The Inner Light of Asian Compounders: The Reborn of India’s Hero Motocorp (Bamboo Innovator Insight)

The following article is extracted from the Bamboo Innovator Insight weekly column blog related to the context and thought leadership behind the stock idea generation process of Asian wide-moat businesses that are featured in the monthly entitled The Moat Report Asia. Fellow value investors get to go behind the scene to learn thought-provoking timely insights on key macro and industry trends in Asia, as well as benefit from the occasional discussion of potential red flags, misgovernance or fraud-detection trails ahead of time to enhance the critical-thinking skill about the myriad pitfalls of investing in Asia at the microstructure- and firm-level.

The weekly Bamboo Innovator Insight series brings to you:

  • The Inner Light of Asian Compounders: The Reborn of India’s Hero Motocorp, Nov 4, 2013 (Moat Report Asia, BeyondProxy)

Hero

Dear Friends and All,

The Inner Light of Asian Compounders: The Reborn of India’s Hero Motocorp

A Hero lights up this Diwali festival: Hero Motocorp (HMCL IN, MV $6.8 billion), the world’s largest two-wheeler manufacturer (by volume), announced on Nov 1, the first day of Diwali, that they achieved the highest-ever retail sales (625,420 units, +18.2% yoy) for any month in October in India. This is also the first time that any two-wheeler manufacturer has exceeded the landmark 6 lakh (600,000) unit sales in a month. Hero sold 6.23 million units in the year ended March 31, and has a capacity to produce 7 million annually. Hero’s performance stood in contrast to the four-wheeler market in which the automakers from Maruti Suzuki, Tata Motor and Mahindra & Mahindra reported lower or nearly flat sales with the Indian economy growing at its slowest pace in a decade and accelerating inflation (onion prices has surged from Rs 16 a kg in Jun to Rs 100) leading the central bank to raise its lending rate twice in as many months. Interestingly, just three years ago on Dec 21, 2010, Hero hit a crisis and was thought to have problems surviving in India. Yet, Hero has emerged stronger from the crisis because of its “Inner Light”, just like the spiritual significance of Diwali.

Diwali, also called Deepavali or the “festival of lights”, is a five-day Hindu festival to celebrate the slaying of the evil demon Narakasura by Lord Krishna, the incarnation of Vishnu (the supreme god of Hinduism), signifying the victory of good over evil and light over darkness. The deeper spiritual meaning of Diwali celebrates the belief that there is something beyond the physical body and mind which is pure, infinite, and eternal, called the Atman or the Inner Light. With this awakening of the Inner Light comes compassion and the awareness of the oneness of higher knowledge which brings ananda (joy or peace).

Hero Motocorp is an incarnation of Hero Honda, the JV formed between founder Brijmohan Lall Munjal and Japan’s Honda Motor (7267 JP) in 1984 in a country that did not think beyond scooters back then. By 2001, Hero Honda beat Bajaj Auto (BJAUT IN) to become India’s largest two-wheeler manufacturer – and also the world’s largest for 12 consecutive years. In the years between March 2000 and March 2011, Hero Honda’s revenue grew from Rs 2,118 crore to Rs 20,787 crore ($3.4 billion); profits increased from Rs 192 crore to Rs 1,927 crore ($314 million).

On Dec 21, 2010, Honda announced a bitter split up and Hero bought over their 26% stake for Rs 3,842 crore ($622 million), ending the 26 year-old JV which started with equity of Rs 16 crore, of which Honda contributed Rs 4 crore. Worse, Honda will be competing with Hero in India and Hero has to drop the Honda name from its brands, products, and distribution outlets after March 2014. How would customers know that the Hero bike is not Honda nad that the quality has not gone down? Dealers are thought to be stampeding out of Hero to join Honda. Prior to the termination of the joint venture, Honda supplies technology for products which Hero marketed in India and Hero’s right to use Honda’s new technology for Hero’s new products will end in 2017, though they can continue to use the existing technology. The 90 year-old Munjal commented, “They didn’t tell us that they want to leave. We told them that if they, themselves, are here to make motorcycles, then they become competitors. How can a competitor and principal be the same?” Since the split, Honda, the world’s biggest motorcycle maker, overtook Bajaj Auto to become India’s second biggest two-wheeler seller with around a 20% market share and vowed to overtake former partner Hero’s 43% leadership by 2020.

