Hero Buys Honda's $1.9 Billion Stake in India Motorbike Maker on Exports

Hero Group plans to boost overseas sales at India’s biggest motorcycle maker and develop own-brand models after agreeing to buy Honda Motor Co.’s $1.9 billion stake in the company.

“We have to go out and look for new markets,” Pawan Kant Munjal, the son of Hero Group’s chairman and the chief executive officer of motorcycle maker Hero Honda Motors Ltd., said yesterday at a press conference in New Delhi. “Over the years, we hope to build volume, which will help our profit margins.”

Scrapping the Honda tie-up will free Hero Group from restraints in the partnership, enabling it to begin sales in more overseas markets as it seeks to reverse Hero Honda’s biggest profit drop in three years. The motorcycle maker will also add new products and use its existing sales network to fend off rising competition from Honda’s own unit in India, the world’s second-largest two-wheeler market.

“The question is how fast and far they can grow their research and development facilities,” said Juergen Maier, a fund manager at Raiffeisen Capital Management in Vienna, who helps manages about $1.3 billion of assets, including Hero Honda shares. For Tokyo-based Honda, “it won’t be easy for them to grow their market share as the market is still dominated by Hero Honda and Bajaj.”

Phased Purchase

Hero Group, controlled by the Munjal family, will buy Honda’s 26 percent stake in a “phased manner,” the companies said in a statement yesterday, without saying how much it will pay. The purchase will be financed through debt, Sunil Munjal, a Hero Honda board member and Pawan Munjal’s brother, said at the press conference. No advisers worked on the deal, he said.

Hero Group, controlled by billionaire Chairman Brijmohan Lall Munjal, already owns 26 percent of the motorcycle-maker, which has a market value of $7.4 billion, according to data compiled by Bloomberg. The group, which grew from a maker of bicycle parts, also has interests in call-centers and auto components.

Hero Honda, based in New Delhi, gained 3.7 percent to 1,681.7 rupees at close of trading in Mumbai yesterday before the deal was announced. The market is closed today for a religious holiday.

Honda, the world’s largest motorcycle maker, will continue to license models to Hero Honda as it expands its own unit in India. Hero Honda will add new models under a new brand name, it said.

In-house Models

The introduction of models developed in-house will help curb the amount Hero Honda pays for using Honda technology. These royalty payments will fall from January, Pawan Munjal said. Hero Honda paid 2.6 percent of sales as royalty to the Japanese company in the fiscal year ended in March, according to its annual report.

“Very soon all the current products we have in our portfolio will have no royalty,” Pawan Munjal said. The company is also pushing ahead with plans to build a fourth factory and may make an announcement soon, he said.

Honda decided to exit the venture as India has “completely changed” from when Hero Honda was formed in 1984, Fumihiko Ike, Honda’s managing director and chief operating officer for regional operations, Asia and Oceania, said at the press conference.

“The main objective of setting up this company 26 years ago was to explore the Indian market,” he said. “No one could imagine that it would change so drastically.”

The move will allow Honda to focus on its own India unit, set up in 2001, which is growing more quickly than Hero Honda. Honda Motorcycle & Scooter India Pvt.’s local sales surged 44 percent to 1.03 million units in the eight months ended in November, outpacing a 13 percent gain to 3.36 million for Hero Honda, according to the Society of Indian Automobile Manufacturers. The overall two-wheeler market grew 28 percent to 7.68 million.

Slumping Market Share

Hero Honda has lost market share on competition from Honda and Bajaj Auto Ltd., India’s second-biggest motorcycle-maker. The motorcycle-maker had 43 percent of the market in the three months ended in September compared with 56 percent in the three months ended in March, 2009, Mumbai-based First Global Securities Ltd. said in a Dec. 10 note.

Hero Honda also posted its biggest drop in quarterly profit in three years in the three months ended in September as rising raw-material costs eroded gains from higher sales. Net income fell 15 percent to 5.06 billion rupees ($111 million).

Honda said in March it will invest about $99 million to build a second motorcycle plant in India with a capacity to make 600,000 units a year and start production in the second half of 2011. The company, Japan’s second-biggest automaker, also has a venture that sells City and Accord cars in India.

To contact the reporters on this story: Subramaniam Sharma in New Delhi at ssharma@bloomberg.net; Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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