MFC 2010-12

FUNDAMENTAL ANALYSIS HERO HONDA

CHAPTER PARTICUALS PAGE NO

1 INDIAN ECONOMIC ENVIRONMENT

2 AN OVERVIEW OF INDIAN AUTOMOBILE INDUSTRY

3 HERO HONDA :COMPANY PROFILE

4 COMPANY ANALYSIS

5

6

PROJECTED PROFIT AND LOSS ACCOUNT

BALANCE SHEET

INDIAN ECONOMIC ENVIRONMENT

India’s growth was powered by a robust performance by the manufacturing sector and an improved performance by the infrastructure sector. The manufacturing sector clocked consistent double-digit growth from October 2009, with the consumer durables and capital goods sectors leading the way.

As 2010 progressed, India nonchalantly brushed aside the side effects of the global economic crisis and veered back towards the path of growth. The global economy, especially the crucial US economy, started showing early signs of recovery towards the end of 2009. However India’s path to recovery started much earlier.

Our growth in 2010-11 has been swift and broad-based. The economy is back to its pre-crisis growth, while agriculture has shown a rebound; industry is regaining its earlier momentum. Service sector continues its near double digit run. Fiscal consolidation has been impressive. This year has also seen significant progress in those critical institutional reforms that would set the pace for double-digit growth in the near future.

Talking about the economic situation of the country over the past 12 months, the Gross Domestic Product (GDP) of India is estimated to have grown at 8.6% in 2010-11 in real terms. In 2010-11 agriculture is estimated to have grown at 5.4%, industry at 8.1% and services at 9.6%. All three sectors are contributing to the consolidation of growth. More importantly, the economy has shown remarkable resilience to both external and domestic shocks.

INFLATION:

Inflation generally refers to a situation where there is a contradictory between the demand and supply position in a country. India as a growing economy has also a serious problem of inflation. Amidst high food inflation, falling industry output and uncertain crude oil prices, the Reserve Bank of India hiked key policy rates for the eighth time since last March by 25 basis points in its mid quarterly review on 17th March this year.

The Repo and Reverse Repo rates were hiked by 25 bps to 6.75% and 5.75%, respectively. CRR was left unchanged at 6%. RBI said it was likely to maintain its anti-inflationary bias, reinforcing the market expectations that further rate increases are in the pipeline, and raised its forecast for headline inflation at the end of March to 8% from its earlier 7%.

“The underlying inflationary pressures have accentuated, even as risks to growth are emerging. Rising global commodity prices, particularly oil, are a major contributor to both developments,” the Central Bank said.

In the last monetary policy review, Subbarao raised policy rates by 25 bps meeting market expectations and raised inflation forecast for the fiscal by 150 bps to 7%, drawing criticism that prognosis and policies are not in sync.

“The policy tone is hawkish, prioritizing inflation over growth,” said Siddharth Sanyal chief India economist at Barclays Capital in Mumbai.

“We have penciled in plus 25 basis points hike every quarter, with risks that they could do more,” said Radhika Rao, economist at Forecast Pte in Singapore.

RBI has raised its policy rates seven times since March, 2010, with a hike of 175 bps in short term lending (Repo) rate and 225 bps in short term borrowings (reverse) repo rates in its bid to arrest inflation. Date earlier in 2nd

week of March showed annual inflation accelerated unexpectedly to 8.31% in February, from 8.23% previous month, defying forecasts of a slowdown. While food inflation has fallen from peaks of 20% in early 2010, it remains stubbornly high at 9.42%

RBI has been the region’s most active in raising rates as the country climbs out of the financial downturn with growth projected at 9% for the next fiscal year starting from April 1.

EXCHANGE RATE:

Exchange rate is the rate of rupee against dollar. The current exchange rate of Indian rupee against American dollar varies between Rs. 45-46. The industries which depends more on exports and imports are severely affected by the fluctuation in dollar value which directly affects their profitability.

 Indian Rupees to 1 USD (invert,data)

120 days latest (Mar 18)45.0364

lowest (Nov 5)44.0216

highest (Nov 30)45.9609

INFRASTRUCTURE:

Infrastructure is one of the most important tools for development of any country, especially for a developing economy like India. For the fiscal 2011-12, an allocation of over Rs.2,14,000 crore is being made for this sector, which is 23.3% higher than current year. This amounts to 48.5% of the Gross Budgetary support to plan expenditure.

