Market warms to Hero Honda royalty deal

Shares up 18%, as outgo less than expected.

Shares of Hero Honda soared 18 per cent on an otherwise flat market on Monday after senior executives of the world’s largest two-wheeler manufacturer said royalty outgoes would be lower than analysts had anticipated. They said royalties to Honda Motor, its soon-to-be former partner, would drop after 2014, and that payments for existing products would cease by that time.


Ravi Sud, Hero Honda’s chief financial officer, said, “The royalty going forward will be in line with what we pay now and we will not be paying any royalty on existing products after 2014.”

Hero Honda shares closed at Rs 1,981.20, 17.99 per cent higher, at the Bombay Stock Exchange on Monday. The BSE Sensex closed up 0.12 per cent at 19,888.88 points.

“Royalty rates on new models to be given by Honda would be in alignment with existing ones. The new models from Honda would help maintain the current trend at Hero Honda of introducing seven to eight models every year,” Sud added.

A definitive agreement between the Hero Group and Honda is expected to be signed in two to three weeks. Hero Honda is likely to pay 2.75-2.85 per cent of net sales as royalty to Honda in the current fiscal.

The Munjals-promoted Hero Group had last week announced that it would buy Honda’s 26 per cent stake in Hero Honda for an undisclosed amount. The transaction is expected to be completed sometime next year.

Following the agreement, the Hero Group is looking to develop its own research & development capabilities. Sud declined to specify the amount the company is looking to invest, but said competitors typically spend 1.4-1.7 per cent of net revenues on R&D.

“We would focus on building our R&D, besides Honda would provide us with some new models. If the need arises, we can also scout for partners globally to source technology,” Sud said.

The Hero Group will also start work on putting in place an overseas distribution network in the coming months. Anil Dua, senior vice-president (marketing & sales) at Hero Honda, said, “We have so far been a national player with limited global presence. We will now look at rapidly tapping opportunities worldwide. In our existing export markets, we will use the joint brand during the transition period for our products. In new geographies, we will project our own brand.”

The company is exploring markets in South Africa, South Asia, Latin America and the Middle East.

Sud also said the Hero Group intends to focus on value engineering some components, which would eventually bring down material costs. “Under the existing agreement with Honda, we source components from vendors approved by them. When the new agreement comes into force, we will gain a cost advantage as we would be able to procure components from anywhere in the world,” Sud added.