Fundamental Analysis

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

FUNDAMENTAL ANALYSIS OF HERO HONDA

SUBMITTED TO Prof. AVIJAN DUTTA

Submitted by:

NAME: NISHANT LOMASH ROLL NO: 07/MBA/45

DEPARTMENT OF MANAGEMENT STUDIES

NATIONAL INSTITUTE OF TECHNOLOGY DURGAPUR

INDEX

1. COMPANIE’S PROFILE……………………………………………………………..………………..3

2. INDIAN ECONOMIC GROWTH...…..……………………………………………………………4

3. EVOLUTION OF THE INDIAN TWO-WHEELER INDUSTRY ……………………..…..…5

4. HERO HONDA AS A COMPANY ………………………………………………………………..16

5. FORCASTS …………………………………………………………………………………………….…23

6. PROFATIBALITY.………………………………………………………………………………..…….27

7. RESULT………………………………………………………………………………………………..….31

Type

Public company BSE:HEROHONDA M

Founded

January 19, 1984 in Gurgaon, Haryana, India

Headquarters

Haryana, India Om Prakash Munjal, Founder

Key people

Mr. Brijmohan Lall Munjal, Mr. Toshiaki Nakagawa, Joint Director

Chairman Managing

Mr. Pawan Munjal, Managing Director Industry

Automotive

Products

Motorcycles, Scooters

Revenue Website

U$ 2.8 billion http://www.herohonda.com

HERO HONDA HEADQUARTERS

INDIAN ECONOMIC GROWTH: The growth forecast from fiscal year 2008-09 to 7 per cent from 7.2 per cent earlier. India has been increasingly attracting the attention of the global economic community due to its good record of achieving annual GDP growth of 9.3 percent in the previous three financial years ending March 2008. Globally, the country is now seen as part of a new axis of economic power in the world. The favorable macro economic conditions, both in domestic and global markets, and the easy flow of global funds into the emerging markets, including India, had contributed to this buoyancy in the Indian economy. However, the rising oil and commodity prices globally, the domestic supply-side constraints, and resultant high inflation and interest rates are causing some deceleration in the growth momentum of the Indian economy. According to the provisional data available for the first quarter of the fiscal year 2008-09, the industry sector has grown by 5.2 percent as compared to 10.3 percent in the corresponding period of 2007-08. During the same period, the agriculture sector has grown by 3.0 percent (4.4 percent), and services sector has reported marginal slowdown from the last year growth rate of 11.8 percent. The investment-led growth in the industrial field witnessed in the last couple of years is presently reporting downward trend, which has also contributed to economic slowdown. The external trade of India continues its path of high growth, albeit not at a pace seen in the previous few years. During the first four months of the current fiscal year, its export has grown by 24.6 percent, as compared to the corresponding period of the previous fiscal year, reaching US$ 59.19 billion and its import has risen by 34.2 percent reaching US$ 100.42 billion. The recent exponential rise in the international oil prices did contribute to a high jump in India’s import bill. Due to increasing trade deficit, coupled with the exit of fairly large amount of capital of Foreign Institutional Investors (FIIs) from the country, the Indian Rupee having remained strong against US dollar for more than a year, has now started depreciating. With public transport failing to keep pace with the growing demand of urban commuters, there are high probabilities that this segment will continue to grow. Current estimates forecast growth at about 10 to 16 percent for the next three years.

EVOLUTION OF THE INDIAN TWO-WHEELER INDUSTRY: The two-wheeler industry (henceforth TWI) in India has been in existence since 1955. It consists of three segments viz., scooters, motorcycles, and mopeds. The increase in sales volume of this industry is proof of its high growth. In 1971, sales were around 0.1 million units per annum. But by 1998, this figure had risen to 3 million units per annum. Similarly, capacities of production have also increased from about 0.2 million units of annual capacity in the seventies to more than 4 million units in the late nineties. The TWI in India began operations within the framework of the national industrial policy as espoused by the Industrial Policy Resolution of 1956. This resolution divided the entire industrial sector into three groups, of which one contained industries whose development was the exclusive responsibility of the State, another included those industries in which both the State and the private sector could participate and the last set of industries that could be developed exclusively under private initiative within the guidelines and objectives laid out by the Five Year Plans (CMIE, 1990). Private investment was canalized and regulated through the extensive use of licensing giving the State comprehensive control over the direction and pattern of investment. Entry of firms, capacity expansion, choice of product and capacity mix and technology, were all effectively controlled by the State in a bid to prevent the concentration of economic power. However due to lapses in the system, fresh policies were brought in at the end of the sixties. Recognition of the deleterious effects of these policies led to the initiation of reforms in 1975 which took on a more pronounced shape and acquired wider scope under the New Economic Policy (NEP) in 1985. As part of these reforms, several groups of industries were deli-censed. Controls over capacity expansion were relaxed through the specification of the MES of production for several

