India’s Hero to buy Honda stake in motorcycle JV

By Devidutta Tripathy and Chang-Ran Kim

NEW DELHI/TOKYO (BestGrowthStock) – Indian group Hero is to buy Honda Motor’s (7267.T: ) 26 percent stake in their motorcycle venture Hero Honda Motors (HROH.BO: ), paving the way for the Japanese company to focus on its wholly-owned Indian unit.

The companies did not disclose financial details of the deal on Thursday. Honda’s stake in Hero Honda, formed in 1984, has a market value of nearly $2 billion.

Hero Honda, which makes the CD range of bikes, Splendour, Glamour and Pleasure scooters, is India’s largest motorcycle manufacturer, with more than half the domestic market.

Selling out of the venture gives Honda the freedom to go it alone in the world’s second-largest market for two-wheelers, where it is building its second wholly-owned motorcycle plant.

The Hero Group, for its part, hopes to explore new products and export opportunities now it has been released from a ban on exporting to markets where Honda has a presence.

“We can now capitalize on diverse market opportunities including large export markets and new product categories and segments,” Hero Honda chief executive Pawan Munjal told reporters in New Delhi.

India’s Munjal family, owner of the diversified Hero Group, owns a 26 percent stake in the joint venture.

Media speculation has swirled since summer that Honda, the world’s biggest motorcycle maker, would unload its stake in the 26-year-old venture to focus on wholly owned unit Honda Motorcycle & Scooter India, set up in 1999.

Shares in Hero Honda, which the market values at about $7.4 billion, ended 3.6 percent higher at 1,679.10 rupees, with the broader Mumbai market (.BSESN: ) up 1.1 percent.

“Indian partners and the international partners have started to believe that the market size has reached a level where both the partners can play independently,” said Jagannadham Thunuguntla, head of research at SMC Global Securities.

Munjal said Hero’s royalty payment to Honda would start declining from next year.

“If the royalty is in line with current levels, or lower, it is obviously good for the stock,” said Joseph George, a sector analyst with BNP Paribas.

“They do not have the R&D capability right now, they will have to build it,” he said, referring to the Hero Group.

Hero Honda has been losing market share to rivals, including No. 2 player Bajaj Auto (BAJA.BO: ) and TVS Motor (TVSM.BO: ), and as global players ramp up sales in the country.

India’s two-wheeler segment grew by a quarter in the fiscal year ended March to more than 9 million units, and global players covet the growth opportunities in an economy growing at 9 percent a year and generating rising incomes.

ROYALTY PAYMENT

Hero Honda shares fell as much as 9 percent on Wednesday after Indian media reports said the Indian partner in the joint venture might have to pay higher royalties to Honda after buying the firm’s stake for about half the current market value.

“The royalty rate will remain in line with the current levels, or going forward they will be even lower,” Munjal said.

When the Hero Honda joint venture was formed in 1984, Indian regulations blocked foreign players from setting up wholly owned subsidiaries in the country. The rules were relaxed later, helping Honda to set up its own unit.

Honda’s wholly owned Honda Motorcycle and Scooter India will invest 5 billion rupees ($110 million) in a new plant in the Indian state of Rajasthan, an official said on Wednesday.

In October, German luxury car maker BMW (BMWG.DE: ) said it would start selling motorcycles in India by December through three dealerships.

Heavyweight motorcycle maker Harley-Davidson Inc (HOG.N: ) said last month it planned to set up an assembly facility in the northern Indian Haryana state. [ID:nSGE6A1088] (Writing by Sumeet Chatterjee; Additional reporting by Kentaro Sugiyama in Tokyo, and Tanmaya Nanda and Prashant Mehra in Mumbai; Editing by Tony Munroe) ($1 = 45.3 rupees)

India’s Hero to buy Honda stake in motorcycle JV