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In Focus: Tough Road

Competition & rising input costs are putting Hero Honda's margins under pressure

What do you do when you face margin pressures due to intense competition? You either improve quality or offer discounts to retain customers along with getting new ones. This is exactly what the world's largest two-wheeler company, Hero Honda Motors, is doing. After failing to make much headway in new technologies, the company is offering discounts. This is coupled with the fact that it is also confronting rising prices of raw materials like steel, aluminium, rubber etc.

Though the company posted a net profit growth of 17% to Rs 238 crore for the first quarter of 2006-07, it was a lower-than-expected result by the market.

The company, which has been giving 1,000 per cent dividend for the last couple of years, reported a drop in operating margins. The company's negative guidance statings that its margins would be under pressure for the current financial year also came as a surprise for the market. As for the discounts the company lost around Rs 25 crore in May on account of discounts.

However, the discounts and new products helped the company grow volumes by 21 per cent.

The company has lined up eight launches for the current financial year along with capacity expansion at Gurgaon and Dharuhera plants. The company is also exploring the possibility of supplying auto parts to Honda subsidiaries worldwide to improve profit margins. Till then it is going to be a tough road for the two-wheeler major.