hero honda marketing strategy

8/8/2019 Hero Honda Marketing Strategy

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B Y :

A . V a n i M a d h a v i

R o l l n o : 1 6

B B A 3 r d s e m

Me

This Project is a Study about worlds Largest Two-wheeler

maker Hero Honda company. This includes company

profile, Marketing strategy, financial position, Market

position.

Summer

Internship Project


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HERO HONDA MARKETING STRATEGY

Investment Rationale

Strategy of rural focus, brand building and new launches to pay off:

Hero HondaMotors Limited (Hero Honda) posteda goodsetofnumberseven in badtimesofrecession just by following itsvery successfulstrategy ofbrand buildingandnewlaunchesattherighttime. Hero Honda maintained its brand image byproviding good modelslike Passionand Splendorwithtechnology expertiseofHonda. Thesetwo modelsremained maincontributorovermany years inthe past.AftersuccessfullaunchofHunk, thecompany launched Karizma ZMR inthepremium segment just beforefestiveseasonto boostfurtherdemand. HeroHonda providesreasonably priced, low maintenanceandfuelefficient models intheruralareathrough itswidespreadnetworkofcustomertouch points. Afteradding 500 touch pointstototal 4,000 in FY2009, thecompany is planning toadd

further500 touch pointsto boostruraldemandwhichhasa potentialofrealgrowth. Weexpectruraldemandto boostfurtheronlowering worriesofmonsoonandsubstantial increase in minimum support pricesofcommoditieslike paddy,wheat, etc. We believewithcontinuousruralfocusandlaunchofnew models, thecompany will gain marketshare inthe Indian motorcyclesegment.

Fiscal incentives at Haridwar plant to expand margins:

Theramp up at Haridwarplant isfastest intheworld. Hero Honda is planning toramp up itscurrent productioncapacity of1.5mnunitsatthis plantto 1.8mnunits by FY2010.Haridwarplant iseligiblefor100% exciseduty andtaxexemptionasdeclared by

the Government. Weexpect EBITDA margintoexpandonaccountoflowerexcise paymentandnet marginto increaseduetoavailabletaxexemption. Wefurtherexpecteffectivetaxrate in FY2010 toreduceto 23.5%.Valuation: WehaveusedRelative Valuation basedonaverageofEV/EBIDTAand Price/Earnings (P/E)ratios. Considering thecompanysleadership position inthe potentially growing industry, focusonrural marketandstrategy ofnew modellaunches, werecommenda Buy onthestockwitha Target PriceofRs 1,976representing a potentialupsideof23.1%.

Price Chart


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Investment drivers

Gain in market share continues despite slowdownDespite itshigh base, Hero Hondahasshownconsiderable marketshare gainsmainly dueto itsstrong presence intheruralsegmentthroughhighernumberof

outlets. Hero Hondas marketsharehas grownsubstantially from 40.3% in FY2008to 45.4% in FY2009 intheeconomy segment (representssub 100cc motorcycle),andfrom 72.1% in FY2008to 77.0% in FY2009 intheexecutivesegment(represents 100ccto 150cc motorcycle). Splendor(100ccand 125cc)and Passion(100cc)has beenthe bestselling productforthecompany overthe past manyyears. Hero Hondaclearly hasastrongerreach intheruralareaswhere its productsare growing strongly. Weakening competition inthecoreexecutivesegment isfurtherhelping thecompany consolidate its marketleadership. Given itsstrongproduct profile, thecompany planstoexpand presenceanddistributionnetwork,whereascompetitorslike Bajaj Auto Ltd (BAL)areactually reducing touch points.Hero Honda isclearly focusedontheexecutivesegment (contributes 71% ofthe

totalvolumes)where incrementalcompetition isweak. Further, overthe past year,thissegmenthas been growing attheexpenseoftheeconomy segment, adding toHero Hondasadvantages.Overthe years Hero Hondahas beendoing exceptionally well intheexecutivesegmentandweexpectthecompany tofurtherstrengthen its position inthissegment. During FY2009, Hero Honda postedstrong growthasagainstdecliningvolumesforBAL. We believe BAL to betheonly playerto providesomecompetitionto Hero Honda inthesub 125cccategory; butthechange intactictoupgradethe

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100cc motorcycle into 125cc+ motorcycle is posing problemsforBAL and isverydifficultforitto break into Hero Hondasdominance inthe 100ccsegment. BAL islooking tofocusonthe 125cc+segmentwhichhas beentheirstrength inthemotorcyclesegment. Strong demandforHero Hondas products intherural marketmakes presenceoflargernumberofdealersfeasible. Betterdistributionfurther

leadstohigherdemand. The marketshareofeconomy segment isdeclining overthe yearsasthenew playersarereluctanttoenter intothissegmentduetostrongdominanceofHero Honda. The 100ccsegment mainly caterstotheruralareasandthesmalltownsforwhichstrong distributionnetwork iscrucialandtodevelop thedistributionnetwork isatimeconsuming process. Therefore, allnew playersarelaunching new models inthe 100ccsegmentleading toreduction in marketshareforthe 100ccsegment. We believestrong presence inruralareaandfocusonbrand building to make it possibleforHero Hondato gainfurthermarketshare.

