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Hero-Honda Split Hurts Valuation

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The Hero-Honda split raised many eyebrows. The deal, under which the Hero Group, through Hero Investments, agreed to buy Honda Motor's 26 per cent stake in Hero Honda Motors at Rs 739.97 per share, was at a steep discount to the market price of the stock. "(The deal is) not at market valuation, so there must be something according to the terms of the joint-venture agreement or other factors that we are not aware of," says Rakesh Batra, auto partner at Ernst & Young. The market reaction was on expected lines. The scrip is trading at Rs 1,515, down 17 per cent since December 2010 when the split was announced.

Some analysts feel Honda would have agreed to the discount only after getting Hero to hike the royalty payments for the use of the Honda brand name and technology. Hero officials have, however, denied this. "In fact, there will be no royalty on the existing products after June 2014," says Ravi Sud, CFO of Hero Honda Motors.

But there is an alternative view that suggests that the price is not too skewed in Hero's favour. For one, perhaps Honda itself was keen to get out to focus on its Honda Motorcycle and Scooter India — the agreement would have ended in 2014 anyway. Besides, Honda could have felt that the price of the Hero Honda scrip also reflected the Honda technology. Because Honda will not supply technology to Hero beyond 2014, that needed to be factored in. And don't forget Hero will now have to spend a huge amount on rebranding, too.

"The fall in market capitalisation has more to do with the perception of how this company is going to fare going forward," says Batra. Hero Honda has lost over Rs 6,300 crore in market capitalisation since the split in December.

(This story was published in Businessworld Issue Dated 28-03-2011)