Industries. Foreign investment was allowed in select industries and norms under the MRTP Act were relaxed. These reforms led to a rise in the trend rate of growth of real GDP from 3.7% in the seventies to 5.4% in the eighties. However the major set of reforms came in 1991 in response to a series of macroeconomic crises that hit the Indian economy in 1990-911.Several industries were deregulated, the Indian rupee was devalued and made convertible on the current account and tariffs replaced quantitative restrictions in the area of trade. The initiation of reforms led to a drop in the growth of real GDP between 1990 –1992, but this averaged at about 5.5% per annum after 1992. The decline in GDP in the years after reforms was the outcome of devaluation and the concretionary fiscal and monetary policies taken in 1991 to address the foreign exchange crisis. Thus the Industrial Policy in India moved from a position of regulation and tight control in the sixties and seventies, to a more liberalized one in the eighties and nineties. A description of the evolution of the two wheeler industry in India is usefully split up into four ten year periods. This division traces significant changes in economic policy making. The first time-period, 1960-1969, was one during which the growth of the two-wheeler industry was fostered through means like permitting foreign collaborations and phasing out of non-manufacturing firms in the industry. The period 1970-1980 saw state controls, through the use of the licensing system and certain regulatory acts over the economy, at their peak. During 1981-1990 significant reforms were initiated in the country. The final time-period covers the period 1991-1999 during which the reform process was deepened. The reforms encompassed several areas like finance, trade, tax, industrial policy etc. We now discuss in somewhat greater detail the principal characteristics of each sub period. a) 1960 – 1969 The automobile industry being classified as one of importance under the Industrial Policy resolution of 1948 was therefore controlled and regulated by the Government. In order to encourage manufacturing, besides restricting import of complete vehicles, automobile assembler firms were phased out by 1952 (Tariff

Commission, 1968), and only manufacturing firms allowed to continue. Production of automobiles was licensed, which meant that a firm required a licensing approval in order to open a plant. It also meant that a firm’s capacity of production was determined by the Government. During this period, collaborations with foreign firms were encouraged. b) 1970 – 1980 This was a period during which the overall growth rate of the two-wheeler industry was high (Around 15% per annum). Furthermore, the levels of restriction and control over the industry 11 were also high. The former was the result of the steep oil price hikes in 1974 following which two-wheelers became popular modes of personal transport because they offered higher fuel efficiency over cars/jeeps8. On the other hand, the introduction of regulatory polices such as MRTP and FERA resulted in a controlled industry. The impact of MRTP was limited as it affected only large firms like Bajaj Auto Ltd. whose growth rates were curbed as they came under the purview of this Act. However, FERA had a more farreaching effect as it caused foreign investment in India to be restricted. In the motorcycle segment FERA did not cause technological stagnation, as a consequence of which, new products nor firms entered the market since this segment depended almost entirely on foreign collaborations for technology. The scooter and moped segments on the other hand were technologically more Self-sufficient and thus there were two new entrants in the scooter segment and three in the moped segment. c) 1981 – 1990 The technological backwardness of the Indian two-wheeler industry was one of the reasons for the initiation of reforms in 1981. Foreign collaborations were allowed for all two-wheelers up to an engine capacity of 100 cc. This prompted a spate of new entries into the industry the majority of which entered the motorcycle segment, bringing with them new technology that resulted in more efficient production processes and products10. The variety in products available also improved after ‘broad banding’ was allowed in the industry in 1985 as a part of NEP. This, coupled with the announcement of the MES of production for the two-wheeler industry11, gave firms the flexibility to choose an optimal product

