Indian motorcycle manufacturer, Hero MotoCorp is expected to soon reach the end of its variable royalty arrangement with Honda, wherein the payment was directly based on the sales of primarily four products – 150cc Hero Impulse, 125cc Hero Ignitor, 110cc Passion X Pro and 110cc scooter Hero Maestro. All these models used technology sourced from Honda Motor Co.
According to company documents, Hero MotoCorp has paid Rs 50.02 crore in FY2012-13, Rs 116.67 crore in FY2013-14, Rs 121.41 crore in FY2014-15 and Rs 78.89 crore in FY2015-16 as variable royalty to Honda of Japan. It is known that Hero MotoCorp has already paid an amount of around Rs 2,500 crore as fixed royalty to Honda Motor Company, amortised between January 1, 2011, and June 30, 2014.
The spike in payments in FY2013-14 and FY2014-15 were on the back of strong sales of the Hero Maestro, which used the same single-cylinder, air-cooled, four-stroke, 110cc engine from Honda’s Activa model. Other models including the 110cc Passion X Pro, 125cc Hero Ignitor and 150cc Hero Impulse did not record good sales in the market.
New scooter models like the Maestro Edge, which was launched along with the Hero Duet, in October 2015 became the first products to be fully designed and developed by Hero’s in-house R&D team.
“Attractively designed with contemporary styling and loaded with a host of unique features, Maestro Edge and Duet have been well received by customers, helping our company increase its market share in the scooter segment. This scooter made its global debut in Colombia (named Dash for that market), during the inauguration of Hero’s first overseas manufacturing facility,” quotes Hero's annual report for FY2015-16.
Hero MotoCorp says it has sold over 1,00,000 units of the Maestro Edge within six months of its launch (as on March 31, 2016). With the Maestro Edge gaining popularity, the company looks to phase out the old Maestro model soon, thus further reducing its financial liability to Honda.
Wishing to stay anonymous, a source aware of the matter disclosed that “Hero MotoCorp is estimating a sharp decline in the variable royalty payment to Honda during the ongoing fiscal. The dues might be lower than Rs 30 crore or even less. Company officials say it would be negligible in FY2016-17. This also means that with the phasing out of the old Maestro model, Hero MotoCorp will free itself of all dues to Honda impacting its margins, which may then rise in the range of 15-16 percent. However, the investments made in R&D and new projects may offset the same.”
The company plans an outlay of Rs 1,100-Rs 1,300 crore as capex during the ongoing financial year.