Jan. 15 (Bloomberg) -- Hero MotoCorp Ltd., India’s biggest motorcycle maker, is wooing rural buyers with promotions such as free health checkups after competition from former partner Honda Motor Co. prompted the first drop in sales in almost a decade.
The New Delhi-based company, which gets over 45 percent of its revenue from sales in non-urban areas in the world’s second-largest market for the two wheelers, is organizing free vehicle servicing and medical camps in over 100,000 villages around the country to bolster its presence and attract new customers, according to Anil Dua, the senior vice president for marketing and sales at Hero.
“We’ve stepped up our engagement with rural India,” Dua said in an interview. “The outlook looks promising on account of several factors” including rising rural income, better farm output and the government’s social spending programs, he said.
Hero is seeking to fortify its leadership in the South Asian country’s villages and small towns after Tokyo-based Honda’s deliveries of scooters and motorcycles jumped 37 percent in the April-December period compared with a 2 percent decline for the Indian manufacturer. Honda, which in 2010 exited a 26-year partnership with Hero, is targeting a 30 percent increase in sales to 2.75 million units in the year ending March 31.
Net income at Hero dropped 27 percent in the three months ended Sept. 30, the first decline in six quarters, while revenue fell 11 percent, the first slump since 2003 as competition from the Japanese maker hurt sales. Revenue growth in the year ending March 31 may be the slowest since 1992, according to the median estimate of 61 analysts compiled by Bloomberg. The Indian company will announce its earnings for the three months ended Dec. 30 on Jan. 17.
Shares of Hero gained 2 percent in 2012 compared with a 26 percent advance in the benchmark BSE Ltd.’s Sensitive Index. The stock rose 0.1 percent to 1,844.60 rupees at the close in Mumbai. Local rival Bajaj Auto Ltd. rallied 38 percent last year.
“The rural market is the right strategy for Hero as the penetration in these markets is low,” said Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai who recommends adding the stock. “Hero can see success provided they market their products properly. They will need to bring customers to the Hero brand from the old Hero Honda brand.”
The company is still relying on technology from Honda for its best sellers, the 100-cc Splendor and Passion, and is struggling to introduce new independent models since the world’s biggest maker parted ways two years ago. It introduced four models in the period, versus at least five by Bajaj and seven by Honda.
Hero, controlled by billionaire Chairman Brijmohan Lall Munjal, will bring out its locally developed model only in the year ended March 31, 2014, according to Dua. Honda’s sales of models in the 110-150 cc range surged 49 percent in the nine months to December, compared with 6.5 percent for Hero and a 14 percent decline at Bajaj, according to data provided by the Society of Indian Automobile Manufacturers.
“It is very tough to maintain your image and market share with the same old products,” said Basudeb Banerjee, an analyst in Mumbai at Quant Broking Pvt., who recommends selling the stock. “Structurally, Hero has been losing market share as Honda has gained. If you continue to lose share, your margins will suffer. This is just the beginning for Honda in India.”
Of the 66 analysts who track the stock, 27 rate it a sell, while 19 advise buying it, according to data compiled by Bloomberg. The company sold 6.23 million units in the year ended March 31, and has a capacity to produce 7 million two-wheelers annually.
Hero is counting on rising incomes in rural areas as farm output picks up and the government spends on social programs, said Dua. Food grain production climbed to a record 257.4 million metric tons in the year ended June 30, according to the agriculture ministry.
Wheat output in India, the world’s second-biggest producer, may reach a record for a seventh year as cold weather boosts yield prospects and record domestic prices spur planting, according to the state-owned Directorate of Wheat Research. Prices in India jumped 29 percent last year after exports rose and the government increased the minimum price paid to farmers to a record.
India’s rural spending was $67.57 billion between 2009-10 and 2011-12, compared to urban consumption of $53.95 billion in the same period, according to a November 2012 note by India Brand Equity Foundation. Rising incomes and low penetration of consumer durables are the reasons cited for the growth in spending, according to the report.
“Honda doesn’t have that great a presence in rural areas and a greater rural presence will help Hero mitigate some of the losses in market share in urban areas,” said Yaresh Kothari, an analyst at Angel Broking Ltd. in Mumbai. “In the long term, the rural market will grow as the penetration is low and spending levels will increase.”
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