PiechartofFY2008

PiechartforFY2009

Sales

Executive

Economy

Premium


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Hero Hondas market share has grown

substantially from 72.1% to 77.0% in

the executive segment in FY2009

Variants of Splendor and Passion

have been the best selling product of

Hero Honda over the past many years

The wide spread network of touch

points and rural focus of the companymakes it possible to gain market

share in the two wheeler industry

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Various tax benefits on Haridwar plant to improve marginsAtthestarting ofFY2009, thecompany hada productioncapacity of3.4mnunitsfrom itstwofacilitiesatManesarand Dharuhera (Haryana). During FY2009, HeroHondastarted production in Apr-08witha plantcapacity of0.5mnunitsat Haridwar

(Uttaranchal). Thecompany plansto gradually increasethecapacity atthis plantto1.5mnunits by FY2011 (which isthedeadlineforavailing variousfiscal incentives).A total investmentofRs 19.0bnalong with itsancillarieswould be made intheproject. Withthisnew plant, thecompany would beabletotakecareofthedemandinthe medium term. To promote industrialactivity in Uttaranchal, thestategovernment isoffering thefollowing incentivesunderthe New Industrial Policy atHaridwarforplantscommencing operations before FY2011:_ 100% centralexciseexemptionfor10 years

Sales

Executive

Economy

Premium


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_ 100% incometaxexemptionforfirst 5 yearsand 30% fornext 5 years_ Centralsalestax @1% for5 years_ Capital investmentsubsidy @15% witha maximum ofUS$ 73,170AsofFY2009, Hero Hondahasapproximately 30.0% ofitsvendors based inHaridwar. Duetothisleveloflowerlocalization, thecompany cannotset-offexcise

duty paidonraw materials procuredfrom outsideduetoexciseexemptionontheend product.However, itstier-I vendorsare inthe processofsetting up facilitiesat Haridwar,whichwould becompleted by September2009, thereby increasing localizationofvendorsto 65%. Therefore, weexpectthenetsaving from exciseduty fromHaridwarplantwill increaseduetorise inlocalization. Hero Hondawouldenjoy100% incometaxexemptionforthefirstfive yearsand 30% exemptionforthenextfive yearsat Haridwar. Duetothis, itseffectivetaxratereducedfrom 31.4% inFY2008to 28.1% in FY2009. Weexpecteffectivetaxrate in FY2010 toreduceto23.5% asthecompany plansto increase itsexisting capacity from 1.5mnunitsto1.8mnunits in FY2010 whichwillleadtohigherprofit growthandearnings per

share. Inaddition, BAL alsohasa plant in Uttaranchal butunlike BAL, Hero Hondahasnot passedany benefitarising from Haridwarplanttocustomersresulting inhighermarginforthecompany.Per unit realization to increase on account of incentives at Haridwar plant and new

launchesThecompany iscontinuously focusing on increasing its perunitrealization. Despitelackofvolume (unitsold) growth in FY2008, thecompany managedto increase itsperunitrealization by 4.4% yoy to 30,960 and, itregistered 11.5% yoy growth involumewith 7.2% yoy increase in perunitrealization in FY2009. This kindofgrowthin bothvolumeand perunitrealization in FY2009 wasduetotheexciseduty benefiton productionat Haridwarplantaswellasdueto 0.4% yoy gain in marketshareto11.7% inthe premium segmentwithnewlaunches. Going forward, weexpect perunitrealizationto increaseonthe backofcompanys plantoramp up capacity atHaridwarplantwhichleadstolowerexcise paymentforthecompany asthis plant iseligiblefor100% exemption inexciseduty. Additionally, thecompany hasrecentlylaunchednewversionofKarizma (Karizma ZMR-225cc) in its premium segmentwhich is pricedatRs 91,000 perunit (ex-showroom, Delhi). We believe increasingfocusonthe premium segmentwithnewlaunchesshouldfurther increase perunitrealization.In Q2FY2010, perunitrealizationofHero Honda increased by 4.0% yoy to 34,144onthe backof increaseddemandofits premium motorcycle. Thecompany isalsomarketing its premium motorcyclevery aggressively intheurbanareas.

Hero Honda announced a total

investment of Rs 19.0bn for Haridwar

plant and ancillary facility

We expect excise and tax payment of

the company to reduce going forward

as Haridwar plant is eligible for central

excise and tax exemptions


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We expect per unit realization to

increase due to successful launch of

Karizma ZMR and Hunk in FY2009

Strong exiting portfolio and new launches to increase market shareHero Hondaholds 77.0% marketshare intheexecutivesegment in FY2009. Thissegment mainly caterstotheneedofmorethan 100ccto 150cc motorcyclescustomers. Itdominatesthelessthan 125ccsegmentwith marketshareof80.2% inFY2009. Splendor(SplendorNXG-100ccand SuperSplendor-125cc)and Passion(100cc)has beenthe bestselling productsforthecompany overthe past manyyears. Thecompany isnotonly doing well in Economy and Executivesegment butalso performing well in Premium segmentwhichcaterstotheneedsofover150ccmotorcyclescustomers. Thecompany has increased its marketshareto 11.7% inthissegment in FY20009 comparedto 11.3% marketshare in FY2008onthe backofnewlaunches including Hunkand CBZ-Xtremeduring FY2009.

