Hero Honda to increase production capacity at Haridwar

NEW DELHI: Bike market leader Hero Honda plans to raise daily production from its Uttarakhand factory nearly four-fold by the end of this fiscal to derive tax exemption benefits the state offers to investing companies.

But despite realizing higher earnings, the company has ruled out any major discount schemes in the upcoming festival season in October.



Ravi Sud, finance head, Hero Honda, told TOI that the company was currently producing around 1200 bikes daily from its Haridwar plant in Uttarakhand. "While we produced only 48000 units in the first quarter, production from the plant is gradually being ramped up. We hope to reach levels of 4000 units daily by the fourth quarter (January-March'09)," Sud said.

The company currently has two factories in Haryana, but plans to part-shift production to the new factory. Uttarakhand offers full exemption from excise for 10 years, while giving complete income tax exemption for first five years and reduced levels for the next five years.

While exemption on income tax gives Hero Honda higher profits, the exemption on excise helps the company manufacture bikes cheaper, giving it more elbow room to price products competitively.

The majority of production at Haridwar is of Hero Honda's best-seller Splendor model and higher volumes would mean greater profits. Production at Haridwar has prompted the company to up its net profit projections for this fiscal as its tax goes down.



Sud said the annualized tax rate was likely to come down to 22% from 31-32% earlier, leading to lower provisions in all the four quarters of this fiscal. The company beat street expectations in the first quarter itself as it reported a good 43.7% rise in net profit, the higher earnings coming at a time of high raw material costs and greater advertising spends.

Sales for Hero Honda grew 11% in the April-June'08 quarter, faster than the industry's 8% growth rate. But marketing head Anil Dua said the momentum would cool down In the coming months due to record high interest rates (on retail finance) and tight retail financing. "The current industry figures do not reflect the true underlying negative sentiment," he said.

Dua said even the festival season, where sales normally peak, was likely to be a tough period. "The festival season will be a true test for the motorcycle industry this time... (and) going forward, you may not see a double digit growth for the industry," he said. The forecast appears alarming considering that the poor growth rate is projected after a year (2007-08) where bike sales fell 12%, providing a low base.

While the bike industry plunged into a undergrowth last fiscal, Hero Honda managed to insulate itself from a major downturn. Asked whether the company would give discounts in the festival season, both Dua and Sud said there were no such plans. "This year too we would not offer any big discount schemes during festivals," Dua said.