Hero Honda recovered sharply from its lower levels on Thursday on good buying support, especially from institutions.

By 12:35 IST, the scrip of the world's largest motorcycle manufacturer was up 2.82% at Rs 225.80 on the BSE, off its low of Rs 218.40. A relatively higher volume of over 293,00 shares was recorded on the counter.

As per market buzz, Life Insurance Corporation of India was said to be active in the stock on Thursday. LIC and Birla Mutual Fund are believed to have bought the stock in the last few sessions due to its attractive valuation.

Dealers said the recovery on the Hero Honda counter was due to the announcement by Japan's Honda Motor that it will renew the technical pact with the company. The promoters - Munjals (Hero Group) and Honda Motor Company – hold a 26% stake each in Hero Honda. Foreign institutional investors have a substantial holding of 23.23% in the company, while domestic funds have 5.68%. The public owns 17.32% and private corporate bodies and NRIs/OCBs 1.76%.

The Hero Group had inked the technical agreement with Honda in 1984, which was renewed in 1994 and now comes up for renewal in June 2004. But according to market sources, the agreement has already been renewed till 2008.

Analysts said the downside for the Hero Honda stock from the current levels is limited. However, they said it is not all hunky dory for Hero Honda as doubts persist over the company's growth prospects. The company derives over 80% of its revenues from the Splendor-Passion combine in the executive segment - the most crowded section of the motorcycle market. Hero Hondas' inability to diversify from this segment, through new launches in the economy or power segments, is a major problem. The company's Dawn and the Ambition models have failed to break Bajaj Auto's dominance in the economy and power segments respectively.

Another cause for concern is the fact that Honda subsidiary, Honda Motorcycles and Scooters India, will be allowed to sell motorcycles in India post April 2004. This casts doubt on the Honda group's actual commitment to Hero Honda. HMSI, in fact, has already put in place a reasonably wide network of dealers and channel agents.

Analysts said that if HMSI launches motorcycles, it will put further pressure on Hero Honda's market share. The entry of a newer player will further increase competition.

Late last month, Morgan Stanley, a leading brokerage house, downgraded the Hero Honda stock from ‘overweight' to ‘underweight', citing the company's faltering earnings potential due to rising competition in the motorcycle segment.

The brokerage said that earnings growth may fall year-on-year in FY 2003-05 in the wake of great strides made by rivals like Bajaj Auto and TVS Motor with new motorcycle launches, especially in the executive segment, in which Hero Honda had a virtual monopoly till FY 2002. The brokerage has cut earnings estimate by 3% for FY 2003, 8% for FY 2004 and 15% for FY 2005 for Hero Honda. Similarly, the stock price has been projected to decline from Rs 310 to Rs 199.

However, the brokerage is bullish about the country's two-wheeler industry, especially the motorcycle segment.

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, analysts said there were fears that margins may be hit. The company has committed a 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 said that in the face of cut-throat competition, Hero Honda may not be in a position to hike bike prices.

For February 2003, Hero Honda registered a 6.46% rise in motorcycle sales to 1,34,801 units compared to 1,26,617 motorcycles in the corresponding period last year. Vehicle sales for February 2003 have been below analysts' expectations. On a month-on-month basis, in fact, Hero Honda reported a 7.6% fall in motorcycle sales from 1.45 lakh motorcycles in January 2003.

In the April 2002-February 2003 period, the company's sales volumes rose by 21.08% to 1.56 million units from 12.89 lakh in the year-ago period.

Earlier, there were reports that the company had revised its full year motorcycle sales from 1.8 million to 1.7 million vehicle sales. If the company has to achieve its sales target for FY 2002-03, it will have to sell 1,38,147 motorcycles in March 2003.

For the third quarter ended 31 December 2002, Hero Honda 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).

BSE code: 500182