Whileotherplayersare moreconcentrating on increasing the profitability byincreasing realization perunit, Hero Honda is increasing its marketshare byconcentrating on branding andnot pricing. Hero Honda is building its brandvalue byproviding excellent products inthe marketlike Splendorand Passionwhichareestablished models. Hero Honda isnotonly successful in maintaining itsexistingmarketsharewiththeestablished products butalso increases its marketshare bylaunching new models. Weexpect Hero Hondato increase its marketshare intheentirethreesegmentsas ithaslinedup morethan 6 ofitsnew products intheformofvariantsornew modelsovernext 12 months. Hero Hondahastechnology sharingagreementwith HeroMotorsandhasalaunching scheduletill FY2012.

Hero Honda recently launched

Karizma ZMR in the premium segment

Hero Honda has lined up more than 6

of its new launch in form of variants

or new model over next 12 months

We expect Hero Honda to gain further

market share on account of its strong

existing portfolio and expected new

launches

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Company Overview

Hero Honda istheworldslargesttwo-wheelercompany (involumeterms). HeroHonda is promotedasa jointventure (JV) betweenthe Hero Group and HondaMotorCompany, eachholding 26% stake inthe JV. Ithasa productioncapacity of3.9mntwowheelersat itstwo manufacturing facilitiesat Gurgaonand Dharuhera


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around 80% to total sales volume

within the two wheeler sector

Auto industry were badly hit in

FY2008 and FY2009 on account of

stringent financial norms set by

financial institutionsDespite the executive segment being

dominated by 125/135cc offerings,

Hero Hondas Splendor and Passion

(100cc motorcycles) continue to rule

the executive segment

Entry level segment generally offers

features like kick start, four gear and

spoke wheel

I

ndustry Overview

Twowheelersectoristhe most importantsegmentofthe Indianautosectoraccounting for75% ofthetotalsalesvolume intheauto industry. Thetwowheelerindustry isdominated by the motorcyclesegmentwhichcontributed80% tothesalesvolume in FY2009. Hero Honda, BAL, TVS Motorsand Hondaarethe majorplayers inthissector.Twowheeler industry volumeswere badly hit in FY2008and FY2009 onaccountofstringentfinancing normsset by financial institutionsandduetohigherinterestrates. Afterreporting ade-growthof1.3% in FY2008anda marginal growthof2.6%in FY2009 thetwowheeler industry hascomeup strongly onaccountofimprovement intheoverall macroeconomy along witheasing offinancing. Attractiveinterestratesled by publicsectorbanksandnewlaunches by companieshavefurtherboostedthedemand inthe Indiantwowheeler industry. Scooters increasedtheirshare inthetwo-wheelerpiefrom 14% to 16% in FY2009. Theentry segmentmadeup ofbasic 100cc bikeshadstartedslowing two yearsago, andduring theyearinreview, sales inthissegmentweredown by morethan 15%. Thiscould beattributedtothefactthat Deluxesegment bikeshave becomeaffordableonaccountofa 4% excisecut, 1% reduction in CST andthespecial packageofreduction inexciseduty in December-2008, which most manufacturers passedontotheconsumers.Hero Honda isa marketleaderintheeconomy segmentand ithas been improvingits marketshare inexecutiveand premium segment motorcycles. Despitetheexecutivesegment being dominated by 125/135ccofferings, Hero HondasSplendorand Passion (100cc motorcycles)continuetoruletheexecutivesegment.Theirmarketleadership intheexecutivesegment isan indicatoroftheirstrongpositionvis--visother125/135ccofferings. BAL isaleader inthe premiumsegment. However, despiteasignificantshift inthe product mixofBAL (as indicatedearlier), itcontinuesto betheleader intheentry segmentalso. Its CT 100, Platinaand Platina 125ccdominatetheentry segment.


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Indiastwowheelersectorcan bedivided intothree maincategories:A)MotorcyclesegmentB) ScootersegmentC)Mopeds

A) Indian Motorcycle segment

Motorcyclesegmentcan befurtherclassified intothreecategoriesonthe basisofdisplacement:i) Entry/Economy level (upto 100cc motorcycle)ii) Executivelevel (between 100ccto 150cc motorcycle)iii) Premium level (morethan 150cc motorcycle)i) Entry level: Motorcycle inthissegment is generally inthesub 100cccategory,offering basicfeatureslike kickstart, fourgearandspokewheelandaretargetedtowards pricesensitive buyers. BAL hasastrong grip inthissegmentwiththeirtwoproducts; Platinaand CT100 holding morethan 50% oftheeconomy segment. HeroHondaholdsaround 30% oftheeconomy segmentwith CD Dawnas its key modelinthesegment. Thereasonforthissegmentlosing its marketshare isthehigher

interestratescenariosincethissegment isthe most interestelasticand BAL hadlowered itsexposure inthissegment intherecent past.ii) Executivelevel: Executive/Deluxesegmentcatersto buyerswhohaveselectioncriterialikefueleconomy, styleand purchase priceofa model. This isthelargest

