Hero Honda Joint Venture break up a near term pain for both

The recent past may have witnessed certain gains in markets in general and auto stocks in particular but  the Hero Honda stock is down six per cent over the last one week . over the last one month, it is over 15 per cent down.  The auto reports are expressing the worries that the Japanese joint venture partner, Honda  may sell its stake in the company and exit to focus on its 100 per cent owned Indian subsidiary, Honda Motorcycles and Scooters India (HMSI). On the other hand the Hero group and Honda have denied that there is any break-up.

 

The auto experts and analysts say that if any such break up takes place, it  will help neither Hero group nor Honda, in the medium term. The analysts also say that Honda will have its task cut out on advertising its brand and sprucing up its distribution network, which is a sixth of Hero Honda’s. The experts also say that it would be better for Honda to stay within the JV instead of moving out as the company has been earning royalty, technical fees, export revenues etc. For instance, in 2009-10, Honda had earned Rs 1,000 crore from the JV which included royalty, technical fees and dividends.

 

Funding the R&D expenditure cannot be an issue for Hero Honda as they have the cash profit of around Rs 3,000 crore and the saving on the royalty payment of over Rs 400 crore. they also have ample time for  establishing R&D set up. Earlier  Bajaj and TVS have proved themselves on these lines. Another analyst says that if Honda exits, the Hero group will have to build their own expertise in research and development and contend not only with such existing competition as Bajaj but also future lower-end launches from Honda. Nothing stops Honda from launching its own version of the Splendor. This year Honda has already launched  a 100cc bike in the market. Many analysts also share the view that the Hero group may tie up with other companies for gaining the technical support as it will be really difficult to hold on to its 50 per cent share of India’s two wheeler market.