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Hero Group to Pay License Fee in Bulk, and Royalty on New Products to Honda

The Honda Motors and Hero Group partnership, Hero Honda, ended in December last year. However Hero Group is still allowed use of the Honda brand till 2014 upon paying the Japanese Honda company Rs.2,479 crore as licensing fee. While it was assumed that this was a royalty fee, the Chief Fiancial Officer of Hero Group, Ravi Sud, is quoted as saying that this amount is a lumpsum payment and not a royalty fee.

Hero Group will have to pay Honda royalty only for any new products which they introduce from now onwards to June 30, 2011, not exceeding 5%. Sud said that the new arrangement became effective since January, this year. The royalty up to December 31, 2010 was Rs.360 crore, while the amortised sum for this year’s first quarter is Rs.177 crore, of which a fourth is payable to Honda every year till June 30, 2014.

Hero Honda has targeted a sale of more than 6 million units in this financial year, which will mark an increase of 12% compared to the 5.4 million models they sold in 2010-11. The Senior VP of Sales and Marketing, Anil Dua, said that their three plants located at Haridwar, Dharuhera and Gurgaon had a production capacity of around 6.15mn units.

He added that the new fourth plant will be imperative for them and they expect to decide about this soon. Once they commission this plant through 2012-13, they will look at increased figures thereafter. Hero Honda Motors will introduce 7 to 8 new variants/models across all segments in this fiscal year so as to increase growth in urban and rural India.

Sud further added that in spite of them witnessing a great topline growth, with the commodity prices increasing, the pressure has been bad for them, resulting in a bleak outlook for the first half of the fiscal year. The decision of the RBI to tighten liquidity might also result in fallout among the ancillary suppliers of Hero Honda.

He added that have more than 200 vendors and even if a handful of them are not able to invest because of the RBI move, they could witness grave supply constraints. The company recently reported a decrease in total profits for the fiscal quarter ended March 31, 2011, in comparision to the same period last year, however their net sales increased by 31%.

The cost of raw materials for the 2010-11 fourth quarter also increased by 41% and up by 32% for the entire year. Meanwhile the scrip of Hero Honda was down by 3.63% on the Bombay Stock Exchange closing at Rs.1,600.10.

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