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Executive segment caters buyers who

have selection criteria like fuel

economy, style and purchase price of

a model

HMSI (Honda) is a market leader with

more than 55% market share in

Scooter segment

Mopeds have seen downward trend in

sales volume and we expect similar

trend to continue in future

segment inthe motorcyclespaceand motorcycle inthissegment is generally inthe100-150cccategory. Hero Honda isthelargest player inthissegmentwithapproximately 70% marketshare. BothofHero Hondastop selling modelsareapartoftheexecutivesegment. Splendoraccountsfor45-50% ofthesalesvolumeand Passionaccountsfor20-25% ofthevolumes intheexecutivesegment. BALwith its key modelslike Discoverand Xceedcouldhave beentheoneto providesometypeofcompetitionto Hero Honda; howeverpoorperformance by BAL overthe pastone yearhasledto Hero Hondatightening its grip inthissegment. Othermodelslike FlameofTVS Motorsand Shineand StunnerofHondahavesofarnotbeenabletochallenge Hero Honda'sdominance inthiscategory.iii) Premium segment: Premium segmenttargetscustomerswholookforpower,speedandstyleandaccordingly they areleast impacted by changes inthe interest


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rates. BAL isthelargest player inthiscategory with its model Pulsarholdingapproximately 50% marketshare. Overthe pastone year, the gap between Pulsarandothersthat includes UnicornofHonda, ApacheofTVS Motorsand FZ16 ofYamahahavestartedtonarrowdown. Thissegment is importantfrom theperspectiveofimproving overalloperating marginforany twowheelercompany.

B) Scooter segmentIn FY2006, Hero Hondaventured intothe gearlessscootersegmentsand inlessthan 4 years, thecompany has managedto garnermorethan 15% marketshare.HMSI (Honda) isthe marketleader inthe gearlessscootersegmentandaccountsformorethan 55% ofthetotal market. Scootersegmentaccountsforabout 16% oftheoveralldomestictwowheelermarket. Hero Honda'sonly model inthescootercategory is "Pleasure" which istargetedtotheurbanfemalesegment. Activa modelofthe Honda isthelargestselling model inthissegment. With growing femaleworking populationandwith increasing popularity ofgearlessscootersamongyoung girls, Hero Honda's Pleasure isexpectedtoreportrobust 20.5% CAGRvolume growth between FY2009 and FY2012. Thiswillalsohelp thecompany to

reduce itsdependenceonthe motorcyclesegment.

C) MopedsMopedsegmentaccountsforapproximately 5.0% ofthe marketshareofIndiantwowheelermarketwith TVS motorsdominating thesegmentwithover90% marketshare. Thissegment issmall intermsofbothvolumeandvalueandonly haslimitednumberofplayers.Mopedshaveseenadownwardtrend insalesandweexpectsimilartrendtocontinue infuture.

Commodity cost on a declining trend

Raw materialcostshavedeclinedsubstantially inthe pastfew months. Also,competitionhaseased invarying degreesacrosssegments, enabling companiestoretain benefitsfrom thelowercommodity cycle. Twowheelershavenotseenareturntoa pricewar. Automobilevolumeshaveshownsignsofrevivalsincethebeginning ofthiscalendaryear. Whiletwowheelerscontinuetoshow growth,domesticcarvolumesarecontinuously improving sincelasteight monthsandcommercialvehiclessalesrecorded positive growth inlasttwo months, owing partlytostrong ruraldemand. Onalowerbase, weexpectastrong volumerecovery goingforward.More importantly, there isclearervisibility regarding areturntolong termgrowth in FY2011 and beyond, particularly withastable government in place. Aftertouching a peak in FY2009 commodity priceshavestartedsoftening sinceQ2FY2009 whichhasleadto improvement in marginsofautomobile players inthelast 1-2 quarters.

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Two wheeler players like BAL has

higher dependence on auto finance

for it sales

Hero Hondas market share gain is


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driven by focus on branding and not

on pricing

Over the years, competitors have

failed to challenge Splendor and

passion in the market and the same to

happen in the future is extremelydifficult

Peer Comparison

Afterarecenteconomicslowdown, Financial Institutionshavesetstringentnormstoprovideautofinanceto itscustomers. Twowheelerplayerslike BAL hashigherdependenceonautofinanceforitssalesas it mainly catersto Premium andExecutivesegmentcustomers intheurbanareawherethedependenceoncredit ishigher. Hero Hondasdependenceoncredit islowerascomparedto its peers

