Move should be opposed and looked into by SEBI and Company Law Board
Hero Honda Motors Limited is a joint venture between the Hero group promoted by the Munjal group and Honda of Japan. The Munjal’s shareholding is 26.21% of the equity while Honda owns 26% of the equity. The non promoter holding is 47.79% of which the institutional holding is 37.54%. FII’s hold 31.75% while domestic institutions own 5.79%. There are 450 FII’s who own the 31.75% stake while there are 194 domestic institutions which own 5.79% stake. The FII’s who own more than 1% stake include Copthall Mauritius Investment Ltd with a stake of 4.18%, Aberdeen Asset Managers with a stake of 3.32% and Europacifio Growth Fund with a 3.05% stake and amongst the domestic funds Life Insurance Corporation of India Limited with a stake of 1.05%. The shareholding details are as per the September 2010 details as given on the BSE website.
The stock price closed at Rs 1832 on the BSE as on Friday the 3rd of December and the market capitalisation was Rs 36,585 crs. The stock price has been underperforming the market over the last two to three quarters. The share peaked in April 2010 when it hit a level of Rs 2094. Compared to Hero Honda, the shares of Bajaj Auto and TVS Motors in the period April to December have moved up from just a shade over Rs 600 to the close of Rs 878, a gain of over 43% in the case of Bajaj auto. TVS Motors have fared even better and have moved from Rs 42 to Rs 80.10, a gain of over 90%. In the sharp contrast between the market leader Hero Honda and the two competitors, Hero Honda shareholders have lost big time. Most of the price damage is due to the conflict currently on and in part to the drop in margins due to cost pressure and rising input costs.
The relationship between Hero and Honda is over twenty five years old. The terms of separation stipulate that the seller has to offer the shares to the continuing buyer and there is a discount of 30% to 40% to the current market price at which these shares have to be sold. At current valuations the 26% stake of Honda would be valued at Rs 9,512 crs and a 30% discount would mean Rs 2,853 crs and a 40% discount would mean Rs 3804 crs. This is as per agreement between the two partners and does not affect any other shareholder directly.
Honda Motors the Japanese entity is entitled to a royalty of about 2.6% of sales every year. By way of compensation of the loss of market cap that Honda would suffer, it is being proposed that the royalty be trebled to around 8%. This would compensate Honda Motors alright but at what cost. The margins of Hero Honda would get severely impacted and in a competitive market place this would have a direct bearing on the stock performance of the company. The PE (price earnings) multiple enjoyed by the company would get impacted and would hurt all shareholders other than the one who has already exited as his deal with Hero group is complete.
I would like all investors and capital market players to stand up for the wrong doing that this would do to minority shareholders. By increasing the royalty payment there would be only one gainer at the cost of the company and the future of Hero Motors Limited would be at stake. How can we allow this to happen? Secondly in many cases where there are such disputes the simple option given is that if you are unhappy with the decision taken or proposed to be taken, SELL your shares. Why should an investor sell? There are various bodies available to address the wrong and only then should one consider the option of exiting.
The institutional holders who have close to 37.54% of the shareholding have more than the required 25% holding required to block any special resolution. This case would be a test for collective shareholder movement of protecting their rights.
I believe the very idea of compensation of loss of market price which is as per agreement being made up in such an ingenious way is against the principle of justice and equality. It must be challenged and opposed at all costs.