and capacity mix which could better incorporate market demand into their production strategy and thereby improve their capacity utilization and efficiency. These reforms had two major effects on the industry: First, licensed capacities went up to 1.1 million units per annum overshooting the 0.675 million units per annum target set in the Sixth Plan. Second, several existing but weaker players died out giving way to new entrants and superior products12. The motorcycle industry witnessed a thorough shake-up in the 1980s following the arrival of the Japanese manufacturers. This coincided with the arrival of Suzuki's passenger car venture with Maruti. In a few years, all four of the major Japanese motorcycle makers were in India. In each case, a joint venture with a local industry was established. In all cases, existing manufacturers of twowheelers in India were involved. Thus TVS joined with Suzuki, Bajaj with Kawasaki, Escorts with Yamaha, and Hero with Honda. The products were very similar in the 100 cc two-stroke class, with the exception of the Hero-Honda CB-100 four-stroke model. d) 1991 – 1999 The reforms that began in the late seventies underwent their most significant change in 1991 through the liberalization of the economy. The two-wheeler industry was completely deregulated. In the area of trade, several reforms were introduced with the goal of making Indian exports competitive. The two-wheeler industry in the nineties was characterized by a) an increase in the number of brands available in the market which caused firms to compete on the basis of product features and b) increase in sales volumes in the motorcycle segment visà-vis the scooter segment reversing the traditional trend.

It has been noticed that the Auto Industry has grown in clusters of interconnected companies which are linked by commonalities and complementarities. The major clusters are in and around Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore in Central India. The envisaging in the Eleventh Five Year Plan period to create a National Level Specialized Education and Training Institute for Automotive Sector and to enhance the transportation, communication and export infrastructure facilities through concerned Ministries in and around these clusters. The Government will make

attempts to eliminate all the barriers to local competition and organize the relevant Government Department and Educational and Research Institution in and around the clusters.

INDUSTRIAL OUTLOOK AFTER 2000: Global motorcycle production has increased from 30 million units in 2003 to 40 million units in 2005. Asia is the major producer of motorcycles in the world with 90% share. Within Asia, China accounts for 17 million units whereas India is at second position with 7.7 million units in 2005 .Whereas India is at second position with areas of concern inhibiting the growth of the industry and those that impact on the competitiveness of the industry. Automobile industry on a whole is grown very fast in past few years and India has grown as a small car hub in past few years. With companies like Hyundai and GM coming up with small cars and economy growth being good with low personal loan rates, there was seen heavy growth in sales of four wheelers. In the mean while many people changed there target of buying a bike to car and huge increase in sales of car were seen. But as condition change in 2008 the loans rates became higher and steel prices and raw

materials rates sky rocking, the companies had seen a great decline in profitability. In case of two-wheeler manufacturers, Hero Honda’s efforts to boost financing available to its customers through increasing tie ups at regional level augmented sales by almost 27 per cent in 2007-2008.

Challenges to growth - Terms of Reference (TOR)- 3 In present scenario world over, it is an accepted view that competitiveness is no longer totally dependent on variables like availability of cheap labour and materials, low interest rates and fiscal incentives. The sustained competitiveness in industry can come only through improvement in productivity both of labour as well as capital. This calls for continuous efforts for innovation by the companies. There is also a need to improve the cost competitiveness in the auto sector. Global auto companies are increasingly sourcing components and vehicles from low cost countries. Outsourcing is also being extended to services like engineering design and other business processes. The globally competitive OEMs (Original Equipment Manufacturers) and auto makers will make their base in places which are high on productivity factor and low on costs, so that their competitive advantage can be sustained. If India has to take advantage of this, its cost competitiveness has to improve. The industry has identified certain factors which are inhibiting the growth of automotive sector.

1. Availability – Fuel Price, Fuel quality and Alternative Fuel Fuel Price a rapidly growing economy demands more supply of energy. As the UN Agenda 21 states “Transportation is the major driving force for the growing demand for energy. It is the largest end-user for energy in developed countries, and the fastest growing one in developing countries”. Crude oil prices have been increasing and may continue so for a long time due to the speculation (“fear premium”) on continuing geopolitical instability. So there is an urgent need to think of an alternate fuel policy. In the above back drop the development of ‘alternative fuel’ has gained greater importance. The Ministry of NonConventional Energy Sources is working on the usage of Hydrogen as a fuel. The work in this area need to be strengthened and expedited. The policies which promote the commercial production, distribution and usage of such alternative fuel and the automobiles using this alternative fuel need to be put in place. Besides the emphasis on commercialization of the alternative fuel, ensuring the availability of the fuel meeting the standards of Bharat Stage III and IV in time as envisaged in the Auto Fuel Policy is equally important. It will be of great help to the industry if the availability of Euro IV fuel can be ensured across the country prior to the implementation of the emission norms. This is important as there is a drastic change in the emission requirements of the above two standards and vehicles designed for Bharat Stage IV will find it difficult to run on fuel suitable for BS III norms. The Ministry of Petroleum and Natural Gas has indicated that as per the roadmap provided in the Auto Fuel Policy, progressive fuel up gradation to Euro-IV equivalent and Bharat Stage-III are being planned from April, 2010 onwards, to be implemented based on the source-apportionment studies currently under way. The present Auto Fuel Policy gives a road map till Euro IV stage and 2010, It is felt that the Auto Fuel Policy beyond 2010 be also drawn now. 2. Affordability – Taxation and related Issues The industry feels an immediate need to bring down total tax to reduce cost of ownership; to make input prices more competitive; to incentivize innovation for low cost products - that are aimed at consumers at the lower income end and to eliminate the incidence of embedded taxes/duties Internal taxes Currently the