mainly dueto itsstrong ruralnetworkandcashsales intheruralareas. HeroHondasability of increasing itscashsales intherecentrecession makes it possibleto posthighergrowth inthedomestic marketandoutperform the industry by alongdistance.Hero Honda getsthetechnology, designspecificationandR&D innovationfromHonda (Japan)which putsthem ina betterpositioncomparedto its peers.We believe Hero Hondaoffers bestearningsvisibility among its peersandexpectedto growata CAGRof14.3% between FY2009 and FY2012 onthe backoflowerraw material pricesaswellasduetovarious incentivesavailableon productionatHaridwarplant. Hero Hondas marketshare gain isdriven by focuson branding andnoton pricing. Thiscoupledwiththehighly consolidatednatureofthedomestictwowheeler industry andfocuson profitability by peershasenabled Hero Hondato gainmarketsharewithout impacting profitability.Splendor(100ccand 125cc)and Passion (100cc)has beenthe bestselling productforHero Hondaoverthe past many years. Overthe years, competitorshavefailedto bring sucha product inthe marketandthesametohappen inthefuture isextremely difficult. While BAL hasastrong grip in Economy segmentwith Platinaand CT 100 and in Premium segmentwith Pulsar, Hero Hondahasastrong hold inExecutivesegmentwith Splendorand Passion brands. Up to 125cccategoryaccountsforapproximately 78.0% ofthe Indian motorcycle industry and HeroHondaholdsa marketshareofmorethan80.0% (FY2009) inthiscategory.

Company Entry Level Executive Level Premium LevelHero HondaCD Dawn,CD DeluxePassion Plus, SplendorNXG,Glamour, SuperSplendorAchiever, Hunk, CBZXtreme, Karizma


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BALPlatina, CT100Discover, XCD 135 Pulsar, AvengerTVS StarFlame Apache

Suzuki - Heat, Zeus GS150RYamahaCrux, Alba,G5GladiatorFZ-16, YZF R15Honda- Shine, CBF StunnerUnicornExhibit 5:

Segment wise Portfolio

Hero Hondasexciseduty (as % ofnetsales)declinedfrom 16.5% to 9.9% inFY2009 mainly duetoreduction inexciseduty from 12% to8% in H2FY2009.

However, BAL and TVS has paidlowerexciseduty comparedto Hero Honda. Weexpect Hero Hondasexciseduty (as % ofnetsales)andtax paymenttofurtherdeclineonfiscal incentivesavailableon productionat Haridwarfacility. Hero Hondahas bettermargin pictureandROE among its peersonthe backofitsstrategy toconcentrateon brand building throughcustomerserviceandadvertising ratherthanpricecut.9Excise duty for FY2009 declined due

to a 4% cut in excise duty

Hero Honda has better margin picture

and ROE among its peers

EBITDA margin during the year also

increased nearly 100bps to 14.1% due

to decline in raw material prices and

reduction in excise payment

Financial Performance

FY2009 performance reviewNetrevenuesofHero Honda increased 19.5% yoy to 12,349.4crin FY2009 onthebackofbothvolume growthand growth in perunitrealization. Hero Hondassalesvolume increased 11.5% yoy to 37.2lacunitsandrealization perunits increased by7.2% yoy toRs 33,179 perunit. EBITDA marginduring the yearalso increasednearly 100bpsto 14.1% withdecline inraw material prices. Net margin increasednearly 100bpsto 10.2% becausetax paymentasa percentageofsalesdeclinedonaccountoftaxexemptionavailableat Haridwarplant.

Q2FY2010 performanceNetrevenuesofHero Honda increased 26.8% yoy to 4,059crQ2FY2010 onthebackofgooddemandduring festiveseasonandnewlaunch inthe premiumsegment. Thecompanyssalesvolume increased by 21.7% yoy to1.2mnunits in


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Q2FY2010 and maintainedover59.0% marketshare inthedomestic motorcyclemarket. EBITDA marginduring the periodalso increasednearly 475bpsto 18.3%andnet marginwitnessedsimilartrendand increasednearly 506bpsto 14.5% onaccountoftaxexemptionavailableat Haridwarplant.

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Margins expected to increase on

availability of fiscal incentives at the

Haridwar plant

Financial Performance

Margins expected to expand on availability of incentives at Haridwar plant

Weexpect Hero Hondasexciseduty payment (as % ofnetsales)todeclineonthebackofcompanys plantoramp up capacity atthe Haridwarplantwhichleadsto

lowerexcise paymentforthecompany asthis plant iseligiblefor100% exemptioninexciseduty. Haridwarplantwillalso beeligibleforexemptionfrom tax paymentwhichwillleadtofurtherboost innet profit margin. Asthe pricesofsteelandaluminum stabilizedafteradecline, thecompany wouldabletosaveatoperationallevelwhichwillleadtoexpansion in margins.

