EBR’s bankruptcy leaves 5 Hero MotoCorp projects pending

India’s largest two-wheeler manufacturer Hero MotoCorp Ltd’s plans of foraying into new segments, according to sources, have seen a setback due to its North American ally, Eric Buell Racing’s (EBR) sudden bankruptcy in the USA on April 16, 2015.

In this context Hero MotoCorp, which had bought a 49 percent stake in EBR via an investment of US$25 million, had issued a press release to the Bombay Stock Exchange (BSE) in April this year. The statement said: “Hero MotoCorp, with its strong in-house R&D capabilities, remains confident that its future line-up would not be affected despite EBR ceasing operations.”

However, sources confirm that EBR’s ill-timed insolvency in the USA has left Hero MotorCorp’s five projects pending. Under the agreement between the two companies, EBR was working on a total of 17 projects commissioned by the Indian company, of which it managed to complete only 12.

Autocar Professional learns that while the completed projects were mainly the refurbished versions of some existing models, the five incomplete projects include the upcoming single-cylinder, liquid-cooled, 250cc fully-faired HX250R sportsbike, an electric serial hybrid scooter named Leap, and three other undisclosed models.

Speaking on condition of anonymity, a source aware of the development disclosed that “since 2011, EBR was working on many of Hero MotoCorp’s projects. They completed 12 out of 17 projects and these were basically modifications of the existing products. A 250cc bike and a hybrid scooter were among the 5 remaining projects. Both were in absolutely advanced stages of development and undoubtedly both the projects are respectively delayed.”

An email sent to the company on June 3 still awaits a response in this regard.

Limited leap
Interestingly, the Leap hybrid scooter, which was first showcased at the Auto Expo 2014 in New Delhi, was designed and developed with an aim of facilitating Hero’s entry into the US and the European markets. Hence it was given a number of advanced features including an all-new 124cc petrol engine along with an 8kw electric traction motor drawing power from expensive and capable lithium-ion batteries. The Leap scooter, which was equipped with a full-LED lighting system and powerful Brembo two-piston front 240mm disc brake, was planned to make a strong statement of Hero’s technical innovations in the western markets.

It can be recalled that Autocar Professional, in June 2014, had revealed Hero’s intent of planning production of the Leap scooter by February 2015 (6,000 units per annum at the Gurgaon plant) for exports. However, the plan did not work due to EBR’s liquidation.

“EBR’s failure to deliver has absolutely rattled Hero’s product launch plans. While on one side, their timing of entering into the highly lucrative European and North American markets (with the Leap scooter) is postponed, their plan of foraying into the 250cc sportsbike segment (with HX250R) in India is also delayed by a few quarters. With the said motorcycle model, Hero not only would have marked its presence in this upcoming category and would have cumulatively gained market share in the near term, but the segment would have also provided the company much required margins, much better than what it earns on the commuter models. Both these models are in almost launch-ready condition. The company is now looking at its own R&D resources and external help via consultants,” said an analyst of a leading market research firm, who did not wish to be named.

Hero MotoCorp is known to have made some high-profile appointments last year that included hiring Dr Markus Braunsperger from BMW, Germany as HMCL’s chief technology officer (CTO) and Markus Feichtner from AVL to lead the engine design and development team.

Contained impact?
The source added that “the EBR liquidation will, however, have a limited impact on the products under development. These products will be eventually rolled out by the Munjal family-backed company, though after an understood delay. Once these products will be rolled out in the market, the company is targeting improved EBIDTA (earnings before interest, taxes, depreciation and amortization) margins in next 2-3 years.”

It is to be noted that HMCL, which reported tight margins for Q4 FY2014-15, saw EBIDTA margins of close to 11 percent (one of the weakest ever) and profit after tax (PAT) of close to Rs 470 crore for the said quarter. Market research reports suggest that the reported PAT was impacted by the write-off of nearly Rs 155 crore, an investment that Hero MotoCorp had done in EBR.

These reports also highlight that the increased marketing spend by the company in Q4 FY2015 (sponsoring major events such as the cricket World Cup, PGA tournament, Indian Hockey League, Indian Football League) was another reason behind putting pressure on the EBIDTA margins.

Steady plans
Going forward, Hero MotoCorp plans to launch two new scooters (possibly two models in the 110cc scooter category and one in the 125cc scooter category) and a new motorcycle variant. While the scooter launch activities will begin, as planned, in the July-September 2015 period, the company will keep rolling out new products through the festive season and the planned motorcycle is scheduled for Q4 FY2015-16.

The company, which is working on a blueprint of launching close to 35 two-wheeler models in the next three years, plans to spend Rs 3,000 crore on capacity expansion over FY2015-16 (Rs 1,650 crore) and FY2016-17 (Rs 1,350 crore).

Reports suggest that while the said investments exclude the commissioned amount for setting up the plant in Andhra Pradesh, they will include Rs 1,700 crore for the Gujarat plant, Rs 700 crore for the upcoming Kukas (Jaipur) R&D Centre, Rs 100 crore for capacity expansion at Neemrana, Rs 300 crore on maintenance activities across other three plants and for upgrading the global parts centre.

Industry outlook
SIAM industry data says that HMCL sold 6,431,686 units in FY2014-15, which saw total overall two-wheeler sales of 16,004,581 units in the domestic market. This stands at an overall market share of 40.18 percent. The last fiscal saw HMCL’s market share stand at 52.87 percent and 16.69 percent in the motorcycle and scooter segments respectively.

However, SIAM’s category of motorcycles with an engine displacement of more than 75cc but less than equal to 110cc (which is Hero’s bread-and-butter segment) shows the company’s market share at an overwhelming 70.2 percent. This is the only category where HMCL is essentially the number one player.

Talking to Autocar Professional about his outlook of the two-wheeler industry and the industry leader’s expected performance in the upcoming quarters, Arun Agarwal, analyst, Kotak Securities, said: “The domestic two-wheeler industry has seen negative growth of close to five percent in Q1 FY2015-16. During this period, HMCL has seen a flat growth of nearly 0.6 percent. Because HMCL is the industry leader, it will absorb maximum impact of the slow-moving market. The fall in rural incomes and inadequate monsoons are the primary reasons behind slowdown in the rural demand. Though the rainfall improved in June, July has been low on expectations so far. We estimate that Q2 FY2015-16 will remain sluggish unless monsoons pick up. Secondly, a delay in the festive season (Q3 in FY2016 as against Q2 in FY2015) this year is likely to contribute to the subdued rural demand in Q2. The rural economic activities are expected to pick up in Q3. Marginally outgrowing the industry, we expect that HMCL’s growth will remain close to five percent this fiscal on the back of these reasons.”