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Hero Honda Motors
Royalty hike speculation overblown
Recent speculation of nearly tripling royalty rates to 8% of sales as part of JV
split deal seem illogical to us. Considering that Japanese auto majors spend just
around 5% of sales on R&D, charging a higher proportion for Hero Honda, which
uses fraction of parent resources, surprises us.
Royalty hike rumours seem overblown
! Royalty hike speculation in recent newspaper articles (Business Standard, 1st Dec) speculate
about hike from current 2.7% of net sales to around 8% as part of the split agreement
between Hero group and Honda Japan (non-rated), till technical agreement validity period
2014. This seems out of context, as parent Honda’s motorcycle division spends just around
5% of net sales towards Research & Development, and Hero Honda uses a fraction of this
reasearch considering concentration of its sales towards Splendor and Passion. Also, when
compared to other Japanese two-wheeler makers like Yamaha (non-rated) and Suzuki Motor
(non-rated), Hero Honda’s total R&D expenses are in line with peers.
! In worst case scenario, we feel only new product launches till 2014 may attract higher royalty
rates, which may have low impact on overall profitability as we feel new product sales may
not form more than 10% of Hero Honda sales.
! The higher royalty outlook for the entire company also doesn’t gel with the thought that it will
substantially deteriorate company profitability in the short term and limit developing in-house
research capability in the coming years, at a time when Indian promoters are raising their
holding in the company.
Hero Honda royalty payments are already higher than Indian peer R&D costs
! Hero Honda’s royalty payment of 2.7% of net sales is already substantially higher than peers’
R&D cost range of 1-2% of net sales (over FY00-10). This clearly states that Hero Honda’s
cost structure is completely out of context as compared to industry trend and technology
requirement. In the medium term, if the split happens, we feel R&D costs would be drastically
lower than current royalty payment structure and hence improve profitability.
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