Hero Honda Gains in Mumbai After Hero Group Agrees to Buy Honda's Stake

Hero Honda Motors Ltd., maker of half the motorcycles sold in India, surged the most in more than 1 1/2 years after saying Honda Motor Co.’s exit from the venture will lead to lower royalty payments and help boost exports.

Hero Honda climbed 18 percent, the most since May 2009, to 1,980.50 rupees at the 3:30 p.m. close in Mumbai trading. The stock fell 8.3 percent in a month through Dec. 16 on concern it would need to pay more to use Honda’s technology following the Tokyo-based company’s exit from the venture.

The New Delhi-based motorcycle maker’s royalty payments will decline from as early as January as it will develop more models in-house, Hero Group said last week after agreeing to buy Honda’s 26 percent stake in the venture. The company will also be freed from restraints now, allowing it to begin sales in markets such as Africa and Indonesia, said Ashish Nigam, an analyst at Antique Stock Broking Ltd.

“The management has addressed a very serious concern by categorically stating that the underlying royalty rates will not increase,” Mumbai-based analyst Nigam wrote in a note to clients today. The company previously “missed out” on export opportunities that have helped boost sales for Bajaj Auto Ltd. because of the ties with Honda, he said.

Nigam raised his recommendation on Hero Honda to “buy” from “hold.” He also increased his forecast for Hero Honda’s unit exports next fiscal year by 1 percent.

Phased Manner

Hero Group, controlled by the Munjal family, will buy Honda’s 26 percent stake in a “phased manner,” the companies said in a statement on Dec. 16, without saying how much it will pay. The group already owns 26 percent of the motorcycle-maker, which had a market value of $7.4 billion based on the Dec. 16 closing price, according to data compiled by Bloomberg. India’s markets were closed on Dec. 17 for a holiday.

Honda, the world’s largest motorcycle maker, plans to exit the venture to focus on its fully owned unit in India. The company, which formed Hero Honda with Hero Group in 1984, rose 1.4 percent to 3,280 yen at the close of trading in Tokyo.

“The current demand for two-wheelers in the domestic market is quite robust,” Vineet Hetamasaria and Nikhil Deshpande, analysts at Infinity.com Financial Securities Ltd., wrote in a report to clients today. That gives room to Hero Honda and Honda “to coexist and grow.”

Hero Honda plans to export motorcycles to markets in Latin America and Asia after Honda exits, Anil Dua, head of sales and marketing at the company, said in a conference call today.

Hero Honda will create a new brand and search for “new markets” overseas as Honda quits the venture, Chief Executive Officer Pawan Kant Munjal said on Dec. 16. The motorcycle-maker paid 2.6 percent of sales to Honda as royalties in the fiscal year ended in March, according to its annual report.

To contact the reporter on this story: 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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