Industry Analysis HM

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7/9/2011

SUDIP BHATTACHARYA, SUMAN MISHRA | WMP 5057, WMP5058

HINDUSTAN

MOTORS

INDUSTRY ANALYSIS OF HINDUSTAN

MOTORS



INDUSTRY ANALYSIS

Hindustan Motors Limited, the flagship venture of the multi-billion-dollar C. K. Birla

Group, was established during the pre-Independence era at Port Okha in Gujarat.

Operations were moved in 1948 to Uttarpara in district Hooghly, West Bengal, where

the company began the production of the iconic Ambassador. Equipped with integrated

facilities such as press shop, forge shop, foundry, machine shop, aggregate assembly

units for engines, axles etc and a strong R&D wing, the company currently

manufactures the Ambassador (1500 and 2000 cc diesel, 1800 cc petrol, CNG and LPG

variants) in the passenger car segment and light commercial vehicle 1-tonne payload

mini-truck HM-Shifeng Winner (1500 cc diesel) at its Uttarpara plant.

Hindustan Motors Ltd was incorporated in the year 1942 at Port Okha in Gujarat as a

small assembly plant for passenger car. In the year 1948, they shifted their activities to

Uttarpara in West Bengal and set up facilities for the manufacture of cars and trucks

and in the year 1971, the company diversified their activities by setting up an

Earthmoving Equipment Division at Tiruvallur in Tamil Nadu for the manufacture of

Earthmoving equipments such as dumpers, front-end loaders and crawler tractors. In

the year 1985, the company commenced a Power Products Division at Hosur for

manufacture of heavy duty transmission required for Earth moving Equipments and in

the year 1986, they commenced the commercial vehicle division for the manufacture of

Heavy Commercial Vehicles at Vadodara in Gujarat. In the year 1987, the company in

collaboration with Isuzu Motor Company of Japan commenced their production of petrol

engines and transmissions at Pithampur in Madhya Pradesh. In the year 1996, the

company modernized, upgraded and expanded their three existing divisions namely

Earthmoving Equipment Division, Power Plant Division and the Uttarpara Plant. In the

year 1997, they began the production of Road Trusted Vehicle and in the year 1998,

they commenced Mitsubishi Lancer Car project. During the year 1999-2000, the

company entered into an agreement with Allison Transmission Division of General

Motors of USA for marketing on-highway transmission. The Earthmoving Equipment

Division of the company was sold to Caterpillar India Pvt Ltd, a wholly owned subsidiary



of Caterpillar Inc, USA with effect form February 9, 2001. During the year 2001-02, the

company in collaboration with Mitsubishi Motors of Japan launched Mitsubishi Pajero in

India. Also, they entered into an arrangement with Ford India Ltd for the supply of

engines and transmission to Ford India from their Pithampur factory. During the year

2003-04, the company introduced two new variants of Ambassador namely Grand and

Avigo. Also they launched new version of Lancer with 1.8 Litre petrol engine as well as

automatic transmission with the brand name, Lancer Invex. Power Products Division in

Hosur exported transmission components Rs 4 crore to Allison Transmission Division of

General Motors USA during the year. During the year 2004-05, Power Unit Plant at

Pithampur and Power Products Division at Hosur were transferred to AVTEC, a

company jointly held by HM, Actis and C K Birla Group. In January 2006, they

introduced a new model of premium car, manufactured under license from Mitsubishi

Motors, Japan and branded as Lancer Cedia. In A new model of 'Montero' was

launched in June 2007 and an upgraded model with automatic transmission was

launched in January 2008. In February 2008, upgraded Pajero was launched in the

market. The Chennai Plant introduced two models of Premium Sport Utility Vehicles

from Mitsubishi Motors, Japan during the year 2007-08. In December 2008, the

company in collaboration with Shandong Shifeng, a China based automotive and agri-

equipment company launched their mini commercial vehicle namely HM-Shifeng

Winner. Also, they are in the process of launching two more variants of the mini-truck

with Chinese collaboration. HML¶s subsidiaries include: Hindustan Motor Finance

Corporation Limited, HM Export Limited and Hindustan Motors Limited, USA.

Hindustan Motors (HML) is an automobile manufacturing company. The company's key

products and brands include the following: Passenger cars, Multi utility vehicles, Sports

utility vehicle, Trucks. The Brands include Ambassador, Winner, Lancer, Lancer Cedia,

Lancer Evolution x, Montero, Outlander & Pajero. The following companies are the

major competitors of Hindustan Motors Limited namely viz. Mahindra & Mahindra

Limited, Tata Motors Limited & Maruti Suzuki India Ltd.



CRISIL research expects that the passenger cars & utility vehicles is likely to grow by

16 ± 18% annually to reach Rs. 1750 billion by 2014 -15. The buoyant growth will be led

by the growth of the sales of ultra low cost cars. The cost of raw material, royalty, selling

& distribution expenses is expected to increase further. However, with growing

competition and increase in excise duty, the manufacturers will have limited flexibility to

pass on these costs. Exports are likely to be driven by the major players making India a

global small car hub. Reduction in excise duty by 4%, rationalizing the income tax slabs

& better financing environment have helped the passenger car segment to grow by

25.6% in year 2009-10 compared to previous year. However, with the rise of cost of raw

materials, implementation of BS IV norms, hike in excise duty by 2%, increase in fuel

price & upward revision of interest rates will affect the cost of ownership.