Government established India infrastructure fiancé company limited (IIFCL) to provide long-term financial assistance to infrastructure projects. It is expected to achieve a cumulative disbursement target of Rs.20,000 crore by March 31, 2011 and Rs.25,000 crore by March 31, 2012. The take out financing scheme announced in the budget 2009-10 has been implemented and seven projects have been sanctioned with a debt of Rs.1,500 crore. Another Rs.5,000 crore will be sanctioned during 2011-12.

To attract foreign funds for the infrastructure financing, it is proposed to create Special Vehicles in the form of notified infrastructure debt funds.

GOVERNMENT REVENUE, EXPENDITURE AND DEFICITS:

Last year govt. expenditure was around Rs.11,08,749 crore but in the current budget the govt. expenditures has been pegged at Rs.12,57,729 crore, which shows an increased allocation as compared to the last fiscal year.

The fiscal deficit last year was 6.4%, but in the current budget it came down to 5.1%. Govt. has targeted to decrease the fiscal deficit by to 4.6% of GDP for the year 2011-12. But it seems difficult to achieve due to higher inflation, lower fuel subsidy and sharp increase in wages MNREGA, etc.

2011-12 BUDGET:

The budget for 2011-12 is as a transition towards a more transparent and result oriented economic management system in India. Govt. is taking major steps in simplifying and placing the administrative procedures concerning taxation, trade and tariffs and social transfers on electronic interface, free of discretion and bureaucratic delays. This will set the tone for a newer, vibrant and more efficient economy.

In this budget, the automobile sector has been granted full exemption from basic customs duty and SAD and concessional CVD @5% is being extended to specified parts of the hybrid vehicles, namely, battery pack, battery chargers, AC/DC electric motors and motor controllers. The concession is subject to actual user condition and will be available till 31.03.2013.

INDIAN AUTOMOBILE INDUSTRY ANALYSIS

The Indian automobile market is the second fastest growing in the world and has shown nearly 30% growth this year. World over, substantial investment are being made in the field of hybrid and electric mobility. To provide green and clean transportation for the masses, National Mission for Hybrid and Electric Vehicles will be launched in collaboration with all stakeholders.

After growing rapidly at 5% in 2008-09 the two wheeler industry was back on track in 2009-10. Sales grew by 24% and crossed 10 million units for the first time ever. Exports contributed 11% to overall sales compared to 12% in the previous fiscal.

Motorcycle sales grew by 24% and clocked more than 8.4 million units. The strong revival in the scooter market continued during 2009-10 and sales grew by 25% from 1.2 million units to 1.5 million. Overall, scooters accounted for 16% of the two wheeler market. Interestingly, mopeds, whose share in the two wheeler space has been declining steadily over the year, bucked the trend during the year in review. Mopeds notched the highest growth in amongst the three product categories in two-wheelers, with sales going up by 28%, from 4.46 lakh units to 5.71 lakh units. The surprising uptrend in the moped category points to the fact that govt. schemes at lower end of the socio-economic pyramid have started having some impact.

SALES:

The automobile sector sales had increased during the past years and it is also expected to grow substantially in the future. The Indian Automobile Domestic Sales Trends are as follows:

AUTOMOBILE DOMESTIC SALES TRENDS (No. of vehicles sold)Category 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Passenger Vehicles

902,096 1,061,572 1,143,076 1,379,979 1,549,882 1,552,703 1,949,776

Commercial Vehicles

260,114 318,430 351,041 467,765 490,494 384,194 531,395

Three Wheelers

284,078 307,862 359,920 403,910 364,781 349,727 440,368

Two Wheelers

5,364,249 6,209,765 7,052,391 7,872,334 7,249,278 7,437,619 9,371,231

Total 6,810,537 7,897,629 8,906,428 10,123,988 9,654,435 9,724,243 12,292,770

PRODUCTION:

As compared to the increase in Sales that shows the growing demand for automobiles, the Production has also increased over the years. The Indian Automobile production trend is as follows:

AUTOMOBILE PRODUCTION TRENDS (No. of Vehicles Produced)Category 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Passenger Vehicles

989,560 1,209,876 1,309,300 1,545,223 1,777,583 1,838,593 2,351,240

Commercial Vehicles

275,040 353,703 391,083 519,982 549,006 416,870 566,608

Three Wheelers

365,223 374,445 434,423 556,126 500,660 497,020 619,093

Two Wheelers

5,622,741 6,529,829 7,608,697 8,466,666 8,026,681 8,419,792 10,512,889

Total 7,243,564 8,467,853 9,743,503 11,087,997 10,853,930 11,172,275 14,049,830

Competition:

The major competitors in the Indian automobile market are Hero Honda, Bajaj Auto, TVS, Yamaha, Nissan, etc. The result of the competition among these competitive industries has made the automobile sector a booming market; as a result India has become one of the International players in the automobile market. It is also expected that the Automobile Industry in India would be the 7th largest automobile market by the year 2016.

