Date: 11th July 2000
Hero Honda - Buy it, hoard it, forget it
Current market price - Rs988
BSE Sensex - 4898

Motorcycling unplugged! Buyers find the vehicle the ultimate in riding experience while those who have rode the scrip will also vouch for the same, albeit on a more sedentary level. If there is one automotive company, which always manages to spring a surprise or two, it is undoubtedly Hero Honda. A star choice for many an analyst, the company has many things going for it.

What is the Business?
The company has been riding the motorcycle boom in the past three years. Sales have risen by an unbelievable CAGR of 41.5% to 0.76mn units in the period FY97 to FY2000. All this has been possible as a result of a focussed approach on manufacturing motorcycles and, only the environmentally friendly ones. In fact, Hero Honda had started wearing a green helmet at a time when many of its peers were blissfully unaware of the approaching emission regime. With the launch of the 'CBZ' model, Hero Honda finds itself catering to all decision parameters, namely fuel efficiency, power, styling and durabality. What is also going for it is the fact that all its products have an impeccable brand equity and parentage - its JV partner is a global leader in four-stroke two wheelers.

Who is the Management?
The chief promoters - the Munjals - have earned kudos for riding its flagship firm to a position where it has been branded as an outperformer. To go back to the late 80's, there was a time when a slew of Japanese joint ventures were reeling under the double blow of a depreciating yen and high import duties, Hero Honda managed to stay afloat. In the early and mid 90's, the management was slow on the take and did not pay adequate attention towards investing in capex to cater to the rise in motorcycle demand. However, it has redeemed itself by increasing capacities in the past three years to cater to the increasing demand. The management has always laid special emphasis on introducing new models and developing a strong network of ancillaries, perhaps, the most critical aspect of the business.

Whither Cash flows?
Unlike scooters and mopeds, the motorcycle segment generally brings in the moolah. A strong growth in net profit coupled with efficient working capital management has kept the stream of free cash flows from becoming dry. While much of it has been used to fund investment in capex, the company did not neglect its shareholders and year after year have rewarded their commitment by doling out handsome dividends. Pay-out ratio has increased from Rs3.2 per share in FY96 to Rs10 per share in FY2000. While the wealth gods have kept smiling, the company has come laughing all the way from the bank. Why? Because it has managed to lower its debt burden and you shouldn't be surprised if it declares itself debt free this year.

Why should I Invest?
As long as those young at heart get a kick out of riding a motorcycle, Hero Honda should not have much to worry about. Given a FY2000 P/E ratio of 20.6x it is not exactly cheap but is certainly undervalued. Given its singularity of focus, strong brand equity, high cash flows and high levels of ROCE and RONW, one would even dare to predict that even if the going gets tough one day, Hero Honda will once again prove its mettle.

Where can I go Wrong?
Much has been made about the imminent entry of the company's JV partner in the two-wheeler business in recent times. But it may just be a case of jumping the gun. As per the agreement between Hero Honda and Honda, the latter's 100% subsidiary will not manufacture motorcycles for the first five years and only go for scooters. And by the time, Honda does set up its plant and gets its project off ground, it will provide ample time for Hero Honda to consolidate its existing hold in the market. Perhaps, there could be a possibility of the foreign partner buying out Munjal's stake in the long term.

Abhijeet Dey

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