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Successful launch of new model in

entry level segment may drop down

market share of the company

Delay in increasing capacity at

Haridwar plant may impact earnings

growth of the company

We expect revenues to increase at a

CAGR of 9.0% between FY2009 and

FY2012 on the back of capacity

expansion at Haridwar plant

We expect margins expansion due to

reduction in excise duty and

incentives at Haridwar plant as well as

new launch in premium segment

We expect two wheeler market to

expand in size by 6.0% in FY2010 due

to emerging demand in the domestic

economy

Major Concerns

Competitors new launches may drop down market share of Hero Honda


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BAL haslaunchedanentry segment bike (Discover100cc)whichhasreceivedagoodresponse. Hondaand TVS arealsolooking atlaunching a bike intheentrysegmentduring FY2010. Successfullaunchesofbikesfrom competitorscouldleadtodrop in marketshareforHero Honda.

Slower increment in production will impact earnings growth

Any delay in increasing productionand increase inlocalizationat Haridwarwillimpact Hero Hondasearnings growth. However, Hero Hondaand itsvendorswouldneedtocompleteallexpansion by March 2010 asthefiscal incentives (mentionedabove)can beavailedonly ifnew/expandedcapacity commencescommercialproduction by 31 March 2010.

Unexpected rise in metal prices will put pressure on marginsWe believeraw material pricesto increase marginally overnexttwo years. Anyunexpectedrise in metal priceswill put pressureoncompanys margins.

Future Outlook

Weexpectrevenuesto increaseata CAGRof9.0% during FY2009 and FY2012 toreachaturnoverofRs 17,417.2crby FY2012 onthe backcapacity expansionatHaridwarplantanddueto itsleadership position in growing executivesegment. Wedontexpectany majorthreattotwoofitswellestablished brand (PassionandSplendor) innearterm. Going forward, we believe Hero Hondawill maintain itsleadership positionas ithasalready provedso by posting anexcellentsetofnumbers inthelast quarterduring globalturbulenttimes. We believefiscal incentiveat Haridwarplant isthe key immediatedriverfortheupsurge inthestock priceapartfrom thesuccessfullaunchofKarizma ZMRinthe premium segmentcoupledwithastrong setofQ2FY2010 results. Going forward, weexpectthe EBITDA marginstoimprove by 238bpsto 16.5% in FY2010 onthe backofexciseexemptionavailableat Haridwarplantaswellasa 4.0% cut inexciseduty to8.0% in H2FY2009. Wedontexpectany hike inraw material prices inthe medium term afterafall intherecent past. Therefore, we believestableraw material priceswill boostoperatingprofits. Wealsoexpectnet profit margintoexpand 236bps in FY2010 mainly duetotheexpectedlowertax paymentconsidering taxexemptionat Haridwarplant.By following thesuccessfulstrategy ofretaining marketsharewithestablishedbrandsandlaunching new modelsattherighttimesupported by reputationofbrandnameandtechnology ofHonda, thecompany has maintained itsleadership positionsince quitelong andstill growing. Domestictwowheeler industry posteda 2.6% yoygrowth in FY2009 afterde-growth in FY2008. Weexpecttwowheelermarkettoexpand insize by 6.0% in FY2010 onthe backofgrowing export marketaswellasemerging demand inthedomestic marketduetoeasing ofliquidity forautofinanceandstable interestratesandfuel prices. Hero Hondaholds 59.8% marketshare inthedomestic motorcyclesegment. Wethusexpect Hero Hondato gain marketsharesteadily inthe growing twowheeler industry by expanding itsexisting capacityand improvement in margins.

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ValuationForvaluing thecompany, wehaveusedRelative Valuation basedon EV/EBIDTAand Price/Earnings (P/E) multiple methodologiesconsidering FY2010 estimates. Acomparativevaluationusing EV/EBIDTA methodology helpsus incomparing thecompanys performancewith its peers irrespectiveoftheirdepreciationandfinance

expenditures. The P/E multiple methodology helps incomparing peergroupperformancewiththecompany withrespecttoearnings potential. Wehaveconsideredan investmenthorizonof12 monthsforthisstock.

Comparative ValuationHero Hondatradesatcurrent EV/EBIDTA of15.6xwhich isatadiscountof33.6%tothe peergroup averageof23.4x. Going forward, we believethatthecompany willmaintain itsleadership position. Hero Hondahasanedgeoverotherplayersduetohigh marginsandwell known brand. Wehavediscountedthe industry averageandassigneda EV/EBIDTA multipleof17.0xtovaluethestockwhich ishigherthanthecurrent multipleenjoyed by thecompany asweexpect Hero Hondatoexpand itsmarginsduetofiscal benefitavailableat Haridwarplantaswellasduetostable

pricesofraw materials (steel, aluminum, etc)aftera big falllast year. Using thistarget multipleonourFY2010 EBIDTA estimatesofRs 2,278.6cr, wearriveatatarget priceofRs 2,011 pershare.Thestock iscurrently trading at P/E multipleof21.2xwhich isatdiscountof45.4%tothe peergroup averageof38.9x. Weexpectthecompanys EPS to growataCAGRof14.3% between FY2009-12E dueto itssuccessfulstrategy ofruralfocusand brand building aswellasduetofiscal incentivesavailableatthe Haridwarplant. Weareassigning a multipleof22.0xtovaluethestockasweexpect priceappreciation inthestocktooutpace itsearning growthovernext 12 months.Employing thistarget P/E multipleonourFY2010 EPS estimatesofRs88.3, wearriveatatarget priceofRs 1943.Pricing