COMPETITION IN INDIAN AUTOMOBILE INDUSTRYCompanies Last Price Market Cap. (Rs. In Cr) Sales Turnover Net Profit Total AssetsHero Honda 1,434.25 28,640.18 15,860.51 2,231.83 3,531.05Bajaj 1,355.50 39,223.70 11,920.98 1,700.11 4,266.92TVS 56.50 2,684.24 4,430.13 88.02 1,868.67LML 9.00 73.79 315.44 -50.64 -75.57Kinetic 20.25 55.78 6.36 -6.56 25.19

COMPANY ANALYSIS

HERO HONDA MOTORS PVT LTD

Hero Honda is a joint venture, set up in the year 1984 between India’s Hero Group and Japan’s Honda Motor Co. It has been the world’s largest two wheeler company for 10 years in succession with a customer base of more than 30 million. It has 48% share of the domestic two wheeler market; in fact, Every second motorcycle sold in the country rolls out from one of the Hero Honda’s factory. The company’s vision is to provide world class, affordable and durable personal transport for masses.

The company has three, globally benchmarked, state of the art manufacturing facilities. It an extensive sales and service network of over 4500 customer touch points, which include authorized dealerships, service and spare parts outlets and dealer-appointed outlets. Hero Honda has a widespread reach in rural India, panning over 100,000 villages.

Hero Honda: Product Portfolio:

Hero Honda offers best in-class motorcycles that set performance and fuel economy standards across various market segments. In the 100 cc segment the Company offers a wide spectrum of bikes starting from CD Dawn, CD Deluxe, Splendor Plus, Splendor NXG, Passion and Passion Pro. The 125cc segment offers Glamour, Super Splendor and Glamour FI. The Company also has single offering called Achiever in 135cc segment in the 150cc and above the Company offers premium brands like Hunk, CBZ X-treme, Karizma and the newly-launched fuel injection Karizma ZMR. Besides, Hero Honda offers a 100 cc scooter Pleasure. Besides the regular sales channels, the scooter is sold through special women only showrooms called “Just4her”

Company Brand:

The company connects and engages with its customers through various initiatives and campaigns based on sports, music and entertainment platform.

MTV Roadies and Sa re ga ma pa are some of the popular ones amongst the youth segment. Hero Honda FIH Hockey World Cup 2010, DLF Indian Premier League (IPL) Twenty 20 and team sponsorship of Delhi Daredevils have been the recent associations with the most sought after disciplines of sports in the country. In addition to this, Hero Honda had been one of the main Global Partners of the International Cricket Council (ICC) for flagship ODI championships including the World Cup cricker and the Champions Trophy, and more recently the T20 World cup in England.

Hero Honda Indian Open Golf tournament is an annual event with participation from international marquee players. Besides, Hero Honda has signed up many Indian sports stars, across multiple disciplines of sports, to promote the brand. Other than promoting sports and sportspersons at the highest level, the Company has also been committed to the promotion of various sports at the grass root level.

FINANCIAL AND BUSINESS HIGHLIGHTS

Hero Honda notched a record financial performance in the FY’10 with the highest ever annual revenues, operating income and earnings per share. Key financial highlights include:

23.6% growth in sales to 4,600,130 two-wheelers in 2009-10 from 3,722,000 two wheelers in 2008-09.

28.1% increase in total turnover to Rs.16,099 crores over Rs.12,565 crores in last fiscal. 74.1% growth in net profit after tax to Rs.2231.83 crores, EPS of Rs.111.77 17.4% EBIDTA margin vs. 14.1% in last year. 5500% dividend (1500% final dividend and 4000% special Silver Jubilee dividend

amounting to Rs.110 per share on face value of each share of Rs.2.

KEY MILESTONES:

o World No. 1 Two Wheeler Company for the 10th consecutive year.

o Sales landmark of 30 million two-wheelers.

o Accomplished production of 11 millionth Splendor motorcycle.

o 59% share in the domestic motorcycle market.

o 48% share in the domestic two wheeler market.

o Network of 4500 plus customer touch points with all main dealerships now converted into

45 ( Sales, Service, Spares and Safety ) dealership.o ‘Hero Honda Passport Program’ enhanced and upgraded to into a smart card based ‘Hero

Honda Goodlife’, with host of new attractive features, rolled out nationally.o Nine product launches including refreshments and variants.

