelers can go down a little. One can
expect the decline in export by 3-4% in2008-2009 but once again it will increase
and go back as on 2007-2008 in 2009-2010.
SALARIES:
Salaries can go up on an average by 18-20% due to high level of inflation in year
2008-2009. The increase in salary in 2009-2010 may be 15-18%.
The sixth pay commission has recommended a 40% hike on salaries as on January
2006. Thus, there will be a one time arrears payment to the employees of central
government and quasi central government entities, (approx 4mn employees).
With election in 10 states scheduled during the next 13 months, we expect similar
announcements by state governments. Also, the wage negotiations for PSU banks
and Oil PSUs are under progress (due effective from Nov 2007 and Jan 2007
respectively). In such a scenario, around 8 mn employees are likely to benefit
during the next 12 to 18 months. This, together with significant revision in tax
slabs can further boost demand. In our view, the net increase in cash will be
equivalent to a down payment of a car or 4 to 6 months installment of a compact
car. In the tables below, we have tried to determine the average one time income
due to arrears accretion and the reduction in tax liability due to fiscal measures.
The quantum of cash availability is likely to provide boost to the demand for
passenger cars.
However, it should be noted that six pay commission is still a recommendation. It
has not yet been approved by the Government. This makes us believe that the
benefit of the sixth pay commission shall yield results not before 4QFY09, as there
is generally a gap of 6 months between approval by Government and actual
benefits filtering to the employees.
POLLUTION CONTROL NORMS:
Emission standards are going higher and higher every year. And there is expected
introduction of Euro IV equivalent emission norms in 2010 in 11 cities and Euro III
equivalent in rest of the country.
FUEL PRICES:
The fuel prices are very important factor in coming years to be looked in to. It can
go up by 14-16% in 2008-2009 and 20-22% next year 2009-2010 (post election).
Duel effect of Fuel prices:
1. The sale of bike will go down due to high fuel prices. It can go down by 2-
3% in 2008-2009 and 4-5% in 2009-2010.
2. The Supply Chain and transportation cost will increase by 10-12% in 2008-
2009 and 14-16% in 2009-2010.
EXPECTED GROWTH IN FUTURE:
In 2008-09, Hero Honda sales are expected to grow by around 11 per cent in
value-terms, anticipated growth recovery export growth.

IN MILLIONS

FY 08 FY 09 FY 10

YOY GROWTH 12.821% 11.294065% 16.785393%

PAT 9871.97 10491.5901 12520.0408

Taking in to considerations these increases in expenditure based on the

assumptions of inflation, liquidity crisis and financial conditions.
Year on year 2008-2009 2009-2010
Net sales 09% 12%
cost of goods sold 14% 10%
selling and administrative expenses 14% 14%
other(income ) and expenses 02% 04%
interest net expenses(Income) 06% 04%
PROFATIBALITY:
We can see the a deep decrease in profatibility as in 2007 -2008 many people did
not buy bike’s and 2 wheelers and went for second hand cars (secondary market)
as an option with eased monetary supply.

FIG 1: PAT change in past few years (in Crore)

FIG2:Expected growth in PAT in next two years

FINANCIAL STATEMENTS :

2008 2007 2006 2005 2004 2003

Current assets
cash and cash equivalent 1310.92 357 1587 176.015 371.2 243.3
trade account and receivables 2974.38 3352.48 1586.5 895.49 438.01 1414.88
inventory 3171.04 2755.84 2265.52 2042.62 1881.99 2009.22
prepaid expenses and others 1911.49 2666.58 2773.08 2431.2 2398.7 1097.7
total current assets 9367.83 9132.72 8212.1 5545.325 5089.9 4765.1
investment(held to maturity 1599.99 1621.29 1595.18 1596.07 1601.56 15.19
securities)
investment in mutual funds 24617.11 18522.31 19680.81 18973.12 14633.41 12467.81
investment in equity 264.58 252.42 241.75 211.14 153.96 145.29
Property, plant and equipments 15494.75 13,401.08 9765.51 7049.94 5860.07 5151.67
total assets 51344.26 42929.82 39495.35 33375.595 27338.9 22545.06

Liabilities
trade accounts payable 7560.7 5548.2 6464.7 6619.6 6989.9 4099.4
accrued expenses 494.82 417.58 305.02 247.5 195.7 177.8
Indian income taxes 63.9 38.5 40.3 45.7 113.5 109
others current liabilities 5689.15 4871.05 4266.25 3538.05 3048.75 2715.85
long term debt due with in one yr 184.93 206.1 227.27 222.83 190.23 290.78
current liabilities 13993.5 11081.43 11303.54 10673.68 10538.08 7392.83
Deferred income taxes 1391.67 1529.68 1375.63 981.67 964.78 770.69
Long term debt 1135.07 1445.6 1630.53 1920.45 1784.76 1380.57
total liabilities 16520.24 14056.71 14309.7 13575.8 13287.62 9544.09

Stockholder's equity
common stock value; Rs 2 (previous 3399.38 399.38 399.38 399.38 399.38 399.38
yrs Rs2)
capital surplus 0.03 0.03 0.03 0.03 0.03 0.03
retained earnings 34424.61 28465.2 24788.66 19400.38 13681.87 12601.56
total stockholder's equity 34824.02 28864.61 25188.07 19799.79 14081.28 13000.97
total liabilities and stockholder's 51344.26 42921.32 39497.77 33375.59 27368.9 22545.06
equity
FORCASTED P/L ACCOUNT:

2008-2009 2009-2010
Profit/(loss) account
exp growth 0.11921209 0.16987664
net profit tax for the years asper audited accounts add/(less):
Profit/(loss)of 10832.63 12672.8408
income from investments( unrealised gain/loss)
affiliated company 10.7 12.8
held to maturity securities 0 0
exchange fiuctuations 0
Deprectation effect of exchange fluctuations 50 80
Deprectation on leased assets 0 0
lease rentals paid 0 0
interest portions of lease rentals 0 0
provision for deferred tax -280.33 -60
Deferred revenue expenditure
Net Income as per US GAAP 10491.6 12520.041
Statement of income
Net sales (1.09,1.12) 119332.29 133652.165
cost of goods sold(1.14)(1.10) 91327.9805 100460.779
selling and adminstrative expenses(1.09) 9825.774 11201.3824
other(income ) and expenses (1.02) -2032.9164 -2093.9039
interest net expenses(Income)(1.04) -408.234 -420.48102
total expenses 103594.905 114176.546
income before income tax(PBT) 15737.3851 19475.619
indian taxes on income 5245.79504 6955.57821
PAT 10491.5901 12520.0408
net earnings per share
On share value of Rs 2 each(EPS) 52.45 62.600204
averge common stock outstanding (numbers)
DPS 16 19
CHANGE IN PAT:

EPS:
RESULTS:

Price Rs826
Target Price Rs900-910
Investment Period 15-18 months

Stock Info

Sector Automobile
Market Cap (Rs cr) 16,495
Beta 0.4
52 WK High / Low 895/561
Avg Daily Volume 69681
Face Value (Rs) 2
BSE Code 500182
NSE Code HEROHONDA
Reuters Code HROH.BO
Bloomberg Code HH IN

Shareholding Pattern (%)

Promoters 55.0
MF/Banks/Indian FIs 13.3
FII/ NRIs/ OCBs 22.9
Indian Public 8.8