Digging in for the long haul, the two local subsidiaries of the Japanese automobile major Honda Motor are sacrificing profits in the short-term as it builds scale through new products, manufacturing capacities ramp-ups and promotional spends in India.
Honda Motorcycle & Scooter India (HMSI), the Honda subsidiary that makes two-wheelers, posted its first decline in profit in the last five years, and its car subsidiary Honda Cars India saw losses swell to Rs 1,000 crore for 2012-13.
Honda Motorcycle and Scooter India's net profit for FY13 declined over 5.54% to Rs 389.31 crore versus Rs 412.18 crore posted by the company in FY12, whereas for Honda Cars India losses jumped over 85% to Rs 1,109 crore.
While Honda Cars has accumulated losses of Rs 1,300 crore, Honda's two-wheeler arm is sitting on a surplus of Rs 1,100 crore. Honda Cars India grew volumes by over 35% in FY13 to 73,483 units with a market share of 2.74%, whereas HMSI posted a healthy volumes growth of 31% to 2.75 million vehicles.
Analysts reckon that a large part of the pressure on the bottom line for the car company has been on account of volatile yen due to significant imports, and also due to the unutilised second plant in Tapukara. This along with higher depreciation, costs and rising costs on promotions on account of the overall market slowdown has indeed cramped margins.
Barring the Amaze which was launched in FY14, all its other models declined in line with the market trend in FY13. As for the two-wheeler subsidiary, the increasing share of lower margin mass market motorcycles, rising ad spend with the company hiring film star Akshay Kumar as its brand ambassador, increase in man power cost and raw material cost took a toll on the company's profits and margins.
To be sure, HMSI's volumes grew at over 20-30% in the last three to four years, the margins shrunk over 350 basis points to 10.1% in FY13. In FY14, the company tied-up with HDFC Bank to sell Dream Yuga at an attractive finance offer and in some markets, the company had schemes running of 0% processing fee.
When contacted, HMSI spokesperson said the company has been on an aggressive expansion overdrive since FY10.
"To realise this huge sales growth, appropriate investments and expense on capitalisation of 2nd plant at Tapukara, Rajasthan, due to which depreciation costs have significantly risen and PAT has been impacted. Increase in expense is due to proportionate increase in new manpower to support our expansion. Increase in advertisement and branding expenses. Increase in material cost due to increase in input prices of steel, aluminum, plastics etc," the spokesperson explained.
The spokesperson for Honda Cars India added: "At any time, there are internal and external factors at work which impact a company's performance and recent currency weakening is one of the reasons at play. With a clear product strategy and expansion plans we are confident of a new phase of growth for Honda in India."
HMSI said attributing falling margins and profits to the increasing share of motorcycle sales would be inappropriate. "Primarily, heavy investments for additional production capacity resulted in moderation of margins," the company explained.
According to Deepesh Rathore co-founder, EMMAAA, an automotive consultancy firm, the drop in profits and margins for brand Honda (two-wheelers and cars) is on expected lines.
"On the two-wheeler front, Honda wants to be number 1 and is running behind volumes and market share. So, higher spend on advertising, promotions are a given and it is taking Hero head on, in their turf, so the margins are expected to be lower. Eventually once they reach a scale, margins and profits will come back. On the cars front, apart from Amaze, the other models were falling in line with the market. So, the company had to shell out more for promotions, relatively unutilised Tapukura plant and diesel engine plant expansion too took a toll on the company's profits," said Rathore.
But such pain is only in the short term. About the future, Rathore feels the best is yet to come, "The next two to three years for both cars and two-wheelers is going to be extremely good," he added.
Honda Motorcycle & Scooter India (HMSI), the Honda subsidiary that makes two-wheelers, posted its first decline in profit in the last five years, and its car subsidiary Honda Cars India saw losses swell to Rs 1,000 crore for 2012-13.
Honda Motorcycle and Scooter India's net profit for FY13 declined over 5.54% to Rs 389.31 crore versus Rs 412.18 crore posted by the company in FY12, whereas for Honda Cars India losses jumped over 85% to Rs 1,109 crore.
While Honda Cars has accumulated losses of Rs 1,300 crore, Honda's two-wheeler arm is sitting on a surplus of Rs 1,100 crore. Honda Cars India grew volumes by over 35% in FY13 to 73,483 units with a market share of 2.74%, whereas HMSI posted a healthy volumes growth of 31% to 2.75 million vehicles.
Analysts reckon that a large part of the pressure on the bottom line for the car company has been on account of volatile yen due to significant imports, and also due to the unutilised second plant in Tapukara. This along with higher depreciation, costs and rising costs on promotions on account of the overall market slowdown has indeed cramped margins.
Barring the Amaze which was launched in FY14, all its other models declined in line with the market trend in FY13. As for the two-wheeler subsidiary, the increasing share of lower margin mass market motorcycles, rising ad spend with the company hiring film star Akshay Kumar as its brand ambassador, increase in man power cost and raw material cost took a toll on the company's profits and margins.
To be sure, HMSI's volumes grew at over 20-30% in the last three to four years, the margins shrunk over 350 basis points to 10.1% in FY13. In FY14, the company tied-up with HDFC Bank to sell Dream Yuga at an attractive finance offer and in some markets, the company had schemes running of 0% processing fee.
When contacted, HMSI spokesperson said the company has been on an aggressive expansion overdrive since FY10.
"To realise this huge sales growth, appropriate investments and expense on capitalisation of 2nd plant at Tapukara, Rajasthan, due to which depreciation costs have significantly risen and PAT has been impacted. Increase in expense is due to proportionate increase in new manpower to support our expansion. Increase in advertisement and branding expenses. Increase in material cost due to increase in input prices of steel, aluminum, plastics etc," the spokesperson explained.
The spokesperson for Honda Cars India added: "At any time, there are internal and external factors at work which impact a company's performance and recent currency weakening is one of the reasons at play. With a clear product strategy and expansion plans we are confident of a new phase of growth for Honda in India."
HMSI said attributing falling margins and profits to the increasing share of motorcycle sales would be inappropriate. "Primarily, heavy investments for additional production capacity resulted in moderation of margins," the company explained.
According to Deepesh Rathore co-founder, EMMAAA, an automotive consultancy firm, the drop in profits and margins for brand Honda (two-wheelers and cars) is on expected lines.
"On the two-wheeler front, Honda wants to be number 1 and is running behind volumes and market share. So, higher spend on advertising, promotions are a given and it is taking Hero head on, in their turf, so the margins are expected to be lower. Eventually once they reach a scale, margins and profits will come back. On the cars front, apart from Amaze, the other models were falling in line with the market. So, the company had to shell out more for promotions, relatively unutilised Tapukura plant and diesel engine plant expansion too took a toll on the company's profits," said Rathore.
But such pain is only in the short term. About the future, Rathore feels the best is yet to come, "The next two to three years for both cars and two-wheelers is going to be extremely good," he added.