COMPANY PERFORMANCE:

During the financial crisis of 2008-09 Hero Honda was the only two wheeler Company that emerged strongly and successfully during the economic slowdown in India. During 2009-10, as economic environment in India improved, Hero Honda strengthened and consolidated its hold over the two wheeler market.

Hero Honda, despite having the highest base of 3.72 million units in the two wheeler industry, could manage a remarkable growth of 23.6 percent and ended the year with sales of 4.6 million. The Company continues to lead both in the domestic two wheeler industry and motorcycle segment, with the shares of nearly 48% and 59% respectively.\

PERFORMANCE ACROSS KEY SEGMENTS:

During the year under review, the motorcycle entry segment grew by only 5% with volumes of 13.49 lacs. As a result of this modest growth, this segment accounted for just 18% of the motorcycle industry compared to 22% in the fiscal 2009.

Hero Honda consolidated its position further on the back of its strong rural reach. The company clocked the sales of 6.13 lacs units in the entry segment growing by 20% and gamering 45% share of the segment.

The motorcycle deluxe segment, which accounted for 66% of sales in the domestic motorcycle market, grew by over 29% over last years. Hero Honda dominated the segment cornering 71% of sales.

The motorcycle premium segment grew at a remarkable pace and contributed 11.23 lacs sales in 2010 compared to 7.75 lacs in 2009. This segment makes up 15% of the domestic motorcycle market, up from 13% in the previous 2 years.

Hero Honda’s performance in the premium segment was mixed. Although sales grew at a healthy 29%, the Company’s share came down from 24% to 21% in 2010.

In the scooter segment, Hero Honda’s Pleasure has been very well accepted. Sales were pegged at 2.08 lacs units, a growth of 36% over 2009. This resulted in a 13.9% market share in 2010.

In Hero Honda family, Splendor continued to be the largest-selling two wheeler brand with sales of close to 2 million, followed by Passion with sales over 1.2 million, and CD Deluxe with sales of 5.7 lac units. These three products accounted for a large chunk of Hero Honda’s overall sales.

EXPORT PERFORMANCE:

During the year 2009-10, Hero Honda exported close to 100,000 two wheelers, a growth of 20% compared to the previous years. The same year company also grew its international spare parts business by around 23%. The strong performance came on the back of successful new model launches in Sri Lanka, Bangladesh and Columbia.

To create a larger impact of its products overseas, Hero Honda introduced a 20 day sales cum technical training module for all overseas training managers at the Hero Honda National Learning Centre in Gurgaon. The overseas training managers, in turn, are expected to replicate their learnings in their country-specific locations. Training Centres for this have also been established in all export markets. Service networks were also strengthened in specific countries. In Bangladesh, for instance, automated workshops are now in place.

Performance and durability of the Company’s products have created brand equity in international markets. Testimony to the ruggedness of certain models, even the Sri Lankan Army decided to place faith the Company’s products in last fiscal.

FINANCIAL PERFORMANCE:

Sales:

The annual sales of the Company grew at 23.59% during last fiscal year and it clocked sales volume of 4,600,130 units in 2009-10 compared to 3,722,000 units in 2008-09. In value terms total sales (net of excise duty) increased by 27.9% to Rs.15,758 crores from Rs.12,319 crores in 2008-09.

Profitability:

The company’s earnings before interest depreciation and taxes (EBITDA) margins increased from 14.13% in 2008-09 to 17.45% in 2009-10 and the Operating Profit (PBT before other income) increased by 64.16% from Rs.1,568.86 crores in 2008-09 to Rs.2,575.48 crores in 2009-10. The margins improvements came from better sales realization, cost rationalization and optimization measures. These included better control over material cost, marketing cost and overheads, besides a sharp focus on operational efficiencies.

Other Income, including non-operating income:

Other income increased by 38.4% from Rs.246 crores in 2008-09 to Rs.341 crores in 2009-10.

Cash Flows:

Growth in sales turnover, better efficiencies in the working capital management improved the cash flow from Operations from Rs.1,359.03 crores to Rs.2,686.64 crores. Cash flows before working changes

have also improved from Rs.1,762.16 crores to Rs.2,777.10 crores on account of better EBITDA margins. The company spent Rs. 527.63 crores in investing activities. Investments in production capacities lead to an outflow of Rs.212.57 crores. The balance was deployed in financial assets. Financing activities accounted for an outflow of Rs.2,109.31 crores attributable to dividend outflows.

Capital Expenditure:

During the year 2010 the company incurred a capital expenditure of Rs.211.57 crores. The funds went into expansion of operations.