MethodologiesTarget priceusing EV/EBITDA approach 50.0% 2,011.1 1,005.6Target priceusing PE ratioapproach 50.0% 1,942.6 971.3Weightedaveragetarget price (Rs) 1,976.9Currentstock price (Rs) 1,605.7Upside/(downside)from currentlevels 23.1%

Using the EV/EBITDA method, we

arrive at a target price of Rs 2,011 per

share

Using the P/E ratio method, we arrive

at a target price of Rs 1,943 per share

Taking the average from EV/EBITDA

and P/E methodologies, we get a

target price of Rs 1,976 per share

Exhibit 10: Income Statement Rs cr


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Particulars FY2008 FY2009 FY2010E FY2011E FY2012E

Net Sales 10331.80 12349.37 13818.42 15559.55 17417.18% chg 4.4% 9.9% 11.9% 12.6% 11.9%Total Expenditure8982.43 10607.36 11539.85 13021.37 14606.65% chg 2.9% 18.1% 8.8% 12.8% 12.2%

EBIDT

A 1349.37 1742.01 2278.57 2538.18 2810.53Margin (%) 13.1% 14.1% 16.5% 16.3% 16.1%OtherIncome 185.42 188.43 188.43 188.43 188.43Depreciation& Amortisation 160.32 180.66 190.19 192.08 194.93Interest 35.81 31.68 28.03 24.79 21.93PBT1338.66 1718.10 2248.78 2509.73 2782.10Margin (%) 12.7% 13.7% 16.1% 15.9% 15.8%

Total Tax 442.40 499.70 541.64 588.64 635.84(% of PBT) 33.0% 29.1% 24.1% 23.5% 22.9%

PAT896.26 1218.40 1707.15 1921.09 2146.26% chg 12.8% 32.4% 37.6% 11.8% 11.1%

Margin (%) 8.52% 9.72% 12.19% 12.20% 12.19%Source: Company data, Parsoli Research

Exhibit 11: Balance Sheet Rs cr


SOURCES OF FUNDSEquity Share Capital 39.94 39.94 39.94 39.94 39.94Reserves& Surplus 2946.30 3760.81 5033.40 6466.74 8096.17Net Worth 2986.24 3800.75 5073.34 6506.688136.11Total Loans (Unsecured) 132.00 78.49 70.64 63.58 57.22Deffred Tax Liabilities 130.59 153.08 178.97 205.35 232.52Capital Employed 3248.83 4032.32 5322.96 6775.60 8425.85APPLICATION OF FUNDS

Gross Block 1938.78 2516.27 2831.87 3146.87 3461.87Less: Acc. Depreciation 782.52 942.56 1132.75 1324.83 1519.76Net Block1156.26 1573.71 1699.12 1822.04 1942.11Capital Work-in-Progress 392.44 120.54 0.00 0.00 0.00Investments 2566.82 3368.75 3368.75 3368.75 3368.75Current Assets 936.78 1013.49 2464.06 4113.60 5952.14Current Liabilities 1824.74 2052.82 2213.12 2532.92 2841.29Net Current Assets-887.96 -1039.33 250.94 1580.67 3110.85Miscellaneous Expenditure 21.27 8.65 4.14 4.14 4.14Capital Deployed 3248.83 4032.32 5322.96 6775.60 8425.85Source: Company data, Parsoli Research

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Exhibit 12: Key Ratios



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Per Share Data (Rs)EPS 48.47 64.19 88.30 98.69 109.68Cash EPS 56.50 73.24 97.83 108.31 119.44DPS 17.00 19.00 21.00 23.00 24.00Book Value 149.55 190.34 254.08 325.86 407.46

Returns (%)ROE 32.41 33.72 34.75 30.29 26.92ROCE 29.79 31.79 33.12 29.08 25.99Dividend PayoutRatio 35.07 29.60 23.78 23.30 21.88Valuation Ratios (x)

P/E 14.24 16.67 18.18 16.27 14.64P/Cash EPS 12.22 14.61 16.41 14.82 13.44P/BV 3.06 2.28 1.97 1.73 1.49EV/Sales 1.33 1.72 2.22 1.87 1.58EV/EBITDA 10.21 12.19 13.45 11.47 9.76Source: Company data, Parsoli Research

