Performance Evaluation

Submitted by:

Aniket Harsh

On: 9th Oct 2014

• Started in 1983 as Hero Honda, with a joint collaboration agreementwith Honda Motor Company Ltd, Japan.

• Name changed to Hero Motocorp post exit by Honda in Jan 2011

• World’s largest two-wheeler company in terms of unit volume sales.

• Presence in 19 countries.

• JV with Magneti Marelli and alliance with Erik Buell Racing.

• 41.2 % share in domestic 2-Wheeler market and 51.8% in domesticmotorcycle market.

• Installed capacity of 7 million units

2W Market FY14

• During FY 2013-14, the two-wheeler industry grew marginallyby 7.1%, from 16.9 million units sold compared to 15.8 millionunits in FY 2012-13.

• In a similar pattern, the motorcycle volumes which account fora major industry proportion grew by 4.3% from 11.95 millionunits in FY2012-13 to 12.5 million units in FY 2013-14.

• The scooter category was the star industry performer with22.1% growth in sales, from 3.07 million units in FY 2012-13 to3.75 million units in FY 2013-14.

Segment Analysis• The two-wheeler industry has three distinct segments, based

on income and lifestyle classifications. In FY 2013-14, thedeluxe category accounted for 66% of sales. It was followed bythe entry segment (18%) and the premium category (16% ).

• The deluxe segment grew by 5.4% with volumes of 6.8 millionunits.

• The entry segment which accounted for 1.8 million units,declined by 2.6%.

• The sales in the industry’s premium segment increasedsignificantly by 7.1%.

KPIs HMC FY14 HMC FY13

Bajaj FY14

TVS FY14

Liquidity and Leverage Ratios

Quick Ratio 1.10 1.06 1.05 0.56

Current Ratio 1.26 1.22 1.19 0.92

Turnover and Control Ratios

Net realization per unit (Rs) 40466.91 39120.71 52576.84 38407.38

Expenses per unit 34799.15 33714.67 41623.64 36101.06

Expenses as a % of sales 84.63% 84.94% 78.27% 88.31%

Raw material cost as a % of sales 72.09% 73.06% 63.58% 68.06%

Equity Turnover 4.59 4.83 2.19 5.65

Asset Turnover 2.55 2.51 1.43 2.24

Capital Intensity 40.19% 40.88% 70.05% 44.60%

Inventory days 10.5 11.16 12 29

Fixed Asset Turnover Ratio 8.30 7.71 9.79 6.81

Inventory Turnover 40.33 40.01 32.40 15.78

Working Capital Turnover 23.84 28.09 23.38 -71.84

Current Asset turnover 11.28 11.68 6.33 5.67

Profitability

Profit before interest and tax/Income from ops 11.39% 10.69% 20.28% 4.73%

Profit before tax/Income from Ops 11.34% 10.64% 22.76% 4.43%

Profit After tax/Income from ops 8.34% 8.91% 15.94% 3.29%

Operating profit before tax/Income from ops 9.62% 9.02% 20.27% 4.73%

EBITDA/Income from ops 14.01% 13.82% 21.16% 6.68%

KPIs HMC FY14

HMC FY13

Bajaj FY14

TVS FY14

Cash Flow

Net cash from operating activities (Rs Crores) 2963.41 1890.43 3545.71 523.79

Net cash used in investing activities (Rs Crores) 1619.32 732.94 2141.49 -259.84

Net cash used in financing activities (Rs Crores) 1414.93 1056.27 1468.22 -198.38

Net cash and cash equivalents (Rs Crores) 66.41 134.95 486.28 65.57

Management Effectiveness

Return on Equity 37.66% 42.31% 35.82% 18.49%

Return on Asset 20.89% 21.97% 23.34% 7.34%

Return on capital employed 52.67% 47.85% 44.76% 18.50%

Dividend Payout

Payout ratio 61.55% 56.55% 42.80% 35.70%

Dividend per share 65 60 50 1.4

Earnings per share 105.6 106.1 116.8 3.9

2012 2013 2014Profit Margin 10.09% 8.91% 8.34%

Asset use efficiency 2.384 2.465 2.503

Equity Multiplier 2.305 1.926 1.803

ROE 0.554 0.423 0.377

Hero Motocorp DuPont Analysis

Liquidity and Leverage: Hero MotoCorp is debt free and showcases best in class liquidity performance

Turnover and Control Ratios: Compared to Bajaj, the per unit realization is lower and raw material consumption and expenses as a % of sales is high which should be a cause for major concern.

Profitability is a concern when compared to Bajaj. End of Royalty payment to Honda would certainly boost up numbers for next year, and it is expected that with the change in regime, market conditions will improve, regardless Hero should be better prepared to defend its margins

Cash flows are healthy. A good chunk of it is being directed towards R&D efforts. However, a look at Bajaj’s cash flow suggests more aggressive effort at financing and R&D investment.

Management effectiveness ratios indicate that the management at Hero is doing a better job than their peers at competition. DuPont analysis shows that decreasing ROE is largely due to decreasing profit margin. It can be seen from asset use efficiency that management has constantly been effecting improvements to increase investors wealth.

Intensifying competition in premium segment is also a cause of concern as it is a high margin low volume segment. Competitors like Honda and Yamaha through their parent companies have ready products which would allow them shorter time to market.

• Pricing strategy might be re-worked to increase realization per unit. As can be seen, there is a substantial

difference in Bajaj’s realization per unit and expense per unit but it is not so with Hero.

• Hero is languishing behind Bajaj in exports. Export focus needs to be increased. Export revenues will help in

shoring up the bottom line. (66.7% of the total Indian motorcycles exported this year were Bajaj’s and

export revenue constitutes more than 40% of Bajaj’s Total Sales)

• Premium segment line needs to be extended as they offer greater margins. This needs to be done sooner

rather than later because with the change in regime it is but a matter of time before Honda and Yamaha

begin manufacturing of their high end motorcycles in India and capture the market.

• Hero needs to implement practices for effective resource management. Expenses and raw material

consumption as a % of sales is highest for Hero.

• R&D should be directed towards creating unique products (alternative fuel bikes etc) and not trying to play

catch-up with Honda and Yamaha (Blue Ocean Strategy). For countering the Japanese, Hero should look for

technology collaborations or outright acquisitions.

• The retail finance arm, Hero FinCorp, could also look at providing vehicle insurance (subject to government

regulations).