11PGHR28 Megha Jain Hero Honda

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MANAGEMENT DEVELOPMENT INSTITUTE

Business Strategy FormulationTerm Project

Project Report on Hero Honda

Megha Jain

11PGHR28


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Acknowledgement

I would like to express sincere thanks to our guide Prof. Harsh Wardhan Mishra , for providing us an

opportunity to do such a project. I would also like to thank him for his invaluable guidance, excellent

supervision throughout the course of this report. Also the pragmatic and invaluable advice of myguide kept me motivated & enthusiastic to go through critical learning of the subject and timely

complete our report. Lastly I would like to thank all our colleagues and friends for their direct or

indirect support and appreciation.


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Index

1. Executive Summary 4

2. Firms Strategic Intent 5a. Vision 5

b. Firm's Mission 5

c. Firm's Strategy 5

3. External or Environmental Analysis 5

a. General Environment of your firm 5

i. Economic 5

ii. Political & Legal 6

iii. Socio-cultural 6

iv. Technological 6

b. Industrial/Competitive Environment of your firm 6i. Bargaining Power of the consumer 6

ii. Threat of new entry 7

iii. Threat from Rivals 7

iv. Bargaining power of the supplier 7

v. Threat from Substitute Products 7

4. Internal Analysis: 8

a. Critical Success Factors (CSFs) 8

b. Value-Chain activities 8

c. Resource based View 9

d. SWOT Analysis of the firm 105. Strategic Performance 10

6. Financial Analysis. 11

7. Strategy recommendation 13

8. Conclusion. Limitations & Future Research. 14

9. References 15

10.Annexure 16

i. Critical Success Factors 16

ii. Value Chain Analysis 17

iii. Resources Based View 18

a. Resources and Capabilities 18

b. Classification of Resources 18

c. VRIO frame work 19

iv. SWOT Analysis 20

v. Financial Analysis 21

a. Current year ratios 22

b. Ratio Analysis (2007-2010) 23

c. Competitive Ratio Analysis 25

d. Financial Statements of HeroMotoCorp 26


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1. Executive Summary

Hero Honda Motors Ltd. is the world's largest manufacturer of two - wheelers, based in India. In

2001, the company achieved the coveted position of being the largest two-wheeler manufacturing

company in India and also, the 'World No.1' two-wheeler company in terms of unit volume sales in a

calendar year.

In December 2010, the Board of Directors of the Hero Honda Group decided to terminate the joint

venture between Hero Group of India and Honda of Japan in a phased manner. The Hero Group

would buy out the 26% stake of the Honda in JV Hero Honda. Under the joint venture Hero Group

could not export to international markets (except Sri Lanka) and the termination would mean that

Hero Group can now export. Since the beginning, the Hero Group relied on their Japanese partner

Honda for the technology in their bikes. So there are concerns that the Hero Group might not be ableto sustain the performance alone.

However, Hero MotoCorp had declared its financial results for the quarter ended September 2011, the

first full quarter without Honda as a shareholder, which showed that sale as well as profit had hit at an

all-time high.

The company is undergoing a strategic change with the termination of joint venture and thus changed

availability of resources at its disposal. Hero MotoCorp invested a huge amount in rebranding

exercise and resource development and it paid off. Hence it would be interesting to analyse the

strategy of this company that underwent a huge change from a successful joint venture to running the

business on its own now.

The organizations Vision, Mission and Strategy are studied to determine its strategic intent. The

other activities pursued to research on the strategic analysis of Hero involved studying the financial

performance of the firm in the current scenario and compare it with the past and also with its

competitors. Basically all the analysis done was tried to fit into various frameworks of strategic

analysis like resource based view and value chain analysis. The organizations Internal and externalenvironment analysis is also done to ascertain potential threats and opportunities. Its strategic

performance in post 2000s are analysed in terms of both implications of strategy adopted & financial

performance. The phased dissolution of the alliance between Honda and Hero group of India means

that the technology pact between the two would continue till 2014 and Honda would sell its complete

stake in Hero by March 2012. Hence analyses and evaluation of the performance of Hero Honda or

Hero MotoCorp (now) is done and future recommendations to Hero Group of India are also presented.

Its competencies and competitive advantage was arrived at by analysing its strategies in these

frameworks. Also the limitations of this research project and avenues for future research are

discussed.