taxes are levied at the city level (octroi), state level (sales tax, registration) and the central level (excise). Depending on the location of manufacturing and the suppliers, these taxes total to a substantive figure, even though excise duty on vehicles have reduced from a high of 66% in the early 90s to 25% and 16% now. The following table provides an idea of the amount of tax element today in a vehicle. It shows that tax amounts to 36-40% of the cost of a vehicle on an average. Cases where octroi is levied could increase it to 40-45%. Clearly this is a very large figure and hampers the growth of the industry.

The move towards VAT has helped in reducing the cascading impact of state taxes. However, even if VAT were to be implemented uniformly by all states (which is not yet 16 the case) there would still be elements of unabsorbed taxes which impact manufacturing competitiveness. These cascading taxes also impact export competitiveness since the duty drawback or exemption schemes do not account for all of the taxes that add up in manufacturing automobiles. The draft National Manufacturing Strategy also recommends that there should be an all India combined Goods and Service Tax (GST), with service sector taxation integrated into the VAT framework instead of being a tax on turnover. This should be accompanied by a withdrawal of all other taxes like central excise, central sales tax, octroi, State-level sales tax, entry tax, stamp duties, transportation taxes and other similar levies. A combined goods and service tax which is fully VAT able replacing all other taxes except the registration tax to simplify administration and reducing the tax incidence on a vehicle will help the industry. This will also remove a major factor of locational competitive disadvantage based on differing state and city level taxes it is perhaps time now to consider a uniform road tax across the country. 3. Accessibility – Procedural delays, Transportation and Infrastructural bottlenecks Rationalization of documentation for interstate and inter-city movement of vehicles and goods; Creation of simple, comprehensive and non-overlapping system of procedures and regulations would improve the efficiency and productivity of the transportation sector and thus also create demand for automobiles. Regulations One of the reasons that is used to explain our country’s poor FDI performance is the high degree of administrative procedures and clearances. It is not the clearances themselves which are the issue, but the time and effort taken to get them. Of course some of the clearances overlap and are now outdated. There is a need to streamline its regulations to do away with unnecessary regulations and combine and merge others to simplify them. 4. Internal trade barriers –movement restrictions, octroi, checking, etc Even though we are a single country, there are a lot of restrictions on inter-city or inter state movement of goods. Apart from the cost of octroi there is another

element of cost that is incurred due to the long queue at check posts which delay shipments and increase logistics costs. The same is the case when goods cross state borders. 5. Infrastructure Bottlenecks Continued investment in infrastructure is essential. Infrastructure should keep pace with growth in the trade. The delays in road and rail network need to be immediately arrested. Power and fuel account for about 6% of manufacturing cost and power cost in India is quite high. Similarly capacity addition in roads has lagged behind traffic growth. Last mile road connectivity is a major bottleneck and needs to be addressed on priority at all ports, especially for, Chennai, Mumbai and JNPT. Analysis of cost structure of Indian automotive sector and that of Malaysia, Thailand and China reveal that deficiencies in logistics infrastructure contributes to 1.1% to 2% difference in the cost structure. 4. Emission Norms: The Auto Fuel Policy has recommended introduction of Euro IV equivalent emission norms in 2010 in 11 cities and Euro III equivalent in rest of the country. Industry can comply with this roadmap subject to the availability of the required fuel in all retail outlets at least one year ahead of the introduction of emission norms. The industry should gear up for complete alignment with ECE regulations on emission and safety by 2015.

