Hero Honda Dividend Policy

Submitted by:Group 2, Section D

Ankit Jain 10P188

Annapoorni CS 10P190

Deepak Bhatia 10P197

Himanshu Manchanda 10P201

Kaustubh Gadkari 10P207

Sandeepan Raha 10P230

Context and Key Dates

• 1984 - HMC sets up Hero Honda with 26% stake for both– 26% sold to public and rest with financial companies

• 2002 - First time market share got reduced (~4%)• Prompted dividend to increase drastically from 150 %

to 850%• Zero long term debt company• Fast Operating cycle (22.7 to 23.2) and Cash

Conversion Cycle (-13.2 to -16.3)• Inventory holding period decreased (17.9 to 16.1)• Constantly Increasing OPBDIT/ Sales Ratio

– Reduction in material cost– Reduction in manufacturing variable cost

• Higher Dividends than the competitors

• 19% IRR on investments

• Policy of distributing 40% of PAT as dividends

Dividend Policy

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-030

100

200

300

400

500

600

700

800

900

1000

Dividend Rate (%)

Trigger event for the high dividends:– No major Investment plan - Stable phase– Eagerness of Lall to make share holders happy– Confident about passing through with price discounts

and lower profits to retain higher market share

• Market share dropped by 4% in 02

• R&D money held up by dividends– In 2002 the company

spent $1.5Mn as compared to $6.4Mn by TVS

Critical Analysis

2003-04 2004-05 2005-06 2006-07

48%43% 42%

39%

Market Share (%)

• 51% of TVS could have been brought• Investment of this money to build 3 more plants

Can Hero Honda sustain this consistent payout??

• Acquisition of TVS• Restructuring their equity structure to enhance

their equity base– Increasing EPS and Increase Stock Price– Great Opportunity as Hero Honda at 52 week low– Competitors like Bajaj brought 15% of equity back

• Investments in new projects• Concentrate on R&D

Alternatives available

• Even though a share buyback increases the EPS, the management believes that this will not benefit the shareholders– Hold only 11.57% of the total shares (Exhibit VII)

Share Buyback

Current Scenario @15% BuybackShares bought back -- 29.9Shares outstanding 199.7 169.74NP 5998 5998EPS(new) 30.0 35.33

• The company can buyback its share to reduce its equity base, increase its EPS and thus, drive up the stock price