Raw Material Costs:

Softening metal prices particularly aluminium and nickel in the first half of the year 2010 combined with better sales realization to bring down the share of material costs considerably. Raw material costs as a proportion of total cost came down from 71% to 68.1%.

Current Asset Turnover:

This ratio, which shows sales as a proportion of average current assets, increased from 14.2 to 17.2 times, on account of lower relative average inventory and bank balance (excluding dividend bank account).

Debt Structure:

Hero Honda has been a debt free Company for the last 10 years. The unsecured loan of Rs.66.03 crore from the state govt. of Haryana on account of sales tax department is interest free and has no holding costs. Net interest payment by the Company has been negative during the last few years.

Dividend Policy:

Over the years, the Company has consistently followed a policy of paying high dividends, keeping in mind the cash generating capacities, the expected capital needs of the business and strategic considerations. For 2009-10, the company had recommended a dividend of 1,500 % higher than 1,000% declared in 2008-09 and has maintained a payout ratio of 31.3% vis-à-vis 36.5% in the previous year. Further, board has also declared 4,000% interim dividend on the occasion of 25th year.

Working Capital Management:

Hero Honda has always sought to efficiently use the various components of working capital cycle. The Company has been able to effectively control the receivable and inventories enabling it to continue to operate on negative working capital.

Table 1: Key Indicators of Profitability2009-2010 2008-2009

Inventory Period 10.06 11.00Operating Cycle 13.3 16.9Cash Cycle -17.0 -13.1Current Ratio 0.45 0.51Acid Test Ratio 0.26 0.30

RISK AND OUTLOOK

Global Uncertainty: While India’s growth path remains clear and secure, there could some ripples on liquidity in India. The debt-related troubles within the Eurozone could slow down the pace of global economy recovery.

Commodity Prices: Even though the surge in commodity prices has lessened in recent months, the medium to long term trend remains volatile.

Monsoons: Even though the country as a whole may receive normal rainfall, wide variances between regions could impact agricultural production during the kharif season.

Inflation: Inflation is spreading to non-food categories such as manufacturing and fuels. A rising rupee and strong overseas capital flows could also add to the environment of volatility.

Interest Rates: Credit growth started picking up towards the end of 2009-10 after dropping to a 12 year low in October 2009. Demand-driven growth could push credit growth to 20% and beyond. This could push up interest rates.

Increasing Competition: Increasing competition across all key segments, including the bread and butter deluxe segment will put some pressure on the market share.

Capacity Constraints: In a growth market, capacity constraints are always a concern and the Company will continue to explore various opportunities of capacity enhancement.

Labour Unrest: The Dharuhera-Gurgaon Industrial belt remains restive and prone to external influences. IR disruptions, especially during peak season, are a source of concern.

OUTLOOK:

The Indian economy is back strongly on track and is expected to grow the range of 8-8.5%, perhaps even higher. The prospects of normal monsoons auger well for the agricultural sector and will soften prices. At another level, the imminent introduction of GST and the Direct Tax Code are seen as epochal policy reforms. GST is aimed at reducing the impact of cascading taxes, lowering transaction costs and propelling economic performance. The actual impact, however, will be seen once the final policy is rolled out.

In a nutshell, the business environment is expected to be growth-oriented, but volatile as well. Of course, it is possible that lower borrowings could lead to lowering of fiscal deficit and hence reduce volatility.

A revival in agricultural performance could positively impact Hero Honda because of its rural-centric focus. The Company’s reliance on cash-down sales could act as a buffer, in case interest rates group and sales are impacted at the highered of the two-wheeler spectrum.

The Company is likely to maintain a steady top line performance while maintaining the bottom-line margins on the back of various cost optimization measures.

MANUFACTURING:

Hero Honda’s manufacturing capacity remained under pressure for the entire FY’10 for several reasons. Most importantly, better than expected performance of the Indian economy pushed up the demand for two wheelers. In addition, the introduction of several new features and variants during the year and a surge on demand for the company’s scooter Pleasure also caused the manufacturing capacities to be tested.

The variability of the product mix, the production upgrades and the unexpected surge in demand provided the Company an opportunity to optimize capacities, space and manpower across each of the three plants. Flexible production techniques implemented across the plants helped reduce changeover time. In turn this helped the Company increase its overall efficiency level.

In line with Hero Honda’s core philosophy of ensuring customer delight, care was taken to ensure the highest quality standards despite of increase in production.

Despite the pressure on the assembly line, rejection cost per vehicle has been on reducing trend in recent years, thanks to a slew of cost control and process improvement projects. These measures, in turn, helped Hero Honda bring down overall variable manufacturing costs per vehicle during the year.

