Ignoring its large pile-up of unsold motorcycles, Hero MotoCorp Ltd is preparing for record production as the festival season approaches, according to people familiar with the company’s plans.
Hero has asked its parts suppliers to gear up for production volumes of 600,000 units in September, its highest ever, said one of the suppliers, requesting not to be named.
The plan is in line with Hero’s aim to sell 1.1 million units during the festival season, said another person.
This, despite the firm being saddled with unsold stock of close to 50,000 units at its plants in Gurgaon and Daruhera in Haryana and Pantnagar in Haridwar.
“Last year, our retail sales crossed one million units of two-wheelers during the festive months of October-November. This year also, we do plan to exceed last year’s retail sales,” Anil Dua, senior vice-president, marketing and sales, Hero MotoCorp, said in an email response.
“Accordingly, our production will be in line to meet this objective. Our dealer inventories will move as per our plans and norms so that they have enough stock to meet the expected market demand,” he said.
Hit by high petrol prices, costlier finance for buyers and negative market sentiment because of a slowing economy, two-wheeler sales in India expanded at 11% to 2.3 million units in the first two months of this year, slower than the 18% growth in the same two months last year, according to the Society of Indian Automobile Manufacturers, or Siam.
Crisil Research estimates two-wheeler sales grew by around 10% in the first quarter of this fiscal, slower than the 17% growth in the first three months of fiscal 2012.
The increases in petrol prices despite subsequent cuts shocked customers and have hurt auto sales but there have been no offers of cash discounts or price cuts by companies so far, said Umesh Karne, auto analyst with Brics Securities.
And with the monsoons being below average this year, analysts are skeptical about the festival season offering a respite to slowing two-wheeler sales. Monsoons in India were 49% below average in the week ended 4 July, data from the weather office showed. The rains are crucial for India’s agrarian economy, especially in the small towns and villages that account for a large portion of two-wheeler sales.
Experts are skeptical about Hero’s plans as well.
“Companies always tend to push stocks in anticipation of strong demand in the festive season. However, whether the market will absorb it depends on how the festive season pans out,” said Mahantesh Sabarad, senior vice-president (equity) at Fortune Equity Brokers Pvt. Ltd. The firm had estimated that India’s two-wheeler market would expand 11% by the turn of the fiscal, but Sabarad said it may now cut that forecast because of the poor monsoon. On Monday, Siam said it expects to lower its growth forecast for India’s overall automobile industry to single digits, from its present estimate of 10-12% growth.
Two other people familiar with Hero’s plans, also requesting anonymity, said the aggressive production and sales targets are the first step towards the company achieving its sales objective of 10 million units by 2015.
“We understand that there are some constraints amid a slowing market,” said one of them, a senior executive at one of Hero’s plants. “But the company thinks that it is a matter of time before the domestic market recovers. We want to go ahead with our plans and targets.”
Hero, the country’s largest two-wheeler maker, despatched 1.6 million units to dealers between April and June, a spokesperson said. The retail sales of two-wheelers is a cyclical process and dependent on several variables such as the economy, the monsoons and the festival season, and dealer inventories keep fluctuating according to these variables, the spokesperson added.
Dealers for Hero and its erstwhile partner, Honda Motorcycle and Scooter India Pvt. Ltd, are seeing two-wheelers piling up. “There is excess supply of Hero and Honda motorcycles at the dealer level,” said Kamal Bhandari, who owns K International Automobile, a consultant and financier for two-wheelers in Chennai. “This is in contrast to the long waiting period seen till seven months ago” for Honda, he added.
Makoto Yoshi, operating head, south, Honda Motors, did not respond to email queries. Yadvinder Singh Guleria, vice-president, operating head, sales and marketing of Honda Motorcycle, was unavailable for comment.
Honda displaced TVS Motor Co. Ltd as India’s third largest two-wheeler maker, selling 1.9 million motorcycles and scooters last year and capturing a 14.9% share of the market. TVS sold 1.8 million units last year.
“Yes, there is glut in the market, but not for us,” said R.R Manohar, managing partner of Ramkay TVS, the largest dealer for TVS motorcycles.
The dealer has reduced its stock to 21 days from holding a one-and-a-half-month inventory in April last year. But monthly average sales dropped to 1,600 units in the first quarter of fiscal 2013 from 1,750 units in the first quarter of fiscal 2012.
“Our interactions with two-wheeler market participants show high levels of dealer inventory across larger manufacturers for the past few months,” said Ajay Srinivasan, director, industry research, Crisil Research. The inventory with dealers is four-six weeks as against normal inventories of around two weeks, he said.
Last year, while unveiling Hero’s new brand identity in London, chief executive Pawan Munjal said the company aimed to cross 10 million units in sales with a turnover of $10 billion in five years. Accordingly, Hero recently announced it will invest Rs.2,600 crore on expanding capacities, building new plants and developing its own research and development centre.
Hero is also expected to enter the 110cc segment, where it does not have a presence, during Diwali with the Passion XPro, which will compete with Honda’s recently launched Dream Yuga. “We have launched Ignitor 125cc recently, despatches for which have already started. Another motorcycle will be coming by the end of this year. The company hopes to drive sales through these products, along with scooters Maestro and Pleasure,” said the Hero plant executive mentioned earlier.
As a run-up to the festival season, Hero plans to despatch an average 5,000 two-wheelers across its 1,200 dealers in the country, said the other person familiar with Hero’s plans.
Two-wheeler makers typically despatch 10% more units to dealers during the festival season; but with the monsoons yet to arrive, Hero may see its inventory build up from November, said Surjit Singh Arora, analyst at brokerage Prabhudas Lilladher Pvt. Ltd. “Should the present scenario continue, despatches to the dealers reported by the company will see a sharp drop month-on-month. So far, the stock at the dealers is not alarming,” he said.