HERO HONDA AS A COMPANY: Company Profile: Two-wheelers in India are a synonymous to the brand Hero Honda, a unit of Hero Group. Established in 1984 as a joint venture of The Hero Group (India) and Honda Motor Co. Ltd. (Japan), Hero Honda is the 'world's No. 1' two-wheeler company. Driven by the trust of over 5 million customers, the product range of Hero Honda commands a market share of approximately 50%. Starting with a sale figure of only 43,000 units in 1985-86, the company has reached a high of 26, 21,400 units in 2004-05. According to Pawan Munjal, Managing Director and CEO of Hero Honda, the gap with its nearest rival, Bajaj Auto, is over a million units in 2004-05. “Hero”, is the brand name used by the Munjal brothers in the year 1956 with the flagship company Hero Cycles. The two-wheeler manufacturing business of bicycle components had originally started in the 1940’s and turned into the world’s largest bicycle manufacturer today. Hero, is a name synonymous with two-wheelers in India today. The Munjals roll their own steel, make free wheel bicycle critical components and have diversified into different ventures like product design. The Hero Group philosophy is: “To provide excellent transportation to the common man at easily affordable prices and to provide total satisfaction in all its spheres of activity”. The Hero group vision is to build long lasting relationships with everyone (customers, workers, dealers and vendors). The Hero Group has a passion for setting higher standards and “Engineering Satisfaction” is the prime motivation, way of life and work culture of the Group. In the year 1984, Mr. Brijmohan Lal Munjal, the Chairman and Managing Director of Hero Honda Motors (HHM), headed an alliance between the Munjal family and Honda Motor Company Ltd. (HMC). HHM Mission Statement is: “We, at Hero Honda, are continuously striving for synergy between technology, systems, and human resources to provide products and services that meet the quality, performance, and price aspirations of our customers. While doing so, we maintain the highest standards of ethics and societal responsibilities, constantly innovate products and processes, and develop teams that keep the momentum going to

take the company to excellence in the new millennium”. This alliance became one of the most successful joint ventures in India, until the year 1999 when HMC had announced a 100% subsidiary, Honda Motorcycle & Scooter India (HMSI). This announcement caused the HHM stock price to decrease by 30 percent that same day. Munjal had to come up with some new strategic decisions as, HMSI and other foreign new entry companies were causing increased intensity of rivalry for HHM.

Hero-Honda's l00cc motorcycle has been very successful in the domestic market and also in several export markets. Consequently, an expansion of capacity is planned to 160,000 units in 1993- 1994 and up to 300,000 units by 1995-1996. Hero Honda is the World's No.1 two-wheeler manufacturing company having the trust of more than 5 million customers. The company is a joint venture of Hero

Cycles of India and Honda Motor of Japan. Achiever, CBZ, CD Dawn, Karizma, Passion, Pleasure and Splendor are its famous brands on Indian. Hero Honda Motorcycles Limited is an Indian manufacturer of motorcycles and scooters. Hero Honda is a joint venture that began in 1984 between the Hero group of India and Honda from Japan. It has been the world's biggest manufacturer of 2-wheeled motorized vehicles since 2001, when it produced 1.3 million motorbikes in a single year. Hero Honda's Splendor is the world's largest selling motorcycle. Its 2 plants are in Dharuhera and Gurgaon, both in Haryana, India. It specializes in dual use motorcycles that are low powered but very fuel efficient.

GROWTH: The business growth of Hero Honda has been phenomenal throughout its early days. The Munjal family started a modest business of bicycle components. Hero Group expanded so big that by 2002 they had sold 86 million bicycles producing 16000 bicycles a day. Today Hero Honda has an assembly line of 9 different models of motorcycles available. It holds the record for most popular bike in the world by sales for Its Splendor model. Hero Honda Motors Limited was established in joint venture with Honda Motors of Japan in 1984, to manufacture motorcycles. It is currently the largest producer of Two Wheelers in the world. It sold 3 million bikes in the year 2005-2006. Recently it has also entered in scooter manufacturing, with its model PLEASURE mainly aimed at girls. The Hero Group has done business differently right from the start and that is what has helped them to achieve break-through in the competitive two-wheeler market. The Group's low key, but focused, style of management has earned the company plaudits amidst investors, employees, vendors and dealers, as also worldwide recognition.

