11PGHR28 Megha Jain Hero Honda

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MANAGEMENT DEVELOPMENT INSTITUTE

Business Strategy Formulation Term 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 my guide 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 2. Firm’s Strategic Intent a. Vision b. Firm's Mission c. Firm's Strategy 3. External or Environmental Analysis a. General Environment of your firm i. Economic ii. Political & Legal iii. Socio-cultural iv. Technological b. Industrial/Competitive Environment of your firm i. Bargaining Power of the consumer ii. Threat of new entry iii. Threat from Rivals iv. Bargaining power of the supplier v. Threat from Substitute Products 4. Internal Analysis: a. Critical Success Factors (CSFs) b. Value-Chain activities c. Resource based View d. SWOT Analysis of the firm 5. Strategic Performance 6. Financial Analysis. 7. Strategy recommendation 8. Conclusion. Limitations & Future Research. 9. References 10. Annexure i. Critical Success Factors ii. Value Chain Analysis iii. Resources Based View a. Resources and Capabilities b. Classification of Resources c. VRIO frame work iv. SWOT Analysis v. Financial Analysis a. Current year ratios b. Ratio Analysis (2007-2010) c. Competitive Ratio Analysis d. Financial Statements of HeroMotoCorp

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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 able to 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 organization’s 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 organization’s Internal and external environment analysis is also done to ascertain potential threats and opportunities. Its strategic performance in post 2000’s 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. 4

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. 5



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 Splendor’s 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 Hero’s 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 industry’s 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. Hero’s 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 twowheelers 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 company’s 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 firm’s 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 CSF’s 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 the competition. 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 it’s 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 9

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 2000’s This phase witnessed a strategic shift from earlier operational core competencies to the addition of other 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 PORTER’S FIVE BUSINESS LEVEL STRATEGS • Differentiation • Uniqueness • Cost leadership

6. Financial Analysis: ( For calculated ratios refer to Appendix 5.a for the Financial year 20102011) Despite its significantly higher base vis-à-vis competitors, Company’s 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 Company’s 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. 11

Profitability The Company’s 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 12

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-à-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 Challenges
Honda 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 wouldn’t 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 Honda’s competitors. Launching of new products, poaching their employees and dealers as well as greater spending on R & D. 13

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 India’s neighbouring countries due to Honda’s global presence. Challenges Cost Control - R&T payments are the third biggest expenses for Hero Honda after raw materials and employee cost. It’s 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 Hero’s 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 network are 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. Hence it 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 14

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 of conceptual 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 manufacturing Strategy 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 Standard 12 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 Competitor’s Technology Negative goodwill due to JV breakup Research and development void Low exports

Opportunities
Growing Indian automobile market New target market – women Hero 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 financing Intense 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 0.31 2008 0.51 0.62 2009 0.4 2010

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 0.11 2008 0.30 2009 0.36 2010 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 0.14 2008 0.09 2009 0.07 2010 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 0.83 2008 0.87 2009 0.89 2010 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 0.42 2008 0.45 2009 0.51 2010 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 117.74 2008 231.38 2009 55.20 2010 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 11.38days 2008 10.58 2009 10.42 2010 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 -7.85 2008 -11.75 2009 -17.49 2010 -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 31.80 2006 34.02 2007 34.56 2008 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 10.38 2006 8.77 2007 7.30 2008 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 85.30% 2006 85.40% 2007 89.07% 2008 88.09%

The company had controlled the operating expenses that’s 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 RS.40.59 2006 RS.48.64 2007 RS.42.96 2008 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 15.91% 2006 15.91% 2007 12.34% 2008 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 of Operating 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 its liabilities. Bajaj and hero has low abilities to pay for its liabilities. 25

