Case Study 2

CASE 2 – FINANCIAL MANAGEMENT AT HERO HONDA MOTORS LTD

Name

Hero Honda Motors Limited

Came into Existence

19 January 1984

Joint Venture

Hero Group and Honda Motor Company

Chairman

Mr. Brij Mohan Lal Munjal

Managing Director

Mr. Pawan Kant Munjal

Shares

Others 27%

Promoters 29%

Institutional Investors 35% Indian Public 9%

Company produces motorcycles and scooters and it is the global leader in motorcycles and world’s largest manufacturer of bicycles. Some of the brand names are Achiever, Karizma, CBZ, Super splendor, CD deluxe, Passion etc. It relies on 3 Rs (reach, research research and reliability) reliability) strategy. strategy.

Q1. Is the financing policy of Hero Honda Motors satisfactory ? How is the unlevered capital structure of the firm justified ? The debt equity ratio of hero Honda is continuously decreasing over the years. It is lowest in 2006, which is 0.09. As compared to the competitor Bajaj Auto ltd. the debt equity ratio is very low.

Debt Equity Ratio = Total Liabilities / Shareholder’s equity Debt Equity Ratio is 0.09 which is very low. Hence the shareholder’s equity is more than total liabilities. Low debt equity ratio indicates low financial risk. Low liabilities shows that liability is very limited towards outside parties. Unlevered capital structure firm is financed by equity only. The zero debt policy is compensated by large shareholder’s equity. Since Hero Honda Motors ltd. is very famous and profitable company, the number of shareholders are large in number. Since it is a Joint Venture , funds and financing activities both are needed in excess. In a joint venture the number of employees are large, hence more money is needed to feed them. But company has fulfilled it needs beautifully.

2. What are the factors that are favoring a zero debt capital for the company ? Hero Honda cut cost in manufacturing activities and done a good business even in festive seasons where heavy discounts were offered. High Retained earnings helped in maintain a zero debt capital structure.

It is not always beneficial to have a zero debt or low debt in the capital structure in case when cost of capital is less than the ROI. It largely depends upon the nature of  the business too.

3. Is investment policy driving the growth of the firm ? What are the key issues that the investment policy of the company is trying to address ? Company is trying to increase its production capacity from time to time to cope up with the rising demand. Capacity of various plants across the India has been increased to meet the demand. Investment policy is definitely driving towards growth as it is taking care to meet the short , middle and long run goals. Key issues consist more and more manufacturing units, cutting down the costs, improving efficiency and investment in increasing its welding capacity.

Company’s goal is to become the global scale and world-class manufacturer.

4. Are you satisfied with the working capital management of the company? Give reasons. The major components of the working capital of Hero Honda Motors Ltd are Inventory, Debtors, Cash and Bank balance and the Creditors. In this working capital structure there are few interesting things to note and analyze. There are no short term bank borrowings taken by the company to finance the current assets of the company. This is mainly because the current assets of the company

are

finance

by

the

credit

deferral

toward

its

creditors.

The working capital of the company is negative this is because the current liabilities of the company are more than the current assets of the company. The reason behind this is that at any given point of time the amount blocked in creditors is more than the amount blocked in its current assets, in the inventory cash and debtors. The current ratio of the company is very low which indicates that the company is following aggressive policy. Under this policy the company does not have the short term liquidity but the amount blocked in the net working capital is zero which gives the company more profitability.

5. Is the dividend policy of the firm appropriate ? What factors determine the existing dividend policy of the firm ? Dividend policy plays an important role in determining firm’s capital structure and agency costs. Firms pay out dividends in order to reduce agency costs. Hero Honda dividend policy cash reserves every year which is enough to maintain their liberal dividend policy. Hero Honda is known to give around 1,000 per cent dividend on face value to shareholders every year. The large number of shareholders, very low debt equity ratio, very less liabilities, retained earnings are some key factors which decide the dividend policy of Hero Honda. India is a large population country, which is also a big factor in the successful business and successful dividend policy by Hero Honda.