The highlight of the FY’10 was a doubling of Hero Honda’s capacities at its Haridwar Plant. In fact, the ramp up from 2008-09 levels was one of the fastest ever recorded in India’s two wheeler history.

At the end of the FY’10 in review, the company had total installed capacity of 5.2 million units. A capacity of this magnitude and robust domestic demand growth in excess of 20% helped Hero Honda retain its position at the world’s largest two-wheeler manufacturing for yet another year, for the tenth time in a row.

RURAL MARKETING:

During the FY’10, Hero Honda’s ambitious rural connect program Har Gaon, Har Aangan Program rolled out across most states of the country. The idea was not just to increase awareness about the two wheeler industry but also to increase buy in for Hero Honda products.

The company has placed brand displays in various DCM Hariyali Kisaan Bazaar Centres, spanning across many states namely Uttar Pradesh, Uttaranchal, Madhya Pradesh, Haryana and Punjab. These premises were also used for conducting free checkup camps and education camps on safety riding skills. Such camps were also held in association with Monsanto, Godrej Aadhar, IFFCO and various other fertilizer and seed companies in many parts of the country.

CUSTOMER RELATIONSHIP:

The customer has always been at the heart of Hero Honda’s success. Eight years ago, Hero Honda pioneered one of India’s largest customer loyalty programs, the Passport Program. Over the years customers and channel partners have shown immense faith in the program which has gone from strength to strength. Currently, more than five million plus customers are enrolled in the program.

To enhance the customer experience at all touch points Hero Honda has intensified focus on sensitizing its customers facing teams. Customized training programs for dealers and their staff are being developed and deployed. The results have started paying off. Over 20 new and customized programs were developed and shared with the dealers and their staff during the year.

INFORMATION SYSTEM:

To fulfill the external and internal needs, Hero Honda constantly focuses on all aspects of people, process and technology by giving thrust on training and awareness, building more efficient support processes and deploying and ensuring usage of the latest technology.

HERO Honda Split – Hero has no Passion left for Honda name

Hero Honda will drop the Honda brand name from its flagship brands – Splendor and Passion – during the first quarter of the next fiscal as its promoters Munjals want to carve out an independent identity at the earliest following the split with 26 year old Japanese partner Honda. The world’s largest two-wheeler company by volumes has already started the re-branding exercise for Splendor, Passion, Glamour and Hunk where it owns the exclusive rights. CBZ and CD, where Honda owns the rights, will not come under the purview of the new branding exercise. The Hero group and Honda will sign the final agreement for the share sale before the end of the current financial year.

Though the Munjals controlled Hero group has recently signed a licensing agreement to use Honda’s technology till 2014, the re-branding is expedited to gain a foothold in international markets where it was not allowed to enter due to the joint venture agreement. Hero Honda is in the process of setting up distribution channels in growing global markets such as Latin America, South East Asia & Africa.

Under the technology agreement, Hero Honda cannot use the Honda brand name if they make any changes in the existing products. The technology agreements for the new models will be valid till June 2017. The new models, produced using Honda’s technology, will carry a higher royalty rate than the current 2.7%.

Analysts feel that re-branding will put pressure on the company’s margins. “We are also building a margin hit of 50 basis points in the financial year 2012 and 40 basis points in the financial year 2013, to take into account higher advertising and promotion expenses for entry into new export markets under a non-Honda brand name,” international brokerage firm BNP Paribas wrote in a recent report.

Hero Honda Motors posted a third successive drop in quarterly net profit as mounting raw material costs and a one-time expense eroded gains from record motorcycle sales. Net profit declined by 20% to Rs.429 crore during the third quarter ended December 31, 2010.

HERO HONDA REBRANDING:

Hero Honda has allocated Rs.100 crore to create a new brand identity that involves re-naming the company and making a corporate logo that will be etched on its two-wheeler, people familiar with the matter. The company has shortlisted five agencies – JWT, Draft FCB Ulka, Mudra, Law & Kenneth, and Percept H – to create the new brand identity, the sources said. JWT, Draft FCB Ulka, and Percept H handle various brands in the Hero Honda portfolio.

The shortlisted five will join London based design agency Wolff Olins to work on the brand repositioning, including new name and logo. The new logo, expected to have a direct connect with its mass customers and to be veiled in the next few months, will drop the Honda name for its corporate identity.

Hero Honda Managing Director Pawan Munjal is talking a personal interest in the presentation made by these agencies, as he wants to ensure no stone is left unturned to announce a new brand after the separation from Honda.