The growth of the Group through the years has been influenced by a number of factors: JUST-IN-TIME: The Hero Group through the Hero Cycles Division was the first to introduce the concept of just-in-time inventory. The Group boasts of superb operational efficiencies. Every assembly line worker operates two machines simultaneously to save time and improve productivity. The fact that most of the machines are either developed or fabricated in-house, has resulted in low inventory levels. In Hero Cycles Limited, the just-in-time inventory principle has been working since the beginning of production in the unit and is functional even till date. This is the Japanese style of production and in India; Hero is probably the only company to have mastered the art of the just-in-time inventory principle. ANCILLARISATION: An integral part of the Group strategy of doing business differently was providing support to ancillary units. There are over 300 ancillary units today, whose production is dedicated to Hero's requirements and also a large number of other vendors, which include some of the better known companies in the automotive segment. EMPLOYEE POLICY: Another Striking feature within the Hero Group is the commitment and dedication of its workers. There is no organized labor union and family members of employees find ready employment within Hero. The philosophy with regard to labor management is "Hero is growing, grow with Hero." When it comes to workers' benefits, the Hero Group is known for providing facilities, further ahead of the industry norms. Long before other companies did so, Hero was giving its employees a uniform allowance, as well as House Rent Allowance (HRA) and Leave Travel Allowance (LTA). Extra benefits took the form of medical check-ups, not just for workers, but also for the immediate family members.

DEALER NETWORK: The relationship of Hero Group with their dealers is unique in its closeness. The dealers are considered a part of the Hero family. A nation-wide dealer network comprising of over 5,000 outlets, and have a formidable distribution system in place. Sales agents from Hero travels to all the corners of the country, visiting dealers and send back daily postcards with information on the stock position that day, turnover, fresh purchases, anticipated demand and also competitor action in the region. The manufacturing units have a separate department to handle dealer complaints and problems and the first response is always given in 24 hours. FINANCIAL PLANNING: The Hero Group benefits from the Group Chairman's financial acumen and his grasp on technology, manufacturing and marketing. Group Company, Hero Cycles Limited has one of the highest labor productivity rates in the world. In Hero Honda Motors Limited, the focus is on financial and raw material management and a low employee turnover. QUALITY: Quality at Hero is attained not just by modern plants and equipment and through latest technology, but by enforcing a strict discipline. At the Group factories, attaining quality standards is an everyday practice - a strictly pursued discipline. It comes from an amalgamation of the latest technology with deep-rooted experience derived from nearly four decades of hard labor. It is an attitude that masters the challenge of growth and change - change in consumers' perceptions about products and new aspirations arising from a new generation of buyers. Constant technology up gradation ensures that the Group stays in the global mainstream and maintains its competitive edge. With each of its foreign collaborations, the Group goes onto strengthen its quality measures as per the book. The Group also employs the services of independent experts from around the world to assist in new design and production processes.

DIVERSIFICATION: Throughout the years of enormous growth, the Group Chairman, Mr. Lall has actively looked at diversification. A considerable level of backward integration in its manufacturing activities has been ample in the Group's growth and led to the establishment of the Hero Cycles Cold Rolling Division, Munjal and Sunbeam Castings, Munjal Auto Components and Munjal Showa Limited amongst other component-manufacturing units. Then there were the expansion into the automotive segment with the setting up of Majestic Auto Limited, where the first indigenously designed moped, Hero Majestic, went into commercial production in 1978. Then came Hero Motors which introduced Hero Puch, in collaboration with global technology leader Steyr Daimler Puch of Austria. Hero Honda Motors was established in 1984 to manufacture 100 cc motorcycles. The Hero Group also took a venture into other segments like exports, financial services, information technology, which includes customer response services and software development. Further expansion is expected in the areas of Insurance and Telecommunication. The Hero Group's phenomenal growth is the result of constant innovations, a close watch on costs and the dynamic leadership of the Group Chairman, characterized by a culture of entrepreneurship, of right attitudes and building stronger relationships with investors, partners, vendors and dealers and customers. DEBT STRUCTURE: Hero Honda has been a debt free company for the last 7 years. The unsecured loan of Rs.132 crore from the state government of Haryana on account of sales tax deferment is interest free and has no holding costs. Net interest payment by the company has been negative during the last few years.

FORCASTS: EXPECTED SALES: The predicted sales for various years have been given below.

