Hero MotoCorp to set up its next plant in Gujarat

Hero MotoCorp Ltd (HMCL), the erstwhile Hero Honda Motor s Ltd, plans to set up its fourth manufacturing facility in Gujarat, according to a report by a Mumbai-based brokerage quoting the company’s chairman Brijmohan Lall Munjal.

The two-wheeler maker will also set up a global parts centre and a research and development (R&D) unit at Kukas near Jaipur in Rajasthan, initially investing about Rs.1,500 crore, according to two people familiar with the development. They didn’t want to be identified.

A Hero spokesperson confirmed a global parts centre will come up in Rajasthan but declined to comment on the investment or the timeframe for the project. The spokesperson did not comment on plans for a fourth plant either.

Motilal Oswal Securities Ltd said Hero plans to simultaneously set up two plants—one in Gujarat and the other in southern India.

“While the Gujarat plant will mostly serve export markets, the South India plant would help to serve the big southern market in order to save logistics cost of at least Rs.1,400 per unit,” analysts Jinesh Gandhi and Mansi Varma wrote in the report quoting Munjal. “The break-up of the JV (with Japan’s Honda Motor Co. Ltd in December 2010) delayed the planning of its fourth plant. HMCL is looking for financial and infrastructure incentives for the new plants.”

A Gujarat government official said on condition of anonymity Hero has reviewed a 100-acre plot in Sanand, where the state government has acquired land for industrial activities.

In an interaction in May, the company’s chief financial officer Ravi Sud said the firm will invest Rs.900 crore in the current fiscal, including Rs.500 crore for a fourth facility.

The new plant’s capacity will be 750,000 units a year, he said.

Hero, which sells one in every two motorcycles sold in India, has manufacturing plants in Dharuhea, Gurgaon and Haridwar.

According to Motilal Oswal, the company plans to increase its R&D budget from 0.2% of net sales to 1%.

“Over the next three years, the senior management is focused on building capabilities to design products with an R&D team of more than 200 members, establish the new brand, and a global distribution model,” the brokerage said in its report.

The company will start exporting two-wheelers to new markets from the next quarter—essentially areas Hero had not ventured into before so as to not compete with its former partner Honda. It expects to sell 1 million units overseas by 2016-17.

“It (Hero) has identified Africa, South-East Asia and Latin America as key markets for exports, and expects to start exporting to some countries in Africa by 3QFY12 (third quarter of fiscal year 2012). It targets export volume contribution of 10% (of its total sales) over the next 5-6 years...,” the Motilal analysts wrote. “HMCL’s teams have visited these potential markets and are getting encouraging response from the local distributors.”

Hero has said earlier it will venture aggressively into export markets using its own logo, potentially competing directly with its former partner Honda Motor.

The company is working to strengthen its marketing network by adding dealerships and other touchpoints such as sales kiosks from 5,000 to 6,500 in 15 months.

In a separate development, Hero’s recently showcased dirt bike Impulse and 110cc scooter Maestro will mean an increase in royalty payments to Honda estimated at around 5%.

The agreed upon fixed royalty of Rs.180 crore a quarter till June 2014 is for models launched till December 2010.

In March, Hero Investments, the investment arm of Hero Group, paid Rs.3,842 crore to buy Honda’s 26% in India’s largest motorcycle maker.