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2. Hero Honda Strategic Intent

a. Vision - The story of Hero Honda began with a simple vision - the vision of a mobile and an

empowered India, powered by its bikes. Company's new identity, reflects its commitment towards

providing world class mobility solutions with renewed focus on expanding company's footprint in the

global arena.

b. Mission - Hero's mission is to become a global enterprise fulfilling its customers' needs and

aspirations for mobility, setting benchmarks in technology, styling and quality so that it converts its

customers into its brand advocates. The company will provide an engaging environment for its people

to perform to their true potential. It will continue its focus on value creation and enduring

relationships with its partners.

c. Strategy - Hero's key strategies are to build a robust product portfolio across categories, explore

growth opportunities globally, continuously improve its operational efficiency, aggressively expand

its reach to customers, continue to invest in brand building activities and ensure customer and

shareholder delight.

3. Enviornmental Analysis

a. General Environment

Economic

Share of motorcycles was 17% in the year 2006-2007 and is growing at 44.8%, Hero has 57%

market share in Indian two wheeler markets.

One of its most famous models like Splendour, sells more than 1 million units per year

Weighted Tax Deductions up to 150% for in house R&D activities.

Reduced Interest rates for export financing.

Economy has grown over 8.5% per annum for last 5 years. Slow down and Economic recession impacts the sales drastically

After the split up with Honda, hero is free to explore export opportunities

Political & Legal

Auto policy of Indian government promotes self sustained growth, 100% foreign direct

investment and revised tariff structure to facilitate development of manufacturing capabilities

as opposed to mere assembly without giving undue protection, ensure balanced transition to

open trade; promote increased competition in the market and enlarge purchase options to the

Indian customer.


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Auto Fuel Policy promotes auto fuel quality consistent with the required levels of vehicular

emissions norms and environmental quality, ensuring availability of appropriate auto fuel/fuel

mixed at minimum social costs across the country.

Environmental regulations - extensive governmental regulations regarding vehicle emission

levels, noise, safety and levels of pollutants generated by its production facilities are likely to

become more stringent. The country adopted the BS 3 emissions standards in April 2010,

which are more stringent than the previous norms. Such regulations in the future increase the

company's compliance costs which may have an adverse impact on the profitability.

Socio-cultural

Life style change Daily life involves more travelling, people also buy motorcycles for

passion and drive. This leads to increased sales

Purchasing power - 4th largest economy on purchasing parity index. There is an increase in

per capita income levels Indian Customers

Education People are highly educated and aware today, hence they are becoming more price

sensitive as well. They look for fuel efficient and low maintenance vehicles

Brand conscious Brand and technological image also affects the buying process of

consumers.

Technological Focus on R & D - Hero has been doing constant improvement in technological features

coming up with cutting edge technology with every new model of Splendour

Hero leveraged the technological edge it got from Honda. But after the split up, it would take

some time for hero to build its own technological edge.

Now, hero is free to acquire technology from other players

Bajaj is giving tough competition on some of the features like electric start and trademark

DTS-si Engine.

b. Industrial/Competitive Environment

Bargaining Power of the consumers - Bargaining power of customers is very high, due to

availability of options. Hero Honda was able to control bargaining power of customers by its

affordable pricing along with best quality in its products. Hero Honda has done very good job in

order to satisfy customers. Pricing, customer service and quality is maintained. Importantly in post

buy service Hero Honda is NO.1 in world.


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Threat of new entry - Suzuki, Honda and TVS have come up with their own bikes which were

previously Hero Splendors playground. Mahindra and Mahindra after buying out Kinetic motors

is also entering this segment. Honda motorcycles ltd has expanded its facility in Manesar in

Gurgaon and has also operationalized its brand new facility in Alwar in Rajastan. These

developments bode tough times for Hero MotoCorp as it would now lack the advance technology

of Honda. New entrants are coming up with bikes which are good in the looks segment. This will

help to attract young customers among whom Heros time tested quality are not that popular.

Today, with the prices of fuel spiraling to scary heights, there's unwieldy pressure on corporate as

well as business groups to ease the stress on the environment. E-Bikes are here as a natural

consequence.

Threat from Rivals - The main rivalry is from Bajaj Auto, TVS Motor and Honda motorcycles.

The Indian two wheeler industrys growth rate remains intact in spite of so many negative factors

like fuel price hike, increase in prices of two wheelers etc. Hero the market leader is continuously

posting double digit growth with robust sales of 5 lakh units each month.

The major treat for Hero is Honda Motors ltd. Heros Technology is mostly bought from Honda.

Honda is planning to launch new variants of bikes this year. Another major threat for Hero is from

its old competitor Bajaj, is planning of re launching its high selling bike Boxer.

Bargaining power of the supplier - Two-wheeler manufacturer Hero is into discussions with

Energtek, a provider of absorbed natural gas products, for technology that would enable two-

wheelers to run on gas instead of petrol. Energtek, which offers absorbed natural gas (ANG)

technology, has initiated discussions to supply the new technology and claims that ANG will

reduce fuel cost by more than 50%. Here as the supplier is lone player in the market so there will

be somewhat monopoly in the market. But usually it is Low, due to stiff competition in the market.

