Hero Honda found its gears again on Tuesday after the company said it was not cutting production levels, nor were its inventories at the dealers' end overdue.

The clarification sought to pacify concerned investors, who were worried about the company's current and future performances and set off a rise of 2.65% to Rs 218.50 in the scrip by 12:30 IST. Volumes reached over 443,000 shares on the counter by that time.

Hero Honda has climbed 6.11% to its current level from Rs 205.90 on 14 February 2003.

The company has categorically stated in response to rumours to the contrary that it has not cut its production nor has its inventories piled up at the dealers' end to over 21-22 days. Earlier, there were rumours that the company cut its production of bikes by 40% in the current month due to the huge inventory piled up at the dealers' end. Following this, in the 10 sessions between 30 January and 12 February 2003, the scrip lost 20.2% from Rs 257.90.

As per market talk, Birla Sun Life and Alliance Capital have been buying on the counter over the last few sessions following talks that the company's retail sales will improve over that achieved in the previous two months.

But that is no indication that the company will achieve its full year growth target of 1.8 million motorcycles, analysts say.

In January 2003, Hero Honda registered a small 6.3% rise in motorcycle sales to 145,000 units. But compared to the December 2002 sales figure of 125,000 units, the growth rate of 16% was redeeming. In the April 2002-January 2003 period (10 months), its sales rose by 22.7% to 1.42 million from 1.16 million in the year-ago period. Even as the motorcycle sales figure for January 2003 was deemed modest, players were disappointed that the company's own target of 173,000 units for the month was missed.

On the flip side, analysts feel that despite aggressive competition and falling market share Hero Honda has been able to maintain profit margins over the last three quarters of FY 2002-03. But, in the current quarter, there are fears that margins may be hit. The company has committed huge expenditure on advertisements and dealer incentives. Hero Honda is a co-sponsor in the Cricket World Cup, currently being held in South Africa. Analysts also say, that in the face of cut-throat competition, Hero Honda may not be in a position to hike bike prices.

Of late, competitors like Bajaj Auto and TVS Motor have eroded the company's market share in the bike segment. According to data from the Society of Indian Automobile Manufacturers, Hero Honda's market share in motorcycles has steadily fallen to 45% in the April-December 2002 period from 49.6% in the year-ago period.

In the same period, Bajaj Auto's market share rose from 21.7% to 23% and TVS Motor's share improved from 14% to 19%.

There is also concern over whether the company's tie-up with Japanese auto giant Honda will sustain. The promoters - the Munjal group and Honda Motor Company – hold a 26% stake each in the company. There is a feeling that Honda may review its alliance with the Munjal group as the former already has a 100% subsidiary in India.

For the third quarter ended 31 December 2002, the company registered a 14.7% rise in net profit to Rs 152.8 crore (Rs 1.52 billion), compared to Rs 133.22 crore (Rs 1.33 billion) in the corresponding period of the previous year. Net sales increased by 12.8% to Rs 1,376.04 crore (Rs 13.76 billion) from Rs 1,219.47 crore (Rs 12.19 billion).

Earlier, the Hero Honda scrip was included in the derivatives segment of BSE as well as NSE.

FIIs have a substantial holding of 23.23% in Hero Honda, while domestic funds have 5.68%. The public owns 17.32% and private corporate bodies and NRIs/OCBs 1.76%

BSE code: 500182