Hero's royalty payment to Honda may rise this fiscal on weak rupee

New Delhi: Hero MotoCorp Ltd, India’s largest two-wheeler company by vehicles sold, will pay more royalty in the year to 31 March to its erstwhile joint venture partner, Honda Motor Co. Ltd, because the rupee has depreciated against the Japanese yen.

The royalty to Honda has risen to Rs. 228 crore in the three months ended 31 December from Rs. 180 crore in the first quarter. Hero MotoCorp estimates its royalty payment in the current quarter will not exceed what it paid in the preceding quarter.

“The rupee has had an unprecedented decline in the last couple of quarters,” Ravi Sud, Hero MotoCorp chief financial officer, said in an investors’ call on Friday. “As a result, our royalty payment has gone up. But we expect the Indian currency to stabilize in the coming fiscal.”

The rupee declined 20% against the dollar in the four months between August and November, making imports costlier for companies that depend on them to build cars. The Indian currency has weakened 22% against the yen in the past five months.

Hero MotoCorp is expected to pay a lump sum of Rs. 2,350 crore, or at least Rs. 180 crore per quarter, as royalty to Honda till June 2014 as a part of a licensing agreement.

The payments will be made in March of 2012, 2013, 2014 and June 2014. These won’t be equal instalments, but as far as a charge to the profit and loss account is concerned, the cost will be spread equally over three-and-a-half years, or 14 quarters, Sud said.

In this fiscal, Hero has already paid Rs. 618 crore in royalty. It will pay a fixed amount of Rs. 180 crore or more in the last quarter subject to currecncy fluctuations.

“The overall royalty payment for the fiscal will definitely go up,” said Jinesh Gandhi, an analyst at Mumbai-based Motilal Oswal Securities Ltd. “This should have some impact on the company’s margins in the coming quarters. However, the company is not hedged and expects the economic conditions to improve in the longer term.”

During the investor call, the New Delhi-based firm also said it is in the process of identifying new dealers in countries where it sells its products through outlets owned by Honda.

“Gradually, we will stop selling our bikes (in) Honda showrooms,” said Anil Dua, senior vice-president, marketing and sales, Hero MotoCorp. “We will either have independent dealerships or outlets with different legal identities.”

However, Hero has deferred its plans to enter other markets till next fiscal. Earlier, it had plans to enter markets such as Latin America, Africa and West Asia by January 2012.

“We are completing our strategy, business model and partners to enter the newer markets,” said Dua. “We should be able to start our operations in the next couple of quarters.”

Contractual commitments with Honda meant Hero MotoCorp had to ignore the lucrative motorcycle exports market.

On the technology front, the company said it has signed some long-term contracts with engine makers and design houses, and is also developing its own research capability.

“To develop our own engine capability is a long-term goal. We are adding talent. We are in the process of some long-term contracts. We have tied up with some international consultants. Later on, maybe we would look at a joint venture and may be acquiring some design house,” Sud said. The company has hired at least 255 engineers at its Gurgaon development centre.

The company said it will be able to develop its own bikes by 2015. “Usually, it takes two to two-and-a-half years to develop a new product. But we should be able to launch our own product in three to three-and-a-half years from the date of separation,” Dua said. Hero also said it will boost its capacity to seven million units in fiscal 2013 from the current 6.4 million.