Suppliers play key role. The supplier play very important role in the pricing of the bikes. Honda

motors pvt.ltd is the main supplier for Hero Honda. Now Honda is very important competitor for

Hero Honda. Hero Honda has five joint ventures or associate companies, Munjal Showa, AG

Industries, Sunbeam Auto, Rockman Industries and Satyam Auto Components, that supply a

majority of its components. Hero is free to use any vendors for its components instead of just

Honda-approved vendors.

Threat from Substitute Products Bajaj is the second biggest manufacturer of motorcycles. The

companys recent indigenous new launches in the New 150/180 / 220 cc have been successful.

With the second-hand car market developing, a preference for used cars to new two-wheelers

among vehicle buyers cannot be ruled out.


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4. Internal Analysis:

a. Critical Success Factors (CSFs) - In identifying critical success factors the goal is to identify

those factors within the firms market environment that determine its ability to survive and prosper.

To survive and prosper in an industry a firm must meet two criteria :

1. What do our customers want?

2. What does the firm need to do to survive competition?

The model for CSFs for two wheeler industry are given in Appendix 1.a and Appendix 1.b

respectively.

b. Value-Chain Analysis - It is fairly clear that Hero enjoys some competitive advantage over thecompetition. In the two wheeler market of India Company commands a robust market share of 52%

and is continuously growing at a healthy rate of 13%. By analyzing its value chain an effort is made to

ascertain competitive advantage it has.

Primary activities -Inbound logistic

Material components make 73% of production cost, so Hero always tried to have close integration

with suppliers. Hence, when procuring components it is very important to control tightly and reduce

the logistical cost. JIT manufacturing philosophy is being adopted by the company, and it demands

close coordination among manufacturing units, vendors and ancillary units. Online real time

connectivity between the operations and that of 72% of its 300 plus strong vendor base has been

established and its a success of the company. All this has resulted in the reduction of logistical &

transactional cost.

Operations

To ensure the high efficiency and low inventory production, Hero uses high degree of automation and

pursues lean manufacturing, with the usual benefits of increased cash flow, reduced cash & operating

cycles and hence improved working capital conditions. The unique tangible assets that it has are these

fully equipped plants where manufacturing concepts are applied. Technological know-how,

improving designs etc. for two-wheelers are offered by Hero after the initial design requirements as

promoted by customers and market trends.

Outbound logistics - Through its well established delivery channels from plants, Hero Honda is

fulfilling the demand in India is exporting approximately 95000 bikes. The effort is to provide for

minimum waiting period or rather filling regions as per demand forecasts and market trends.


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Marketing & Sales

Years ago Fill it, Shut it, Forget it campaign was started by marketing department of Hero Honda to

pitch for better fuel efficiency and hence lower owning cost. To attract new customers, retain previous

customers and reliability of its products the marketing department of Hero Honda strived constantly.

It came up with Honda passport program to ensure the loyalty of customers. There is no product

differentiation to justify price differences etc. To make its offerings well accepted Hero Honda

improved its 4Ps and paid attention to customers needs. Dealers, authorized representatives, stockers

etc together form distribution network of Hero Honda and use conscious strategies to penetrate new

markets and unrepresented territories. The distribution network of Hero Honda is wide & deep rooted;

it is based on mutual trust and relationship between company and its distributors and its philosophy to

ensure growth of partners with its own growth. It has unique intangible resources in the form of

strengthened supply chain and distribution networks.

Services

Hero Honda comprised one of the best after-sales services network in the industry. In addition to

providing better quality service and trouble-free availability of spare parts, company also paid

attention to tidiness and other aesthetics of service stations and added facilities like air-conditioned

waiting rooms, coffee shops etc

To provide service stations at every nook and corner of the country is almost impossible for the

company, so it introduced mobile service stations to ensure the customers in rural areas. In this way

increased loyalty of customers is ensured.

Diagrammatic Representation of Value chain analysis is given in Appendix 2.

c. Resource based View - The manufacturing Capability and resources of Hero can be seen under the

framework - The Resources and Capabilities are divided under three categories namely proprietary

Process and Equipment, Internal learning and External learning. (Refer Appendix 3.a)

Resource based view in its one of the tests take the assumption of Firm resource heterogeneity and

Firm resource Immobility. To achieve sustainable competitive advantage, an organisation should have

its resources as Valuable, rare, Imperfectly Inimitable and Organisational capability. Resources as

seen under VRIO frame work refer appendix 3.b.

