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Hero Honda and Honda signs MoU for new licensing arrangement
Hero Honda and Honda have signed an MoU following which Hero Group will acquire
Honda’s 26% stake in Hero Honda Motors Ltd. (HH). The transaction, which will be funded
through debt, will be completed in a phased manner by next year. The management,
however, did not disclose the financial details pertaining to the purchase of shares.
As per the licensing arrangement, Honda will continue to provide technology for all the
existing models along with providing technology for new models under a fresh licensing
agreement. In addition, HH can use the Honda brand name until June 2014. Further, HH
now has the freedom to set up its own R&D facilities, seek new partners for technology,
expand its business to markets around the world and establish new distributors. On the
crucial issue of royalty payment, management has indicated that royalty rates will not
increase and would in fact decline from January 2011. Currently, the company pays
~2.6% as royalty charges.
We believe the new deal addresses the concerns related to technology in the short term.
However, in the long run, HH would require access to technology either through
technology tie-up or develop its own through R&D spends. Moreover, it would be a
challenge to maintain the market share as the competitive pressure is expected to increase
with Honda becoming more aggressive in the market. We await more clarity on the deal
and remain Neutral on the stock.
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