Year 2006 - 07 2007 - 08 2008 – 09(E) 2009 – 10 (E) 2010 – 11(E) 2011 – 12(E)

Two Wheelers 8629809 9931260 11009643 12955455 15366462 17849003

IMPLICATIONS OF BUDGUT 2008-2009:  Reduction in excise duties on hybrid cars: Excise duty reduced to 14% from 24% on hybrid cars manufactured by auto manufacturers effective from 01 April 2008. Impact on Auto-mobile manufacturers: Very positive for manufacturer companies of hybrid cars. • Reduction of excise duty on small cars. Excise duty reduced to 12% from 16% on small cars manufactured by small car manufacturers effective from 01 April 2008. Impact on small car manufacturers: Very positive for small car manufacturers like Maruti, Hyundai, etc. Small car manufacturers may cut their prices due to their savings on lower excise duty. Generally, manufacturing companies transfer most of this type of benefit to the end customers by cutting its market price for car.

• Reduction in excise duty on two-wheelers: Excise duty reduced to 12% from 16% on two-wheeler manufacturer companies. Impact on two wheeler manufacturer: Positive for two-wheeler manufacturer companies like Bajaj Auto, Hero Honda, etc. generally, manufacturing companies transfer this type of benefit to the customers by making available cheaper twowheelers in the market. • The corpus of rural infrastructure development fund to be raised to Rs.14, 000cr more corpuses provided for rural infrastructure development fund will ultimately become beneficial to Auto-mobile industry as improved infrastructure activities like developed roads, bridges, etc will benefit to Auto-mobile industry. OTHER ASSUMPTIONS: INFLATION: In the year 2008-2009 the assumptions on inflation on an average can be 7.5% 8.75% on an average. For the year 2009-2010 inflation can be 5- 6.5 % on an average. EFFECT ON COST OF RAW MATERIAL: It depends on inflation of steel and commodities market. The input cost of steel has increased heavily this year. In year 2008-2009 the prices of steel are expected to rise by 25-30% on an average. And average price hike in 2009-2010 may be 1822%. EFFECT ON EXPORT: Due to financial crisis the export on two wheelers can go down a little. One can expect the decline in export by 3-4% in2008-2009 but once again it will increase and go back as on 2007-2008 in 2009-2010. SALARIES: Salaries can go up on an average by 18-20% due to high level of inflation in year 2008-2009. The increase in salary in 2009-2010 may be 15-18%.

The sixth pay commission has recommended a 40% hike on salaries as on January 2006. Thus, there will be a one time arrears payment to the employees of central government and quasi central government entities, (approx 4mn employees). With election in 10 states scheduled during the next 13 months, we expect similar announcements by state governments. Also, the wage negotiations for PSU banks and Oil PSUs are under progress (due effective from Nov 2007 and Jan 2007 respectively). In such a scenario, around 8 mn employees are likely to benefit during the next 12 to 18 months. This, together with significant revision in tax slabs can further boost demand. In our view, the net increase in cash will be equivalent to a down payment of a car or 4 to 6 months installment of a compact car. In the tables below, we have tried to determine the average one time income due to arrears accretion and the reduction in tax liability due to fiscal measures. The quantum of cash availability is likely to provide boost to the demand for passenger cars. However, it should be noted that six pay commission is still a recommendation. It has not yet been approved by the Government. This makes us believe that the benefit of the sixth pay commission shall yield results not before 4QFY09, as there is generally a gap of 6 months between approval by Government and actual benefits filtering to the employees. POLLUTION CONTROL NORMS: Emission standards are going higher and higher every year. And there is expected introduction of Euro IV equivalent emission norms in 2010 in 11 cities and Euro III equivalent in rest of the country.

FUEL PRICES: The fuel prices are very important factor in coming years to be looked in to. It can go up by 14-16% in 2008-2009 and 20-22% next year 2009-2010 (post election). Duel effect of Fuel prices: 1. The sale of bike will go down due to high fuel prices. It can go down by 23% in 2008-2009 and 4-5% in 2009-2010. 2. The Supply Chain and transportation cost will increase by 10-12% in 20082009 and 14-16% in 2009-2010. EXPECTED GROWTH IN FUTURE: In 2008-09, Hero Honda sales are expected to grow by around 11 per cent in value-terms, anticipated growth recovery export growth. IN MILLIONS FY 08

FY 09

FY 10

YOY GROWTH

12.821%

11.294065%

16.785393%

PAT

9871.97

10491.5901

12520.0408

Taking in to considerations these increases in expenditure based on the assumptions of inflation, liquidity crisis and financial conditions. Year on year Net sales cost of goods sold selling and administrative expenses other(income ) and expenses interest net expenses(Income)