Key Financial Ratios of Hero Honda Motors

------------------- in Rs. Cr. -------------------

Mar '06

Mar '07 Mar '08 Mar '09 Mar '10

Investment Valuation RatiosFace Value 2.00 2.00 2.00 2.00 2.00Dividend Per Share 20.00 17.00 19.00 20.00 110.00Operating Profit Per Share (Rs) 69.21 60.19 68.50 87.79 137.40Net Operating Profit Per Share (Rs) 436.64 496.07 518.06 617.23 793.22Free Reserves Per Share (Rs) 98.62 121.70 147.55 188.33 171.52Bonus in Equity Capital 59.98 59.98 59.98 59.98 59.98Profitability RatiosOperating Profit Margin(%) 15.84 12.13 13.22 14.22 17.32Profit Before Interest And Tax Margin(%)

14.44 10.63 11.57 12.64 16.01

Gross Profit Margin(%) 16.35 12.85 11.67 12.75 16.11Cash Profit Margin(%) 12.37 9.98 9.59 10.84 14.00Adjusted Cash Margin(%) 11.19 8.84 9.59 10.84 14.00Net Profit Margin(%) 11.06 8.58 9.27 10.30 14.00Adjusted Net Profit Margin(%) 9.88 7.44 9.27 10.30 14.00Return On Capital Employed(%) 60.31 43.48 41.57 43.33 75.07Return On Net Worth(%) 48.34 34.73 32.41 33.72 64.41Adjusted Return on Net Worth(%) 43.16 30.11 28.14 30.73 58.87Return on Assets Excluding Revaluations

25.05 123.70 149.55 190.33 173.52

Return on Assets Including Revaluations

25.05 123.70 149.55 190.33 173.52

Return on Long Term Funds(%) 60.31 43.48 41.57 43.33 75.07Liquidity And Solvency RatiosCurrent Ratio 0.49 0.57 0.48 0.46 0.58Quick Ratio 0.35 0.40 0.32 0.31 0.49Debt Equity Ratio 0.09 0.07 0.04 0.02 0.02Long Term Debt Equity Ratio 0.09 0.07 0.04 0.02 0.02Debt Coverage RatiosInterest Cover 453.39 711.75 648.15 664.40 1,262.36Total Debt to Owners Fund 0.09 0.07 0.04 0.02 0.02Financial Charges Coverage Ratio 92.33 93.44 108.14 142.76 255.15Financial Charges Coverage Ratio 70.70 73.51 84.76 113.15 218.53

Post TaxManagement Efficiency RatiosInventory Turnover Ratio 38.74 36.25 42.82 47.53 42.80Debtors Turnover Ratio 70.26 40.11 32.70 55.10 122.63Investments Turnover Ratio 50.65 47.48 42.82 47.53 42.80Fixed Assets Turnover Ratio 11.41 9.54 5.89 5.34 6.29Total Assets Turnover Ratio 4.20 3.99 3.52 3.36 4.80Asset Turnover Ratio 6.45 6.01 5.89 5.34 6.29

Average Raw Material Holding 7.96 8.46 10.69 8.27 10.78Average Finished Goods Held 2.99 2.49 1.87 2.16 1.22Number of Days In Working Capital -35.52 -25.22 -35.26 -34.58 -47.76Profit & Loss Account RatiosMaterial Cost Composition 70.45 73.24 72.16 71.73 68.32Imported Composition of Raw Materials Consumed

1.69 1.10 0.67 0.79 1.66

Selling Distribution Cost Composition 4.63 5.11 4.86 4.72 4.80Expenses as Composition of Total Sales

2.90 2.66 2.35 2.01 2.13

Cash Flow Indicator RatiosDividend Payout Ratio Net Profit 46.88 46.29 45.86 36.45 115.04Dividend Payout Ratio Cash Profit 41.93 39.80 39.34 31.95 105.95Earning Retention Ratio 47.51 46.62 47.19 60.01 -25.86Cash Earning Retention Ratio 53.63 55.06 55.65 65.36 -15.06Adjusted Cash Flow Times 0.19 0.19 0.13 0.06 0.03

Mar '06

Mar '07 Mar '08 Mar '09 Mar '10

Earnings Per Share 48.64 42.96 48.47 64.19 111.77Book Value 100.62 123.70 149.55 190.33 173.52

Balance Sheet of Hero Honda Motors ------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 39.94 39.94 39.94 39.94 39.94

