‘Bajaj & TVS to feel Honda heat more than Hero’

Raamdeo Agrawal, director and co-founder of Motilal Oswal Financial Services, has held on to Hero Honda Motors for over 14 years. As per the 15th annual wealth creation study (2005-2010) done by Motilal Oswal Financial Services, Hero Honda has been the most consistent wealth creator over the last decade, having appeared on all 10 occasions. During this 10-year period, the company has delivered net profits at a compounded annual growth rate (CAGR) of 22.5% and the stock has rewarded its firm believers by giving CAGR returns of 33.9%. In an interview to DNA, Agrawal shares his views on the company, its management and the business. Excerpts:

What made you invest in Hero Honda when the brand was not as popular as it is now?
During those days, the two-wheeler market was undergoing value migration with motorcycles just taking over from scooters. The motorcycles were in short supply and there was not much competition. Honda was a world leader and with them, Hero Honda’s leadership in motorcycle was destined, and they were getting incremental market share. Apart from that, they had a very good management and the stock was available at attractive valuations. With P/E of less than 10, and excellent return ratios like ROE and ROCE, it was a perfect backdrop for investing in Hero Honda.

You mentioned about the management being good. How do you see them now?
The Munjals have been great entrepreneurs, as they started off with bicycles and soon created an empire out of it. They have always been very calibrated and conservative, without creating any speculation. They have consistently rewarded their investors with liberal dividends and the stock has given fantastic returns. But somehow, despite all this, the stock has not enjoyed market confidence as it should have. The stock has therefore newer flown in terms of P/E being always in the range of 15-20 all these years.

How would this JV termination affect the group’s performance?
The exit is not happening overnight. The brand ‘Hero Honda’ would be there for the next four years and Munjals would be free to export while Honda can come out with its own models in India. Also, on the development side, Honda would provide technical support for a few more models. The entire facts of the deal are not out yet, so cannot figure the full impact of this at the moment.

What challenges do you see for Hero Group in the coming days, with Bajaj Auto and others including Honda hot on their heels?
Honda is present in India for sometime now and it is not a new player in the market. They already have some of the models in India. In fact, Honda would turn out to be a challenge for the other two players (Bajaj Auto and TVS) in the market rather than Hero as the brand Hero Honda still commands a recall. Also, it would take time for Honda to ramp up the capacities in India to challenge these players. But, history has shown that whenever competition increases, profitability does decrease a bit.

Would this deal hit the minority investors like you?
The management of the company has always taken care of the minority shareholders in the past and I am sure they would not do anything which goes against the minority shareholders’ interest.

After all, they own only a part of the company and if they shortchange the investors, they would loose the trust over the long term. So, I am sure it would not be against the interest of common investors.

What about the stock?
Whatever negatives had to come have already come now, with all the media reactions. I do not see further negatives for the company.