The competencies developed based on these Resources were:

1. Technical Superiority

2. Manufacturing Excellence

3. Sales and Marketing

4. Brand Image


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d. SWOT Analysis refer Appendix 4.

5. Strategic Performance -

Stretch & Leverage of the Resources

When Hero Honda entered the two-wheeler market in 80s, it was shaped very much by the regulatory

& bureaucratic forces and has been dominated by 2-stroke scooters & bikes manufactured by Bajaj

Auto and some other companies. The 4-stroke technology taken up by Hero Honda was looked at with

skepticism, even though it promised higher power-to-weight ratio, higher efficiency (and thus better

mileage) and less pollution. But Hero Honda aspired to be the largest player in the industry, the gap

between the aspiration & reality being huge.

The promoters of the JV, both Hero Group & Honda of Japan, had a lot of faith & confidence on the

eventual success of this strategic alliance, even though it faced a lot of challenges like a violent strike

which affected its production facilities in 1987. Even Splendor when it was launched initially had

many technical problems. But it stretched & leveraged its resources the supplier & distribution

network (initially based on the reliable & loyal distribution channel of Hero Cycles, which is a group

resource) and technological superiority of Honda engines & design to bridge the gap between its

aspiration levels & current reality and eventually succeeding & becoming the largest player in the

industry.

The Hero Group, as a whole, has firm beliefs in its capability of successfully borrowing & extracting

knowledge from numerous technical/strategic alliances & JVs that it has formed over the years as

means of resource accumulation in its pursuit of leveraging resources. Apart from the most

celebrated JV with Honda, it has established such alliances with numerous other companies. As an

underlying theme in all these activities, we can see a general trend emerging (i) Vertical Integration

- this is common for most related diversifications, (ii) Diversification importance is given here for

risk mitigation & opportunity grabbing by moving in unrelated but high growth areas

Performance Post 2000s

This phase witnessed a strategic shift from earlier operational core competencies to the addition ofother core competencies which is marketing. Number of competitors increased manifold, apart from

its regular competitors. Honda also became the direct competitor in this phase.

Competitors are

Honda, Bajaj. TVS-Suzuki, Kinetic, Yamaha etc.

Strategy Adopted:

Product diversification: In this phase Hero Honda has launched 5-7 new models almost every year.

They diversified their product based on target customers groups


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Aggressive Marketing: They have extended their core competency from operational efficiency to

marketing efficiency, added new advertisement strategy and customer base.

R&D Expenditure Increased

In this phase, R&D base has been developed for Hero Honda in India in collaboration with

Honda. Now the engineers collaborate in bringing out better products to suit Indian condition for

different segments.

Market Diversification

They have now started targeting to High End Niche segment also, which means that they have moved

from sub125cc segment. They have also launched first Scooter for Women.

Positioning for Different Segment

Young ladies - Pleasure ad Why should boys have all the fun

Young and Brash - MTV Roadies - Brand Association

Family oriented segment SA RE GA MA PA Association

Mainly the following strategies are adopted PORTERS FIVE BUSINESS LEVEL STRATEGS

Differentiation

Uniqueness

Cost leadership

6. Financial Analysis: ( For calculated ratios refer to Appendix 5.a for the Financial year 2010-

2011) Despite its significantly higher base vis--vis competitors, Companys two-wheeler sales

improved by 17%; from 4.6 to 5.4 million units during the year to garner over 40% two wheeler

market share. In the domestic two wheeler market, it had a share of 44.5%, with sales of 5.2 million.

In the motorcycle segment, the Company sold over five million units. In the domestic market, the

Company sold over 4.9 million motorcycles at a growth of 15%, thereby capturing 54.6% domestic

motorcycle market share. In the scooter segment Pleasure, grew a whopping 65% during the year,

with sales of 3.42 lakh units. This single scooter brand now accounts for over 16% market share.

Across various motorcycle segments, the Company bested industry growth in the entry segment by

growing in excess of 17%, and selling more than 1.5 million units. In the deluxe segment, the

Company captured 68.9% share. With sales of 3.8 million units, the Company registered growth in

excess of 12%.

Sales

The Companys sales grew by 17.44%. It ended the year with a domestic market share of around

45%. The Company clocked a sales volume of 5,402,444 units in 2010-11, compared to 4,600,130

units in 2009-10. In value terms total sales (net of excise duty) increased by 22.1% to Rs. 19,245

crores from Rs. 15,758 crores in 2009-10.


