Even five years back Hero (erstwhile Hero Honda) would have been a no-brainer investment. A dominant market leadership with no real competition virtually assured that the company's good run would continue. In fact, a Rs 10,000 investment in Hero only five years ago would be worth Rs 22,600 today. But like all parties, this one too had to eventually end.
In 2010, the Munjals and Honda decided to end their 25 year partnership. According to market grapevine, Honda no longer wanted to share its technology with the Munjals and now wanted to go alone in the big Indian market.
Not surprisingly, many investors including FIIs had doubts about the long-term success of Hero without the technological advantage that Honda brought into the game. Hero MotorCorp, therefore, became one of the rare large-cap companies to see FIIs reduce their holding from 33.21 per cent a year ago to 29.85 per cent.
Should you follow the FII route?
Post the JV split, the Hero group for the first time in its existence now faces a very real threat in Honda. Honda knows the game - it is the largest two-wheeler manufacturer in the world. It has the technological advantage and by virtue of its long association with Hero, it now knows the Indian market too. The only thing it needs to build on is a sales network that rivals Hero's. In time, Honda is likely to challenge Hero's leadership in the Indian markets.
In the meantime, Hero is now battling one of the worst slowdowns in the domestic auto industry. The latest June quarter sales saw the fourth successive quarter of y-o-y sales volume decline as has been the case with Hero's profitability.
Royalty payments to Honda are scheduled to end in Q1FY15. This could result in savings of around Rs 200 crore per quarter but how Hero maneuvers the invasion of the Japanese in the long run is still an open question. Hold.
This article was originally published on October 09, 2013.
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