Margin Pressures and Their Impact on Hero Honda Share Price
October 7th, 2011 by hendri 
No Comments Margin Pressures and Their Impact on Hero Honda Share Price
We think that it is necessary to define margin pressures first before discussions on their impact on the Hero Honda share price can start. To paraphrase Investopedia, margin pressures are the effects of certain internal and external market forces on the company’s margins including the gross, operation and net figures. Basically, any event that cause the company’s expenses to rise and/or its revenues to fall will exert pressures on the margin by way of falling net earnings for a certain period of time.
In the case of Hero Honda, many margin pressures have made themselves known to the company, its investors and other stakeholders. These margin pressures include competitors offering lower-priced same-quality products and the commodity costs and other expenses on the rise. These margin pressures will be discussed in this article with the view in mind of forecasting their effects on the Hero Honda share price in the market.
Competitor Actions
Hero Honda has set the goal on increasing the volume of its motorcycle sales, the actions of competitors primarily Bajaj will adversely impact on said objective. This August 2011, Bajaj will launch the 150cc Boxer bike with an attractive price that can take away Hero Honda’s market share.
Other companies like Honda itself and Yamaha will be launching motorcycles in a head-to-head competition with Hero Honda.
It must be noted that these brands have more brand equity than Hero Honda when it comes to the premium segment of the market.
Yes, the sales at Hero Honda, which remains to be India’s largest motorcycle maker, are still on the fast track with margins actually increasing in June 2011 after five quarters of less-than-stellar performance. But the ability of its competitors to offer lower-priced and yet same-quality motorcycles makes for the margins being up in the air instead of sealed in stone, so to speak.
As can be expected, the Hero Honda share price will take a beating.
Analysts say that even with increased volume, the company’s net profits will remain subdued because of the strong competition along with the other two factors to be discussed later. In fact, most analysts share the view that the Hero Honda shares are expensive and, thus, peg a “sell price” from between Rs 1,550 to Rs 1,730.
Commodity Prices and Company Operating Expenses
And then there are the prices of commodities that go into the manufacture of the motorcycles along with the operating expenses incurred by the company.
These expenses are important margin pressures simply because the higher the costs of production, the lesser the amount expected on the net profit. Understandably, the Hero Honda share price will likely take a plunge.
The increased costs incurred by Hero Honda come from the research and development aspect as well as from rebranding exercises. These expenses are the result of the Hero-Honda split obviously since Hero must now rebrand itself in the market as well as do its own R&D without the assistance of the giant Japanese company.
Even the decrease in the costs of commodities like aluminum seems to have little effect on lessening the costs of R&D and rebranding. Keep in mind that the decrease in commodity costs was only slight, not significant.
All is not lost in the Hero Honda share price. The company still has time to prove that it can thrive despite the strong competition, the rise in costs and the company split.
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