Hero Honda stock slips 5% on JV split details

Hero Honda Motors stock tumbled nearly 5% on Monday in early trade before closing 3% down at Rs 1,774 on the Bombay Stock Exchange, after news reports that the two-wheeler major has reached an agreement to dissolve its 26-year-old joint venture with Japanese automaker Honda.

Honda and its Indian partner, Hero Group, are currently seeking approval from their respective boards. The deal valued at $1.2 billion (. 5,400 crore), a discount of 45%, will be concluded by the end of the month, said two people familiar with the matter.

A number of institutional investors are opposing the sale of shares by Honda to its Indian joint venture partner — the Hero Group—at a discount to the current market price. The institutional investors are also uneasy about the fact that the Hero Group is likely to sell Honda’s 26% holding to private equity investors at a premium to the purchase price but below the market price, ET reported on Monday.

Aberdeen Asset Management, which owns 5.14% in the company, is its largest institutional shareholder while Capital World, Life Insurance Corporation of India and Vanguard have holdings ranging from 1-2 % in the Indian company. The company currently pays 2.5% of its annual sales as royalty to Honda and a steep increase is bound to impact the company’s earnings, said analysts.

Honda Motor operates in India through a 100%-owned subsidiary, Honda Motorcycles and Scooters (HMSI), which directly competes with Hero Honda in the key two-wheeler segments. Honda is also planning to enter the 100cc motorcycle market in which Hero Honda enjoys a majority market share.

The disagreement between the two partners started after Honda asked Hero Honda to increase supply of components from HMSI. The company wants to increase its royalty from the sales of the joint venture, but has been unable to do so because bulk of the sales, about 60%, are contributed by relatively older bikes — Splendor and Passion.

The Hero Group and Honda came together in 1984 to build and sell motorbikes. In 2004, the Hero Group and Honda extended their agreement for 10 years, under which the Japanese partner would continue to provide technology to the JV. The technology agreement is valid till 2014.

The Hero Group is planning to set up its own R&D centre in preparation for life after 2014 if — as it increasingly looks likely — it ends up running the company on its own.