Hero nears end of royalty settlement with Honda

Hero MotoCorp, India’s largest two-wheeler manufacturer, is expected to soon reach the end of its variable royalty arrangement with Honda, wherein the payment was directly based on the sales of primarily four products – Hero Impulse, Hero Ignitor, Passion X Pro and Hero Maestro. All these models used technology sourced from Honda Motor Co.

According to company documents, Hero MotoCorp has paid Rs 50.02 crore in FY2012-13, Rs 116.67 crore in FY2013-14, Rs 121.41 crore in FY2014-15 and Rs 78.89 crore in FY2015-16 as variable royalty to Honda of Japan. The spike in payments in FY2013-14 and FY2014-15 were on the back of strong sales of the Hero Maestro, which used the same single-cylinder, air-cooled, four-stroke, 110cc engine from Honda’s Activa model. Other models including the 110cc Passion X Pro, 125cc Hero Ignitor and 150cc Hero Impulse did not see substantial sales.

New scooter models like the Maestro Edge, which was launched along with the Hero Duet, in October 2015 became the first products to be fully designed and developed by Hero’s in-house R&D team. “Attractively designed with contemporary styling and loaded with a host of unique features, Maestro Edge and Duet have been well received by customers, helping our company increase its market share in the scooter segment. This scooter made its global debut in Colombia (named Dash for that market), during the inauguration of Hero’s first overseas manufacturing facility,” quotes Hero's annual report for FY2015-16.

Hero MotoCorp says it has sold over 100,000 units of the Maestro Edge within six months of its launch (as on March 31, 2016). With the Maestro Edge gaining popularity, the company looks to phase out the old Maestro model, thus further reducing its financial liability to Honda.

Wishing to stay anonymous, a source aware of the matter disclosed that “Hero MotoCorp is estimating a sharp decline in the variable royalty payment to Honda during the ongoing fiscal. The dues might be lower than Rs 30 crore or even less. Company officials say it would be negligible in FY2016-17. This also means that with the phasing out of the old Maestro model, Hero MotoCorp will free itself of all dues to Honda impacting its margins, which may then rise in the range of 15-16 percent. However, the investments made in the R&D and new projects may offset the same.”

According to Hero, its capex for the ongoing fiscal will stand in the range of Rs 1,100-Rs 1,300 crore. It is known that Hero MotoCorp has already paid an amount of around Rs 2,500 crore as fixed royalty to Honda Motor Company, amortised between January 1, 2011, and June 30, 2014.

The Ignitor is one of the four models making Hero liable for royalty payment to Honda.
 

Hero MotoCorp’s annual report FY2010-11 quotes, “During the year, the company has entered into a Memorandum of Understanding (MoU) with Honda Motor Company Limited Japan (Honda) dated December 16, 2010, which is effective from January 1, 2011, and in accordance therewith has entered into New License Agreements pursuant to the Share Transfer agreement, wherein Honda has given to the Company right and license to manufacture, assemble, sell and distribute certain products/parts and export license for certain products and their service parts under the intellectual property rights.”

“The amount to be paid by the Company for licenses granted as stated above of Rs 1,928.37 crores for manufacture, assembly, selling and distribution and Rs 550.96 crores for an export license."

According to Abdul Majeed, partner, automotive, Price Waterhouse, "This is good for Hero MotoCorp, in my view, because it has to ultimately invest in its R&D capabilities which it is making. The company will be completely focused on its in-house R&D, it will have a lot more flexibility in terms of what it needs to do. Hero MotoCorp is slowly coming to an end of its arrangement with Honda. Hero must continue to innovate and bring the best products to meet customers’ demands in the market.”

Autocar Professional contacted Hero MotoCorp for its comment on the royalty issue but the company was yet to revert till the time this news went online.

This news has also been published in Autocar Professional's September 1, 2016 NCR Special.