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Honda Eyes Slice Of Munjals’ Auto Comp Biz

28 September, 2010

Japanese automobile giant Honda Motor Company may seek an economic interest in the auto components business of the Munjal family, promoters of the Hero Group and a partner in a 25-year-old successful two-wheeler joint venture, Hero Honda Ltd.

Honda may be looking at it in return for allowing the Indian JV, managed by the Munjals, to export motorbikes to south east Asian and African markets, said two sources tracking the developments.

Both partners are holding re-alignment talks, which, sources added, may be critical to the continuation of the JV.

Recent media reports have suggested that Munjals, who started off with bicycle components trading six decades ago, and Honda, the second largest automobile maker in Japan, are on the verge of breaking the JV Hero Honda. These reports indicated that Hero Group along with global

private equity giants are in discussions to buy out Honda’s stake at a discount. While Honda Motors holds a 26% stake in the Hero Honda Motors Ltd, Hero Group entities hold slightly more at 26.26%, as per NSE data.

“There is a lot of posturing on both sides at the moment,” said one source, who did not wish to be named. This is not the first time the collapse of Hero Honda JV has been predicted, as  speculations preceeded the renewal of the partnership in 1994 as well. The 20-year pact signed then is coming up for renewal only in 2014, but the developing situation could be more complex this time.

Emails sent to the Hero Group and Hero Honda Motors Company spokespersons did not elicit a response at the time of publication of this article. A spokesperson of Honda’s local subsidiary HMSI offered no comments, while efforts to reach Honda Motor Co did not succeed.

Honda had told Reuters last month that the company has no plans to sell its stake in Hero Honda at this time.

“We have already conveyed earlier that the Hero Group and Honda Motor have for years enjoyed a very cordial and fruitful relations … and there has been no change in the relationship in any manner,” a Hero group spokesperson had told Reuters last month on reports of the group

buying Honda’s stake in JV.

Hero Honda has been prospecting three locations in Tamil Nadu, Karnataka and Gujarat for setting up an export oriented plant. The company, which is the largest two-wheeler maker in India and in the world, is looking at direct exports to markets such as Indonesia and Philippines as well as Africa.

But the challenge would be in Honda’s search for a role in the auto components business run by the Munjals – whether the family will be unanimous in approaching it formally. Honda could be discussing that while it shares the profits of the finished products, a lot of the value in the components business is left uncaptured, especially since most of the Munjal family’s components operations drive mainly on Hero Honda.

The Hero Group has more than half a dozen group firms engaged in the auto component business. These companies include Hero Motors Limited, Hero Exports, Majestic Auto Ltd, Sunbeam Auto Limited, Munjal Auto Industries Limited, Munjal Showa (a JV with Showa Corporation), Munjal Castings, Munjal Auto Components, Hero Global Design. These companies are engaged making components like shock absorbers, struts, exhausts, castings, etc.

The pragmatic patriarch Brij Mohan Lal Munjal has played a key role in shaping the family’s business interests, as well as business partnerships. Much of the discussions with Honda and the future of the joint venture hinges on this man.

There is a strong argument being put forth that the family must now be prepared for life with Honda, and, some feel, Hero’s long-term interests will be achieved only by doing it. But there are also concerns expressed about Hero going along in a market that is turning hyper competitive. “These are varied positions right now and a consensus on it will dictate the future course. Things will be clearer when the dust settles a bit,” said a second source.

This source said the possibility of ending the JV will be triggered conclusively only once the business talks with Honda collapses.

Even a buyout at below the prevailing market cap cannot be construed as a discount as it it would have just factored in the price correction after Honda’s exit. “Again, we are talking about a discount at  the peak of the cyclical market,” added the second source.

Further, private equity funds could be asking for rather onerous undertakings, and even commitments on technology upgradations, to maximise future value in a cut throat industry. And this uncertainty comes at a time when the competition in the domestic two-wheeler market is heating up. Key rival Bajaj Auto has also been eyeing Hero Honda’s key segments by launching new products. Hero Honda’s market share in the 75-125cc motorcycle category has been slipping by falling to to 69% in the April-August period as compared to 82% in the same period last fiscal.

Besides Bajaj, Hero Honda has also been facing competition from Honda Motorcycle & Scooter India (HMSI), a wholly owned Indian subsidiary of Honda Motor Company. This company has released bikes like Unicorn and Shine in the Indian market. HMSI has also started building its second plant in Rajasthan after the existing one in Haryana.

The share price of Hero Honda closed at Rs 1,851.05 today, down marginally. The firm has a market capitalisation of Rs 36,965 crore at this rate. The share prices recently reached a lifetime high of Rs 2,094 earlier this year but have dragged down due to recent stake sale talks.


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Honda Eyes Slice Of Munjals’ Auto Comp Biz

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