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Profitability

The Companys earnings before interest depreciation and taxes (EBITDA) margins decreased from

17.45% in 2009-10 to 13.49% in 2010-11 and the Operating profit (PBT before other income)

decreased from Rs. 2,575.48 crores in 2009-10 to Rs. 2,214.61 crores in 2010-11. The margin fell

despite healthy growth in the sales volume on account of higher prices of raw materials and

components and additional cost of meeting emission norms

Other Income, including non-operating income

Other income increased by 24.7% from Rs. 341 crores in 2009-10 to Rs. 425 crores in 2010-11.

Cash flows

The free cash flow from operations during the year stood at Rs. 2,288.11 crores (previous year

2,686.64 crores). The same have been deployed in capital assets, investments and paid out as

dividends during the year.

Capital expenditure

During the year, the Company incurred a capital expenditure of Rs. 364.12 crores. The funds went

into capacity expansion and replacements.

Raw material costs

Hardening of metal prices particularly steel, copper, aluminium and nickel during the year results in

escalation in material costs. Raw material costs as a proportion of total cost increased 68.1% to 73.3%

and adversely impacted EBITDA margins.

Current asset turnover

This ratio, which shows sales as a proportion of average current assets, decreased from 17.2 to 15.5

times, on account of higher average inventory and loans and advances.

Debt structure

Hero Honda has been a debt free company for the last 10 years. The unsecured loan of Rs. 32.71

crores 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.

Dividend policy

Over the years, the Company has consistently followed a policy of paying high dividends, keeping in

mind the cash-generating capacities, the expected capital needs of the business and strategic


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considerations. For 2010-11, the Board has recommended a dividend of 1750% higher than 1500%

declared in previous year, and has maintained a payout ratio of 42.1% vis--vis 31.3% in the previous

year. Further, it has also declared 3500% interim dividend (previous year 4000%).

Working capital management

The Company has always sought to efficiently use the various components of working capital cycle. It

has been able to effectively control the receivable and inventories, enabling it to continue to operate

on negative working capital.

With the help of ratio analysis, comparison of current year figures can also be made with those of

previous years and if some weak points are located, remedial measures are taken to correct them.

If accounting ratios are calculated for a number of years, they will reveal the trend of costs, sales,

profits and other important facts. Such trends are useful for planning.

Ratio analysis over a period (Refer to Annexure 5.b)

The purpose of financial statements analysis is also to help the management to make a

comparative study of the profitability of various firms engaged in similar business. Such

comparison also helps the management to study the position of their firm in respect of sales

expenses, profitability and using capital.etc.

Comparative ratio analysis of Hero Honda with its competitors (Refer to Annexure 5.c)

7. Recommendations

ChallengesHonda recently sold off its stake of 26% in the Hero Group. So, basically their 25 year old successful

association has culminated. This would affect the Hero Group at three different levels: -

Customers

Communication

Competitors

Hero Honda has built its massive customer base because of its brand name Hero Honda. The name is

what attracts people to Hero Honda because it is associated with trust and quality.

But then communication too is important for the top of the mind recall for customers. The Desh Ki

Dhadkan campaigns of Hero Honda are probably some of the most famous ad campaigns in the

country. With Hero breaking up from Honda, the Hero Group would have to come up with an entire

new communication strategy. The branding campaign would have to be completely changed because

people wouldnt be able to associate with the Hero Group so readily.

The most important thing they need is reinforcement of the brand and smooth transition from being

Hero Honda to just Hero.

The ones who are grinning from ear to ear at this divorce are Hero Hondas competitors. Launching ofnew products, poaching their employees and dealers as well as greater spending on R & D.


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The Hero Group can draw benefits from the following strategic measures -

New Markets: The Hero Group will gain by being able to export more motorcycles and scooters

around the world. Hero Honda, which has a 44 percent domestic market share, is currently limited to

exporting motorcycles only to Indias neighbouring countries due to Hondas global presence.

Challenges

Cost Control - R&T payments are the third biggest expenses for Hero Honda after raw materials and

employee cost. Its another challenge to optimize the savings to rebranding activity.

Maintaining Innovation - The Hero group has two options, either to go for in-house R&D or choose

a domestic/foreign partner for technical collaboration. The most appropriate option would be

determined by cost effectiveness. Hero should be able to live up to the expectations of customers at

technical level.

Maintaining the robust marketing and distribution team - It will be a challenge for Honda to

compete with robust Heros marketing and distribution team.

8. Conclusion

Through above discussions we have seen interdependencies between value chain analyses, resource

based view and the future strategy of Hero Group in the light of dynamic business environment.

The just in time strategy for inventory management and strong distribution and marketing networkare the prime resource capabilities of Hero. These components are its strengths to surge ahead in the

market after the dissolution of its venture with Honda. Besides change in environmental conditions

Hero Honda has been able to sustain its position and hence we come to know that its interlinking

variables in its competencies provide long term competitive advantage to Hero.

