Hero Honda was beset by weakness on Monday as the market is worried over the status of the partnership with Honda after 2004.

The scrip of the motorcycles maker inched lower by 0.4% to Rs 219.25 on BSE in mid-morning trades. It fell as much as 1.3% to Rs 217.15 earlier. Aroound 1.2 lakh Hero Honda Motors shares were traded on BSE in just two hours of trading.

The stock has witnessed immense volatility over the last few trading sessions on alternate bouts of buying and selling. The scrip lost 19% to a 52-week low of Rs 205.90 on 14 February 2003 from Rs 254.50 on 4 February 2003. After this sharp fall, value buying emerged propelling the scrip to Rs 226.90 level on 19 February 2003. It lost ground again to the current Rs 219-220 level.

A brokerage downgrade on the stock from 'Overweight' to 'Underweight' by Morgan Stanley has precipitated the latest decline in HHML. A slowdown in earnings growth due to high base effect and intense competition from rivals Bajaj Auto, TVS Motors and Yahama have been cited as the reason for the downgrade. A major reason for the downgrade, however, is the uncertainty over the future of the partnership with Honda. This, as Honda Motor will be in a position to manufacture its own motorcycles in India after 2004. Honda Motor has an existing 100% subsidiary in India – Honda Motorcycles Scooters - which currently manufactures scooters under the Activa brand.

Bajaj Auto and TVS Motors are expected to launch nearly four motorcycles/variants each in the entry-level and executive segments and post sales increases of 20-25% YoY in F2004. Although HHML has also planned a 200cc-plus vehicle, new entry-level motorcycles for F1H04 and variants of Splendor/Passion for the second half, its success with new products in the recent past has been modest.

In FY 2003, nearly 55% of all motorcycles sold were in the executive segment. Hero Honda continued to dominate this segment with a market share of nearly 64%. With most players launching their new motorcycles in this segment, HHML's market share in this segment could fall.

Splendor and Passion are two brands of the company in this segment. Gains in the entry-level and premium segments should somewhat offset this decline.

But to brighten things up, a possible favorable announcement over the continuation of the joint venture, a success in new product launches and maintenance of market share and a much higher rate of growth for the overall motorcycles market could lead to recovery in the stock.

BSE code: 500182