d. Balance Sheet of Hero MotoCorp – (Rs in Crores)
Mar '11 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets 5,538.46 1,458.18 4,080.28 125.14 5,128.75 524.93 130.59 47.75 703.27 783.48 23.77 1,510.52 0 5,316.40 1,081.07 6,397.47 4,886.95 0 4,447.22 2,750.98 1,092.20 1,658.78 48.14 3,925.71 436.4 108.39 1,863.48 2,408.27 438.46 43.73 2,890.46 0 3,965.69 1,026.35 4,992.04 2,101.58 0 3,531.05 2,516.27 942.56 1,573.71 120.54 3,368.75 326.83 149.94 217.49 694.26 325.8 2.08 1,022.14 0 1,678.93 526.97 2,205.90 1,183.76 0 3,879.24 1,938.78 782.52 1,156.26 408.49 2,566.82 317.1 297.44 130.58 745.12 196.37 0.51 942 0 1,455.57 499.76 1,955.33 1,013.33 0 3,118.24 1,800.63 635.1 1,165.53 189.92 1,973.87 275.58 335.25 35.26 646.09 268.04 0.52 914.65 0 1,171.50 437.24 1,608.74 -694.09 0 2,635.23 39.94 39.94 0 0 2,916.12 0 2,956.06 1,458.45 32.71 1,491.16 4,447.22 39.94 39.94 0 0 3,425.08 0 3,465.02 0 66.03 66.03 3,531.05 39.94 39.94 0 0 3,760.81 0 3,800.75 0 78.49 78.49 3,879.24 39.94 39.94 0 0 2,946.30 0 2,986.24 0 132 132 3,118.24 39.94 39.94 0 0 2,430.12 0 2,470.06 0 165.17 165.17 2,635.23 Mar '10 Mar '09 Mar '08 Mar '07

Contingent Liabilities Book Value (Rs)

131.9 148.03

73.04 173.52

100.54 190.33

56.37 149.55

165.59 123.7

26

Cash Flow Statement

Mar '11 Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents -1322.31 -989.18 2404.76 2288.11

Mar '10 2831.73 2686.64

Mar '09 1781.46 1359.03

Mar '08 1410.28 1211.78

Mar '07 1246.1 625.05

-527.63 -2109.31

-861.19 -499.93

-781.01 -432.33

-273.13 -474.34

-23.38 62.61 39.23

49.7 13.45 63.15

-2.09 15.19 13.1

-1.56 16.66 15.1

-122.42 158.72 36.3

Profit and loss Account

Mar '11 Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest 14,236.45 100.47 618.95 409.89 1,090.72 340.42 0 16,796.90 2,597.07 2,835.34 28.2 20,787.27 1,420.30 19,366.97 238.27 27 19,632.24

Mar '10

Mar '09

Mar '08

Mar '07

16,856.43 1,016.85 15,839.58 290.69 -11.54 16,118.73

13,553.23 1,227.85 12,325.38 222.14 22.09 12,569.61

12,048.30 1,703.29 10,345.01 216.3 -14.14 10,547.17

11,553.47 1,647.52 9,905.95 197.68 3.2 10,106.83

10,822.99 81.05 560.32 454.36 885.03 280.64 0 13,084.39 2,743.65 3,034.34 11.14

8,842.14 73.7 448.65 354.08 669.98 205.9 0 10,594.45 1,753.02 1,975.16 13.04

7,465.36 56.55 383.45 304.11 563.27 190.36 0 8,963.10 1,367.77 1,584.07 13.47

7,255.66 52.45 353.81 280.17 558.99 206.11 0 8,707.19 1,201.96 1,399.64 13.76

27

PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax

2,807.14 402.38 0 2,404.76 0 2,404.76 476.86 1,927.90 2,560.45 0 2,096.72 340.14

3,023.20 191.47 0 2,831.73 0 2,831.73 599.9 2,231.83 2,261.40 0 2,196.56 371

1,962.12 180.66 0 1,781.46 0 1,781.46 499.7 1,281.76 1,752.31 0 399.38 67.87

1,570.60 160.32 0 1,410.28 0 1,410.28 442.4 967.88 1,497.74 0 379.41 64.48

1,385.88 139.78 0 1,246.10 0 1,246.10 388.21 857.89 1,451.53 0 339.47 57.69

Per share data (annualised) Shares in issue (lakhs) 1,996.88 Earning Per Share (Rs) 96.55 Equity Dividend (%) Book Value (Rs) 5,250.00 148.03

1,996.88 111.77 5,500.00 173.52

1,996.88 64.19 1,000.00 190.33

1,996.88 48.47 950 149.55

1,996.88 42.96 850 123.7

28

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