Equity Share Capital 39.94 39.94 39.94 39.94 39.94

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves1,969.3

92,430.12 2,946.30 3,760.81 3,425.08

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net worth2,009.3

32,470.06 2,986.24 3,800.75 3,465.02

Secured Loans 0.00 0.00 0.00 0.00 0.00

Unsecured Loans 185.78 165.17 132.00 78.49 66.03

Total Debt 185.78 165.17 132.00 78.49 66.03

Total Liabilities2,195.1

12,635.23 3,118.24 3,879.24 3,531.05

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Application Of Funds

Gross Block1,471.9

71,800.63 1,938.78 2,516.27 2,750.98

Less: Accum. Depreciation 522.60 635.10 782.52 942.56 1,092.20

Net Block 949.37 1,165.53 1,156.26 1,573.71 1,658.78

Capital Work in Progress 44.19 189.92 408.49 120.54 48.14

Investments2,061.8

91,973.87 2,566.82 3,368.75 3,925.71

Inventories 226.55 275.58 317.10 326.83 436.40

Sundry Debtors 158.66 335.25 297.44 149.94 108.39

Cash and Bank Balance 23.22 35.26 130.58 217.49 1,863.48

Total Current Assets 408.43 646.09 745.12 694.26 2,408.27

Loans and Advances 278.63 268.04 196.37 325.80 438.46

Fixed Deposits 135.50 0.52 0.51 2.08 43.73

Total CA, Loans & Advances 822.56 914.65 942.00 1,022.14 2,890.46

Deferred Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities1,192.9

81,171.50 1,455.57 1,678.93 3,965.69

Provisions 489.92 437.24 499.76 526.97 1,026.35

Total CL & Provisions1,682.9

01,608.74 1,955.33 2,205.90 4,992.04

Net Current Assets -860.34 -694.09 -1,013.33 -1,183.76 -2,101.58

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00

Total Assets2,195.1

12,635.23 3,118.24 3,879.24 3,531.05

Contingent Liabilities 73.48 165.59 56.37 100.54 73.04

Book Value (Rs) 100.62 123.70 149.55 190.33 173.52

PROJECTED PROFIT AND LOSS ACCOUNT (Rs in Crores)

PARTICULARS 2007-08 2008-09 2009-10 2010-11 (Projected)

Explanations

OPERATING INCOME 1211.78 1359.03 2686.64 4162.14 54.91% proportionate increase

NET SALES 10331.8 12319.12 15758.18 19473.28 23.57 % proportionate increase

OTHER INCOME 185.42 246.09 340.61 461.75 35.56% proportionate increase

TOTAL EXPENDITURE 9106.94 10783.75 13267.06 16016.00 20.72% proportionate increase

PROFIT BEFORE TAX (PBT)

1410.28 1781.46 2831.73 4039.11 42.64% proportionate increase

PROVISION FOR TAX 442.4 499.7 599.9 730.09 21.7% proportionate increase

PROFIT AFTER TAX (PAT)

967.88 1281.76 2231.83 3420.86 53.27% proportionate increase

AMOUNT AVAILABLE FOR APPROPRIATION

2562.66 3303.53 4939.11 6367.02 39.21% proportionate

DIVIDEND (INCL TAX) 443.89 467.25 2567.56 8405.77 227.38% increase

TRANSFER TO GENERAL RESERVE

97 129 225 345.8 53.7% increase

RETAINED EARNINGS 2021.77 2707.28 2146.55 2429.78 13.19% proportionate increase

EPS (EARNINGS PER SHARE)

48.47 64.19 111.77 171.27

GENERAL RESERVE 2430.12 2946.3 3760.81 4680.06 24.44% proportionate increase

No. of Shares 1996.88 1996.88 1996.88 1996.88

INTRINSIC VALUE CALCULATION:

Current PE ratio of Hero Honda = 14.9 (as on 18th March, 2011)

Face Value = Rs.2

Current Market Price = Rs.1509.70 (as on 18th March, 2011)

As mentioned earlier Hero Honda is a global leader in producing two wheelers and it has also an international repute. But it is not free from the competition; perhaps it’s facing a cut-throat competition with Bajaj Automobiles and many others viz; Mahindra and Mahindra, TVS, Yamaha etc.

The average industry PE ratio is estimated at 21.34

Projected PE Ratio = 18.12

Projected EPS = Rs.171.27

Intrinsic Value = projected PE * projected EPS

=18.12 * 171.27

= Rs.3103.41

CONCLUSION:

The Current Market Price of Hero Honda is Rs.1509.70, which is much more less than the fundamental intrinsic value of Rs.3103.41. Therefore it is suggested to buy or hold the shares.