Limitations The major limitation of this research project is the challenges posed by the phased

dissolution of the alliance between Honda and Hero group of India. The technology pact between the

two would continue till 2014 and Honda would sell its complete stake in Hero by March 2012. Henceit was difficult to ascertain the effects of the dissolution of the joint venture on either of the

organizations in an objective manner. Hence I have tried to analyse and evaluate the performance of

Hero Honda till the time the breakup of JV came into effect and based on the terms and conditions of

this development have tried to give future recommendations to Hero group of India.

Future Research Future research in this regard could be strategic analysis of Hero Moto Corp India

and its strategies in different stages of its journey till date. Also its performance after the breakup of

JV and before that could be compared and how it would sustain in market conditions in times to come

can be studied


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9. References

"Hero Honda Motors (India) Ltd.: Is it Honda that Made it a Hero?." 2003: Web.

"Hero Motocorp Annual Report 2010-2011." www.heromotocorp.com. heromotocorp, 1 Apr.

2011. Web. 30 Dec. 2011.

Barney, J B. " Is the resource based view useful perspective for Strategic management

research? Yes."Acad of Mgt review 26 (2001): 41-56. Web.

Barney, J B. "Firm resources & Sustained Competitive Advantage."Journal of management

17 (1991): 99-120. Web.

Hamel, Gary , and C K. Prahalad. "Strategy as stretch & Leverage." Web.

King, A W. "Disentangling Interfirm and Intrafirm causal Ambiguity: A causal Model ofconceptual ambiguity and Sustainable competitive Advantage."Academy of Mgt Review

(2007): n.pag. Web.

Ramaswamy , Kannan , and Rahul Sankhe. "Is it Honda that Made it a Hero?." Thunderbird,

The American Graduate School of International Management(2003): n.pag. Web.

Rayport,, J F., and J J. Sviokla,. " Exploiting the virtual value chain." Web.

Shroeder, R G., K A. Bates, and M A. Juntilla . " A Resource base view of manufacturingStrategy and the relationship to manufacturing Performance." Strategic management

Journal 23 (2002): 105-117. Web.

Sirmom, D G., M A. Hitt, and R D. Ireland. "Managing Firm resources in Dynamic market to

create value, looking inside the Black Box." Academy of management review, Web.

Srinivasan, Raghuvir . "Hero and Honda Fill it, shut it, forget it? ."Business Line n.d.n.pag. Web.

Swaraj , Baggonkar. "Hero Honda aims for 25% growth."Business Standard12 July 2009:

n.pag. Web.

www.bajajauto.com. N.p., n.d. Web. 30 Dec. 2011.

www.tvsmotors.com. N.p., n.d. Web. 30 Dec. 2011.


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10. Annexure

1. Critical Success Factors for Two Wheeler Industry


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2. Value Chain Analysis of Hero India


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3. Resource Based View

a. Resources and Capabilities

Classification of Resources


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b. VRIO Framework


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4. SWOT Analysis

Strengths

Leading Domestic Market Share

Robust Supply Chain

Very strong distribution network

Recognised Brand

Look and Style

Technological edge

Resell Value

Low cost of maintenance

Weaknesses

Absence of some features of Competitors Technology

Negative goodwill due to JV breakup

Research and development void

Low exports

Opportunities

Growing Indian automobile market

New target market womenHero group can now venture into exports

Now It Can hiring technology from other players

Rural Market

Strategic joint ventures

Threats

Steel price fluctuations

slowdown in financingIntense competition - new technology of competitor

Labour Issues

Environmental regulations


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5. Financial Anlaysis

a.


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b. Ratio analysis for Hero over a period of time

1) Liquidity Ratio - Current Ratio:

2007 2008 2009 2010

0.31 0.51 0.62 0.4

The ideal ratio 2:1. The liquidity position of the company is not satisfactory because it is not reached

the ideal ratio 2:1. The company should increase the current assets and decrease the current liabilities.

Quick Ratio:

2007 2008 2009 2010

0.11 0.30 0.36 0.33

Liquidity position of the company is not satisfactory because the ratio is decrease and not reached the

ideal ratio 1:1 the company should increase quick assets such as cash and bank balance and decrease

the current liabilities.

3) Leverage Ratios Debt Equity Ratio

2007 2008 2009 2010

0.14 0.09 0.07 0.04

The Ideal Ratio is 2:1.The solvency position of the company is satisfactory but it should decrease the

loans such as secured and unsecured. It should increase the reserves and share capital also.