The revenue account of Hindustan Motors shows a loss of Rs. 51.10 Crores after

providing Rs. 17.63 Crores for depreciation and Rs. 17.84 Crores for deferred tax and

other taxes. There was a debit balance of Rs. 81.17 Crores in the Profit and Loss

Account, which was brought forward from last year. There is a closing debit balance of

Rs 132 28 Crores in the Profit and Loss Account foe March ending 2010. In accordance

with the Order of the Government of West Bengal in September 2006 wherein the

Company was allowed to develop 314 acres of land at Hindmotor as Integrated IT

Township & Auto Ancillary Park, the Company has transferred the balance part of its

land admeasuring 62.791 acres by handing over physical possession thereof against

payment to the Developer and profit of Rs. 51.37 Crores Thereon has been included in

the Profit and Loss Account during that year. Hindustan Motors had entered into a full

and final out of Court settlement regarding disagreement/ disputes with the Developer

and the said settlement was duly recorded by the Honble High Court at Calcutta. The

amount of Rs. 5 Crores paid in pursuance of this settlement has been netted off from

the profit on sale of the land. With this, the Company has completed the transfer of 314

acres of land to the Developer. The accumulated losses of the Company at the end of

financial year 31st March, 2010 have resulted in erosion of more than fifty percent of its

peak net worth during the immediately preceding four financial years. The Company has

decided to report to the Board for Industrial and Financial Reconstruction about such



erosion of networth as envisaged under Section 23 of the Sick Industrial Companies

(Special Provisions) Act, 1985.

Presently, Hindustan Motors has been focusing on automobile business and auto

component business namely forgings, castings and stampings with plants at Uttarpara,

Tiruvallur and Pithampur in the following trade names Accu Forge, Accu Cast & Accu

Stamp. However, in the automobile business, the company is focussed on Ambassador,

Lancer, Cedia, Sports Utility Vehicles namely, Pajero, Montero and Outlander and the

recently launched goods carrying mini truck called Winner. After much persuasion, the

Company was able to persuade its foreign collaborator to reduce kit prices in order to

stay competitive in the market. The gains of such reduction, due to inherent lead time in

shipments, became available to the Company only in the later part of the final quarter of

the year 2009-10. In addition, the Company is trying to minimize pressure on margins

by way of aggressive cost reduction and value engineering measures. During the last

couple of years, the Company¶s Uttarpara plant has been experiencing steady declinein

volumes. The sales of Ambassador car, predominantly sold in taxis, institutional and

commercial segment, have been declining due to competition from mid-size car & utility

vehicles. However, the sales of Ambassador have improved in 2009-10 due to large

fleet replacement of taxis in the city of Kolkata. The volume increased but the profit did

not increase much because of lower margin in yellow taxis. The Company¶s effort to

grow through diversification in auto ancillaries like forgings, castings & stampings was

stymied by prolonged labour strike in 2007, wherein the customers who had handed

over their tools to the Company had to approach the Hon¶ble High Court of Calcutta to

regain possession of their tools. Moreover, the downturn in the automobile sector in

year 2009 has affected HM¶s business in auto ancillary.

Hindustan Motors has appointed Mr. Manoj Jha as Managing Director in place of Mr. R.

Santhanam when latter resigned from his post. It is observed that the remuneration of

Mr. Jha is quite high compared to Company¶s previous standard. The Company has

given assignment to Mr. Jha to rebrand, rebuild and turn around the organization.



A close look to the company¶s financials reveals that the company¶s net worth has

eroded alarmingly. Since, it is a family run business; the company has invested a large

share in various companies of Birla Group. Moreover, the cross share holding pattern of

the Birla group in various companies is very intriguing. It is seen that company spends

maximum amount in the raw materials. To stay afloat in the industry, it has not been

able to pass on the costs to the customer. The next important expense component is

employees cost which is very substantial. The reason is very large no. of unionized

employees employed compared to the volume of work. Another observation is that the

company keeps very large amount in Bank Fixed deposits, which is less producing

compared to other instruments. It is evident from the company¶s balance sheet that the

company¶s fixed assets are ageing as more than 50% of the book value has got

depreciated. Perhaps this may be one of the reasons for high operating costs and poor

productivity. The productivity may have been affected due to labour unrest and ageing

machineries in Uttarpara plant. In spite of the ageing machinery the company took the

steps of revaluating the assets in financial year 2009-10. The company has shown Rs.

715 lakhs as intangible asset in the name of technical knowhow, which is being

amortized over 10 years. But it is highly ambitious to amortize the technical knowhow in

10 years where the technology changes almost every five years.

Industry Analysis HM

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