Post-split, Hero group to bring in 3-wheelers

The Hero group, which has agreed to buy out its Japanese partner Honda’s 26% stake in the two-wheeler joint venture Hero Honda, plans to enter the three-wheeler business, pitting itself against market leader Bajaj Auto.

The BM Munjal-controlled group may launch a passenger carrier followed by a commercial goods mover, according to people familiar with its strategy. These plans were discussed at a meeting with vendors in Delhi, the people said.

“The group is examining the option of re-engineering its bigger two-wheeler engines to make three-wheelers. We have been asked to prepare for the entry into three-wheelers and other segments,” said a Delhi-based vendor who attended the meeting. Executives from over 50 companies, which supply critical parts to Hero Honda, took part.

Hero Honda uses 150cc engines for premium bikes such as Hunk while its top-end model Karizma is fired by a 225cc engine. TVS Motors rode piggyback on its two-wheeler technology to venture into three-wheelers in 2007, helping it to spread costs.

The Hero group will start implementing these plans once it signs a definitive agreement with Honda Motor Company. The Hero Honda spokesperson said there were no immediate plans to enter the three-wheeler segment. Three-wheelers are referred to as autorickshaws in India.

“Under the proposed new arrangement, several opportunities may exist in terms of new segments and product categories, but currently there is no such plan on the anvil,” the Hero Honda spokesperson said.

Diversified businesses help rivals Bajaj Auto and TVS improve profitability and the Hero group will have to drive down the same road, analysts said. Bajaj Auto’s net profit margins are around 20% in the three-wheeler business, higher than 15-17% in the two-wheeler segment.

“Exports (of three-wheelers) fetch higher prices than in the domestic market, leading to better margins. Export volumes are steadily growing, helping players such as Bajaj and TVS to post better profitability,” said Vaishali Jajoo, Analyst with Mumbai-based Angel Broking.

Three-wheelers are mainly shipped to neighbouring countries such as Sri Lanka, Bangladesh, Nepal and South East Asia. Markets such as Africa are also showing buoyant growth, signalling rising prospects for exports.

Pune-based Bajaj Auto, which is Hero group’s biggest rival in the two-wheeler business, is the largest manufacturer and exporter of three-wheelers. It dominates the domestic market with 40% share followed by Italian major DiMaggio Vehicles, with 38%. The domestic market grew 18.4% to 3.39 lakh three-wheelers in this fiscal till November.

The existing pact with Honda Motor — which will soon be scrapped — did not allow the Hero group to manufacture three-wheelers and export products except to neighbouring countries