Proprietary Ratio

2007 2008 2009 2010

0.83 0.87 0.89 0.92

These ratio is the indicative of strong financial position of business. The higher the ratio, the better it

is, but the company should increase the shareholders funds

Fixed Assets Ratio

2007 2008 2009 2010

0.42 0.45 0.51 0.50


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This ratio is satisfactory and the ideal ratio is 0.67 and it will never be more than 1, the long term

funds are used to buy or acquire the fixed assets.

Interest Coverage Ratio

2007 2008 2009 2010

117.74 231.38 55.20 40.38

The ideal ratio is 6. This Ratio indicates whether a business is earning sufficient profits to pay the

interest charges. This ratio is not satisfactory and company should increase the sales and profits, to

pay the interest charges for the long term debts.

4)Turnover Ratios Inventory Holding Periods

2007 2008 2009 2010

11.38days 10.58 10.42 11.93

The Inventory turnover ratio also be expressed in terms of no. of days (or) months it takes for the

stock to get converted into sales. Here the company is satisfactory and company has to work hard to

have more sales.

Working Capital Turnover Ratio

2007 2008 2009 2010

-7.85 -11.75 -17.49 -11.64

The Company should increase the sales and also increase the working capital i.e., increases the

current assets and decrease current liabilities.

Inventory Turnover Ratio

2005 2006 2007 200831.80 34.02 34.56 30.17

The ideal ratio is 8. The company should control the cost of goods sold expenses and increase the

sales in order to increase the ratio.

Fixed Assets Turnover ratio

2005 2006 2007 2008

10.38 8.77 7.30 6.67


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The ideal ratio is 5. the ratio is decreasing from year to year and we should increase the sales up to the

maximum level and we should use the fixed assets up to full 100% capacity.

5) Profitability Ratios Operating Ratio

2005 2006 2007 2008

85.30% 85.40% 89.07% 88.09%

The company had controlled the operating expenses thats why the ratio is decreased, the lower the

ratio the better it is, the company should continue this performance in the future also. It is satisfactory.

EPS

2005 2006 2007 2008

RS.40.59 RS.48.64 RS.42.96 RS.48.47

The profits of the company are increasing slightly and we should increase the sales and we should

decrease the cost of goods sold, operating expenses. The shareholders returns on their investment is

increasing year to year

Gross Profit Ratio

2005 2006 2007 2008

15.91% 15.91% 12.34% 13.46%

The profitability position of the company is satisfactory because of the Gross profit ratio is increasing

from year to year but it is not enough the company should control the cost of goods sold expenses and

increase the sales.


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c) Comparative financial analysis with competitors

1. Profitability ratio Operating Margin

It shows that the operating efficiency of Hero Honda motors limited is better than Bajaj Auto and

TVS motors. While operating efficiency of TVS motors is lower than Hero and Bajaj. So rank ofOperating Efficiency of two wheelers companies can be given as Hero Honda, Bajaj & TVS Motors.

2. Leverage Ratios Debt Equity Ratios

This ratio indicates what proportion of equity and debt the company is using to finance its assets.

From the above diagram we can say that Bajaj Auto Ltd has a high debt equity ratio means it is

aggressive in financing its growth with debt. Than affter TVS motors has a low debt ratio as

comparison with bajaj. And Hero Honda comes at third rank in Debt Equity ratio.

3. Liquidity ratio Current ratio

Current ratio of TVS motors is high than hero and bajaj. This means TVS has a high ability to pay itsliabilities. Bajaj and hero has low abilities to pay for its liabilities.


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d. Balance Sheet of Hero MotoCorp (Rs in Crores)

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Sources Of Funds

Total Share Capital 39.94 39.94 39.94 39.94 39.94

Equity Share Capital 39.94 39.94 39.94 39.94 39.94

Share Application Money 0 0 0 0 0

Preference Share Capital 0 0 0 0 0

Reserves 2,916.12 3,425.08 3,760.81 2,946.30 2,430.12

Revaluation Reserves 0 0 0 0 0

Networth 2,956.06 3,465.02 3,800.75 2,986.24 2,470.06

Secured Loans 1,458.45 0 0 0 0

Unsecured Loans 32.71 66.03 78.49 132 165.17Total Debt 1,491.16 66.03 78.49 132 165.17

Total Liabilities 4,447.22 3,531.05 3,879.24 3,118.24 2,635.23

Application Of Funds

Gross Block 5,538.46 2,750.98 2,516.27 1,938.78 1,800.63

Less: Accum. Depreciation 1,458.18 1,092.20 942.56 782.52 635.1

Net Block 4,080.28 1,658.78 1,573.71 1,156.26 1,165.53

Capital Work in Progress 125.14 48.14 120.54 408.49 189.92

Investments 5,128.75 3,925.71 3,368.75 2,566.82 1,973.87

Inventories 524.93 436.4 326.83 317.1 275.58

Sundry Debtors 130.59 108.39 149.94 297.44 335.25

Cash and Bank Balance 47.75 1,863.48 217.49 130.58 35.26

Total Current Assets 703.27 2,408.27 694.26 745.12 646.09

Loans and Advances 783.48 438.46 325.8 196.37 268.04

Fixed Deposits 23.77 43.73 2.08 0.51 0.52Total CA, Loans &Advances 1,510.52 2,890.46 1,022.14 942 914.65