Exhibit 13: Cash Flow Statement Rs cr

Particulars FY2008 FY2009 FY2010E FY2011E FY2012EProfit beforetax 1410.28 1781.46 2304.84 2559.32 2825.97Depreciation& Amortisation 160.32 180.66 190.19 192.08 194.93Change in Working Capital (138.15) 48.13 (15.76) (5.61) (11.41)Directtaxes paid& Fringe Benefit Tax 35.73 34.18 41.68 50.64 65.18OtherNon-cash Exp/(Inc) (14.11) 6.87 11.04 (5.91) (11.53)Cash Flowfrom Operations 1454.08 1982.95 2448.63 2689.23 2932.77(Inc.)/Dec. in Fixed Assets (174.21) (91.56) (120.00) (150.00) (175.00)Cap WIP (33.59) 27.43 (3.53) (4.33) (4.96)Free Cash Flow 1246.28 1918.82 2325.10 2534.90 2752.82Inc./(Dec.) in Investments (109.81) (29.00) 0.00 0.00 0.00Inc./(Dec.) in Capital 0.30 0.00 0.00 0.00 0.00Inc./(Dec.) in Loans 217.71 (100.97) (107.37) 6.27 7.70Dividend paid (incl.tax) (4.94) (10.97) (13.38) (32.54) (41.89)Interest paid (Net) (24.85) (21.64) (29.16) (16.28) (17.03)Cash Flowfrom Financing 213.00 (32.60) (149.90) (42.55) (51.21)Inc./(Dec.) in Cash 39.55 97.89 (78.55) 29.89 44.55Opening Cash balances 63.13 101.20 199.08 120.53 150.42Closing Cash balances 102.68 199.08 120.53 150.42 194.97Source: Company data, Parsoli Research

15

Disclaimer

Thisdocument is providedforassistanceonly and isnot intendedto beand mustnotalone betakenasthe basisforaninvestmentdecision. Nothing inthisdocumentshould beconstruedas investmentorfinancialadvice, andnothing inthis


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documentshould beconstruedasanadviceto buy orsellorsolicitationto buy orsellthesecuritiesofcompaniesreferredto inthisdocument. Eachrecipientofthisdocumentshould makesuch investigationsasitdeemsnecessary toarriveatan independentevaluationofan investment inthesecuritiesofcompaniesreferredto in

thisdocument(including the meritsandrisks involved), andshouldconsult itsownadvisorstodeterminethemeritsandrisksofsuchan investment. The investmentdiscussedorviewsexpressed may not besuitableforallinvestors.Parsoli Corporation Limitedhasnot independently verifiedallthe information given inthisdocument. Accordingly, norepresentationorwarranty, expressor implied, is madeastotheaccuracy, completenessorfairnessofthe informationandopinionscontained inthisdocument. This information issubjecttochangewithoutany priornotice. The Company

reservestherightto make modificationsandalternationstothisstatementas may berequiredfrom timetotimewithoutany priorapprovalornotification. Parsoli Corporation Limited, itsaffiliates, theirdirectorsandtheemployees may fromtimetotime, effectorhaveeffectedanownaccounttransaction in, ordealas principaloragentinorforthesecuritiesmentioned inthisdocument. They may perform orseekto perform investment banking orotherservicesfor, orsolicitinvestment banking orotherbusinessfrom, any company referredto inthisreport. Eachoftheseentitiesfunctionsasseparate, distinctand independentofeachother. Therecipientshouldtakethis intoaccountbefore interpreting thedocument.Thisreporthas been preparedonthe basisof information, which isalready available in publiclyaccessible mediaordevelopedthroughanalysisofParsoli Corporation Limited. TheviewsexpressedarethoseoftheanalystandtheCompany may ormay notsubscribetoalltheviewsexpressedtherein. Thisdocument is beingsuppliedto yousolelyforyourinformationand may not bereproduced, redistributedorpassedon, directly orindirectly, toany otherpersonorpublished, copied, inwholeor in part, forany purpose.Neitherthe Company, noritsdirectors, employees, agentsnorrepresentativesshall beliableforany damageswhetherdirectorindirect, incidental, specialorconsequential including lostrevenueorlost profitsthatmay arisefrom orinconnectionwiththeuseofthe information.


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Questionnaire

I needthefollowing questionnairefilledformy MBA projectwork. Needtosubmit ittomorrow

so inarush. Quickreplieswould beappreciated. (Youcan justwritethe questionnumberand

copy theoptionselected.)

1. Do youlikeriding bikes?


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Yes No

2. Whatage group do you belong to?18-25 36-45

26-35 Above 45

3. Why do youusually ridea bike?

Tocommute ForfunNootheroption Cheap &easy ride

4. Are you interested in performance bikes?Yes No

5. Howdoesthe ideaofa multi-brand premium bikestoresoundto you?

5___________4____________3____________2___________ _1Excellent Good Average PoorPathetic

6. Would you beencouragedtovisitastorethatofferstestrideforpremium bikes (evensuperbikes)?

Yes NoMay be

7. Would youappreciatethe testride inaroomfacility?Yes No

8. How muchare youcomfortably willing tospendona premium bike?Upto 5 lac8lac 10 lac5 lac 8lac Above 10 lac

9. Would you be interested in buying accessoriesfrom thesamestorewhere you buy the bike?Yes No

10. Pleaseratethese brandsas peryourliking.Yamaha Suzuki HondaHero Honda Bajaj TVS

11. Ifyousodesire, pleasefillthefollowing:

Name:Addresslocation:Phoneno:


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hero honda marketing strategy

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