2008-2009 09% 14% 14% 02% 06%

2009-2010 12% 10% 14% 04% 04%

PROFATIBALITY: We can see the a deep decrease in profatibility as in 2007 -2008 many people did not buy bike’s and 2 wheelers and went for second hand cars (secondary market) as an option with eased monetary supply. FIG 1: PAT change in past few years (in Crore)

FIG2:Expected growth in PAT in next two years

FINANCIAL STATEMENTS : 2008

2007

2006

2005

2004

2003

1310.92 2974.38 3171.04 1911.49 9367.83 1599.99

357 3352.48 2755.84 2666.58 9132.72 1621.29

1587 1586.5 2265.52 2773.08 8212.1 1595.18

176.015 895.49 2042.62 2431.2 5545.325 1596.07

371.2 438.01 1881.99 2398.7 5089.9 1601.56

243.3 1414.88 2009.22 1097.7 4765.1 15.19

24617.11 264.58 15494.75

18522.31 252.42 13,401.08

19680.81 241.75 9765.51

18973.12 211.14 7049.94

14633.41 153.96 5860.07

12467.81 145.29 5151.67

total assets

51344.26

42929.82

39495.35 33375.595 27338.9

22545.06

Liabilities trade accounts payable accrued expenses Indian income taxes others current liabilities long term debt due with in one yr current liabilities Deferred income taxes Long term debt total liabilities

7560.7 494.82 63.9 5689.15 184.93 13993.5 1391.67 1135.07

5548.2 417.58 38.5 4871.05 206.1 11081.43 1529.68 1445.6

6464.7 305.02 40.3 4266.25 227.27 11303.54 1375.63 1630.53

6619.6 247.5 45.7 3538.05 222.83 10673.68 981.67 1920.45

6989.9 195.7 113.5 3048.75 190.23 10538.08 964.78 1784.76

4099.4 177.8 109 2715.85 290.78 7392.83 770.69 1380.57

16520.24

14056.71

14309.7

13575.8

13287.62 9544.09

common stock value; Rs 2 (previous yrs Rs2) capital surplus retained earnings total stockholder's equity

3399.38

399.38

399.38

399.38

399.38

399.38

0.03 34424.61 34824.02

0.03 28465.2 28864.61

0.03 24788.66 25188.07

0.03 19400.38 19799.79

0.03 13681.87 14081.28

0.03 12601.56 13000.97

total liabilities and stockholder's equity

51344.26

42921.32

39497.77 33375.59

27368.9

22545.06

Current assets cash and cash equivalent trade account and receivables inventory prepaid expenses and others total current assets investment(held to maturity securities) investment in mutual funds investment in equity Property, plant and equipments

Stockholder's equity

FORCASTED P/L ACCOUNT:

Profit/(loss) account exp growth net profit tax for the years asper audited accounts add/(less): Profit/(loss)of income from investments( unrealised gain/loss) affiliated company held to maturity securities exchange fiuctuations Deprectation effect of exchange fluctuations Deprectation on leased assets lease rentals paid interest portions of lease rentals provision for deferred tax Deferred revenue expenditure

Net Income as per US GAAP Statement of income Net sales (1.09,1.12) cost of goods sold(1.14)(1.10) selling and adminstrative expenses(1.09) other(income ) and expenses (1.02) interest net expenses(Income)(1.04) total expenses income before income tax(PBT) indian taxes on income PAT net earnings per share On share value of Rs 2 each(EPS) averge common stock outstanding (numbers) DPS

2008-2009

2009-2010

0.11921209

0.16987664

10832.63

12672.8408

10.7 0 0 50 0 0 0 -280.33

12.8 0

10491.6

12520.041

119332.29 91327.9805 9825.774 -2032.9164 -408.234 103594.905 15737.3851 5245.79504 10491.5901

133652.165 100460.779 11201.3824 -2093.9039 -420.48102 114176.546 19475.619 6955.57821 12520.0408

52.45

62.600204

16

19

80 0 0 0 -60

CHANGE IN PAT:

EPS:

RESULTS: Price Target Price Investment Period

Rs826 Rs900-910 15-18 months

Stock Info Sector Market Cap Beta 52 WK Avg Daily Volume Face Value BSE Code NSE Code Reuters Code Bloomberg Code

Automobile (Rs cr) 16,495 0.4 High / Low 895/561 69681 (Rs) 2 500182 HEROHONDA HROH.BO HH IN

Shareholding Pattern (%) Promoters MF/Banks/Indian FIs FII/ NRIs/ OCBs Indian Public

55.0 13.3 22.9 8.8