Deffered Credit 0 0 0 0 0

Current Liabilities 5,316.40 3,965.69 1,678.93 1,455.57 1,171.50

Provisions 1,081.07 1,026.35 526.97 499.76 437.24

Total CL & Provisions 6,397.47 4,992.04 2,205.90 1,955.33 1,608.74

Net Current Assets-

4,886.95-

2,101.58-

1,183.76-

1,013.33 -694.09

Miscellaneous Expenses 0 0 0 0 0

Total Assets 4,447.22 3,531.05 3,879.24 3,118.24 2,635.23

Contingent Liabilities 131.9 73.04 100.54 56.37 165.59

Book Value (Rs) 148.03 173.52 190.33 149.55 123.7


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Cash Flow Statement


Net Profit Before Tax 2404.76 2831.73 1781.46 1410.28 1246.1

Net Cash From OperatingActivities 2288.11 2686.64 1359.03 1211.78 625.05

Net Cash (used in)/from

-1322.31 -527.63 -861.19 -781.01 -273.13Investing Activities

Net Cash (used in)/fromFinancing Activities -989.18 -2109.31 -499.93 -432.33 -474.34

Net (decrease)/increase InCash and CashEquivalents -23.38 49.7 -2.09 -1.56 -122.42

Opening Cash & CashEquivalents 62.61 13.45 15.19 16.66 158.72

Closing Cash & CashEquivalents 39.23 63.15 13.1 15.1 36.3

Profit and loss Account


Income

Sales Turnover 20,787.27 16,856.43 13,553.23 12,048.30 11,553.47Excise Duty 1,420.30 1,016.85 1,227.85 1,703.29 1,647.52

Net Sales 19,366.97 15,839.58 12,325.38 10,345.01 9,905.95

Other Income 238.27 290.69 222.14 216.3 197.68

Stock Adjustments 27 -11.54 22.09 -14.14 3.2

Total Income 19,632.24 16,118.73 12,569.61 10,547.17 10,106.83

Expenditure

Raw Materials 14,236.45 10,822.99 8,842.14 7,465.36 7,255.66

Power & Fuel Cost 100.47 81.05 73.7 56.55 52.45

Employee Cost 618.95 560.32 448.65 383.45 353.81

Other ManufacturingExpenses 409.89 454.36 354.08 304.11 280.17

Selling and AdminExpenses 1,090.72 885.03 669.98 563.27 558.99

MiscellaneousExpenses 340.42 280.64 205.9 190.36 206.11Preoperative ExpCapitalised 0 0 0 0 0

Total Expenses 16,796.90 13,084.39 10,594.45 8,963.10 8,707.19

Operating Profit 2,597.07 2,743.65 1,753.02 1,367.77 1,201.96

PBDIT 2,835.34 3,034.34 1,975.16 1,584.07 1,399.64

Interest 28.2 11.14 13.04 13.47 13.76


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PBDT 2,807.14 3,023.20 1,962.12 1,570.60 1,385.88

Depreciation 402.38 191.47 180.66 160.32 139.78

Other Written Off 0 0 0 0 0

Profit Before Tax 2,404.76 2,831.73 1,781.46 1,410.28 1,246.10

Extra-ordinary items 0 0 0 0 0PBT (Post Extra-ordItems) 2,404.76 2,831.73 1,781.46 1,410.28 1,246.10

Tax 476.86 599.9 499.7 442.4 388.21

Reported Net Profit 1,927.90 2,231.83 1,281.76 967.88 857.89

Total Value Addition 2,560.45 2,261.40 1,752.31 1,497.74 1,451.53

Preference Dividend 0 0 0 0 0

Equity Dividend 2,096.72 2,196.56 399.38 379.41 339.47

Corporate DividendTax 340.14 371 67.87 64.48 57.69

Per share data (annualised)

Shares in issue(lakhs) 1,996.88 1,996.88 1,996.88 1,996.88 1,996.88Earning Per Share(Rs) 96.55 111.77 64.19 48.47 42.96

Equity Dividend (%) 5,250.00 5,500.00 1,000.00 950 850

Book Value (Rs) 148.03 173.52 190.33 149.55 123.7

11PGHR28 Megha Jain Hero Honda

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