Some buyers are still yearning for the Hero Honda badge, a challenge the firm is expected to overcome as it builds brand Hero
It was never meant to be a smooth transition. A strong distribution network and a marketing blitz have helped Hero MotoCorp Ltd grow sales by 7.4% in the June quarter. But as the company seeks to reorganize the business under the Hero name, some consumers are resisting the change.
According to Antique Stock Broking Ltd, lack of the Honda badge is deterring some buyers from buying certain models. Ashish Nigam and Kunal Jhaveri of Antique Stock Broking said in a note, “Our interaction with Hero dealers validates what we feared. As per some dealers, dropping the Honda tag from the flagship Splendor Pro and Splendor Plus has impacted conversions (enquires converted into sales) by 5-10%. This is clearly worrying as these models combined account for approximately 90% of Splendor and thereby approximately 35% of total volumes.”
Considering Honda’s brand equity, it is no surprise some buyers are still yearning for the Hero Honda badge. The company is expected to overcome the challenge as it builds the Hero brand. As pointed by the Antique analysts, the percentage of sales affected due to the change in brand name is relatively small—conversions have been impacted by just 5-10%. But the impact of a change in brand name, even though small, could make considerable difference to Hero MotoCorp in the short-term.
Like the rest of the two-wheeler companies, sales at the Hero MotoCorp are already slowing. From 23.2% in the first six months of 2011, growth in two-wheeler sales decreased to 6.4% in January-June this year.
What’s more, the slowdown in the domestic two-wheeler market is getting deeper. A survey conducted by IIFL’s institutional equities research desk found the demand for two-wheelers has worsened in July. Joseph George of IIFL Institutional Equities said in a note, “The demand scenario for two-wheelers seems to have weakened compared with our previous dealer survey (early June 2012). In our previous round of dealer checks in June, Hero and Honda dealers were positive on the demand scenario whereas Bajaj dealers were bearish. Over the past three months, the demand scenario has weakened for Hero as well.”
To be sure, the slowdown is not limited to Hero MotoCorp. But the loss of sales due to the change in brand name can make the slowdown more challenging for the company. While the competition from Honda and Suzuki motorcycles is intensifying, inventory pile-up at dealers leaves Hero MotoCorp little elbow room to boost dispatches in the next few months.
According to Antique, against a normal level of 3.5 weeks, inventories reached around six weeks at Hero MotoCorp. The sharp rise in inventories, coupled with slowing two-wheeler sales, is expected to soften the company’s dispatches further in the coming months. Analysts at Antique add, “Inventory levels remain alarmingly high (currently about 6 weeks; normal is 3.5 weeks). Clearly, there is less head-room to build up festive stock in the coming months. Hence, post the 1% year-on-year (y-o-y) decline in July dispatches, we expect August/September dispatches to also decline by 6%/4% y-o-y.”
Overall, it is going to be a bumpy ride for Hero MotoCorp. Against the automobile index on the Bombay Stock Exchange gaining 13.5%, the stock lost 4.5% of its value since the beginning of this year.
The company is aggressively promoting its motorcycles in overseas markets. Hero MotoCorp is targeting to sell 1 million units in overseas markets by 2016-17, Mint reported on Friday. While the company is still building a dealer network in overseas markets, sales in the domestic market have to pick up for the stock to regain positive momentum.