So how did Hero survive the crisis? What are the lessons for value investors in assessing stocks in Asia beyond the quantitative financial numbers? What are the five key Bamboo Innovator takeaways?

Red flags waving over Asian corporate debt

November 3, 2013 5:06 pm

Red flags waving over Asian corporate debt

By Jeremy Grant

Anyone looking for signs of coming strains on Asia Inc as the end of easy central bank money looms needs look no further than the voracious borrowing by Chinese companies in the US dollar bond markets. The Bank for International Settlements estimates that foreign currency loans in China grew 35 per cent in the 12 months to March this year – more than twice the rate for renminbi loan growth, and much of that in US dollars. For some, this is the classic “canary in the coal mine” warning of problems just around the corner. Bryant Edwards, a lawyer with law firm Latham & Watkins, says the situation is “scarily reminiscent” of Europe in 2001, when the high-yield market was similarly dominated by telecoms and IT companies that subsequently crashed. “It really worries me that there is so much concentration in this sector,” he says. Read more of this post

When Buffett Was Right, but We Were Too Scared

Oct 31, 2013

When Buffett Was Right, but We Were Too Scared

DAVID WEIDNER

Just over five years ago, global financial institutions appeared on the verge of collapse and stocks were sinking, Warren Buffett wrote an op-ed in The New York Timesthat seemed, at that time, out of touch with the pulse of the market. He encouraged investors to buy. Buy? Mr. Buffett, then 78, appeared to finally have succumbed to a senior moment. Of course, it was great advice. Unfortunately, not enough of us followed it. Read more of this post

Ten Things a Fund Prospectus Won’t Tell You; A lot of crucial information isn’t there. Here’s what’s missing—and how to get it

Ten Things a Fund Prospectus Won’t Tell You

A lot of crucial information isn’t there. Here’s what’s missing—and how to get it.

KAREN DAMATO

Nov. 3, 2013 4:00 p.m. ET

So, you’re trying to decide whether to buy a mutual fund or ETF, and you need to know the essential facts. Here’s an unfortunate truth: You won’t find many of the answers you need in the prospectus. Whether you have the svelte “summary” version or the less commonly distributed “statutory” prospectus, which can run to dozens of pages, a lot of the information necessary to make an informed decision just isn’t there. Here are 10 key questions that aren’t answered by the prospectus, and instructions on how to easily find this must-have information: Read more of this post

Ben Franklin Had A Humorous Suggestion For Getting People To Wake Up Earlier

Ben Franklin Had A Humorous Suggestion For Getting People To Wake Up Earlier

DAVEN HISKEYTODAY I FOUND OUT NOV. 3, 2013, 12:30 PM 3,247 4

Today I found out that Ben Franklin’s proposal for something similar to daylight saving time was written as a joke. In a comedic letter he wrote, “An Economical Project,” (published in 1784), “to the authors of the journal of Paris,” Franklin mentions something like daylight saving time. Although, instead of changing clocks, he suggested ringing church bells and firing cannons, among other things, as the sun rises to maximize the amount of time people would be awake during times when the sun is providing free light. The letter was meant to be a satire, rather than actually suggesting these changes be made. Here’s an excerpt of the letter: Read more of this post

The Business of Business is More Than Business

The Business of Business is More Than Business

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

31 October 2013

BERKELEY – Earlier this year, Robert Simons of Harvard Business School fired off a blistering indictment of American businesses and business schools. American companies, he charged, have become softheaded, unfocused, and uncompetitive, in part because business schools are persuading them to embrace a long list of gauzy, feel-good values, such as social responsibility, environmental sustainability, and inclusiveness. Read more of this post

China mimics worst of ‘Abenomics’ at worst time

China mimics worst of ‘Abenomics’ at worst time

BY WILLIAM PESEK

NOV 2, 2013

If imitation really is the greatest form of flattery, Shinzo Abe should be thrilled the Chinese are copying his “Abenomics” strategy to excite investors. The rest of the world shouldn’t be. China isn’t cribbing the prime minister’s actual blueprint, but his formula of spin and hype that has convinced the world something that doesn’t yet exist is real. The key to a great ad campaign is attracting customers and keeping them, something Abe has done with a brilliance that could teach the Edelman public relations firm a thing or two. Read more of this post

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