Marketing Research Project

OOn

Two-Wheeler IndustryTwo Wheeler Industry22.01.2006

Strictly Confidential

Sachin Manik

Industry AnalysisIndustry Analysis• In terms of volumes, two-wheelers In terms of volumes, two wheelers

constitute nearly 80% of the vehicles produced in India.

• In value terms, they account for 25%In value terms, they account for 25% approximately of the total vehicle production.

• Between 2003-04 and 2004-05 theBetween 2003 04 and 2004 05, the industry’s overall sales of two-wheelers grew by 16.7 per cent, from 5.63 million to 6.57 million.million to 6.57 million.

• Motorcycles, showed increase in the volume of sales by 20.9 per cent, from around 4 32 million to almost 5 22around 4.32 million to almost 5.22 million.

FORCES THAT DRIVE THE INDUSTRY

Government Policies and Regulatory Environment g yPrice and Credit Facilities Rising Income Levels and Urbanization Fuel-Efficiency yOther Factors Driving 2-Wheeler Demand Parts & Accessories: Playing a Crucial Role in the Motorcycle Industry

Two-wheeler sales, a key contributor to the industry growth, grew by an impressive 22.23% in May'05.

Sectoral key indicators

35

Future Outlook :Growing competition price undercutting rising steel

24

11 48

16.6920

25

30

Growing competition, price undercutting, rising steel prices and other input costs would continue to pose a threat. Reduction in import duties for imports could also pose a threat for the higher end bikes

3.75 4.65 5.05 5.63 6.57

-1.31

8.611.48

0

5

10

15

threat for the higher end bikes.0'00/01' '01/02' '02/03' '03/04' '04/05'

Years

Sales growth(%)Sales volume (millions)Sales volume (millions)

C A l iCompany AnalysisBoard of Directors

Chairman Mr. Brijmohan Lall Munjal

Managing Director Mr. Pawan MunjalJoint Managing Director Mr. Miki Yamamoto

Wholetime Director Mr. Shinichi Nakayama

d l

Board of Directors

Director Mr. Satyanand Munjal

Director Mr. Om Prakash Munjal

Business HighlightsJ i V b H G h ld' l bi l f d h H d M• Joint Venture between Hero Group, the world's largest bicycle manufacturers and the Honda Motor

Company of Japan, has today become the World's single largest two wheeler Company.• The company sold an unprecedented 26,21,400 motorcycles in the year 2004-05, a remarkable growth of 27% way above the industry growth of 20.5%.

hi d b f l f l h hi h d d i i l• HHML achieved a never seen before sales of 2,45,475 motorcycles, the highest ever recorded in a single month by any company in the global two wheeler industry. • At present, HHML has a 40% share in the overall two wheeler industry.• Hero Honda believes that the essence of Corporate Governance lies in the phrase Your Company'. It is

' C b i b l h h h ldYour' Company because it belongs to you - the shareholder.•

Business highlights contd

Over the last two decades, HERO HONDA MOTORS LIMITED has consistently delivered value and maximized returns to its shareholdersvalue and maximized returns to its shareholders.

• The 5-year trend in the Company's income, profit after tax (PAT), and profitability as measured by the ratios of PAT to total income, return on average equity [ROAE] and return on average capital employed [ROACE]average capital employed [ROACE].

• During 2004-05, your Company sold 2.62 million bikes, and for the fourth successive year, Hero Honda Motors retained its spot at the top as the world's largest two--wheeler manufacturermanufacturer.

• The `AAA' (triple A') rating by CRISIL, the rating agency to the above mentioned programme /instruments of the Company. The ratings indicate that the degree of safety with regard to timely payment of interest and principal on the instruments is very strongregard to timely payment of interest and principal on the instruments is very strong.

• Hero Honda has, over the years, honed its own research capabilities. This has helped in large-scale localization and integration, allowing the Company to keep costs low. Company's R&D has already developed requisite infrastructure and expertise to develop test and approveR&D has already developed requisite infrastructure and expertise to develop, test and approve products in-house as per Honda specifications and acceptance criteria. These facilities are upgraded from time to time, ahead of new technology adoptions, thus considerably reducing the product development cycle

Major players in the Industry

I t h l HHML’ k t h t d t 37% d i FY04In two-wheelers, HHML’s market share stood at 37% during FY04.

In the premium segment, HHML enjoyed a 14% market share for FY04.

FOREIGN EXCHANGE EARNINGS AND OUTGO

A) EXPORT ACTIVITIES/ INITIATIVES TO INCREASE EXPORTS/ DEVELOPMENT OF NEW EXPORT MARKETS / EXPORT PLANS

Regular interaction with distributors and new product launches in export market have contributed significantly to growth in export business in the year under review. The new models CD Dawn, Splendor+ & Passion plus have been well received in th t k t Th i t ti C l bi B l d h & S i L k k t f thithe export market. The main concentration was on Columbia , Bangladesh & Sri Lanka markets for this purpose.

Development of new markets is carried out in consultation with Honda Motor Co., Ltd., Japan and the same has been an ongoing process.

Export plans

With the launch of new models like CD Deluxe, Super Splendor & others, export would continue. The maximum business from the export markets comes from three major countries i.e. Columbia, Sri Lanka & Bangladesh and the same trend is expected to continue. The Company intends to try and explore some new markets in Africa in absolute consultation with Honda Motor Co Ltd JapanHonda Motor Co., Ltd., Japan.

B) FOREIGN EXCHANGE EARNINGS & OUTGO

Foreign exchange earnings during the period under report was Rs. 181.70 crores as compared to Rs. 118.21 crores in the previous year.

Comparison according to the Market Share of Motorcycle

Performance vis-à-vis competitors

• With rise in per capita income, lowering of interest rates, changes in consumer preference towards trendier two-wheelers, there was a conscious shift in the composition of two-wheeler industry led by increase in the demand of motorcycle as against scooters and moped. •In FY04, out of the total two-wheeler industry of 5.6 m units, the share of motorcycles was 77%, as against 42% in FY99. During the period FY97 to FY04, while two-wheeler industry grew CAGR of 10%, the demand for motorcycle grew at 27% CAGR.

ForecastingGeneral Overview of the Industryy

The two-wheeler industry thrives in developing countries especially in densely populated countries like IndWith income levels rising, customers are opting for entry-level motorcycles than scooters. The h e f t le i t t l t heele le ti e t i e (76 6% f 74 4% i 2002 03)The share of motorcycles in total two-wheeler sales continues to improve (76.6% from 74.4% in 2002-03) while that of geared scooters continues to be on the decline.

Identification of the factors that drive the MarketIdentification of the factors that drive the Market• Rising disposable income levels.• Continuing poor public transport system. • Declining interest rates.

Wid il bili f fi• Wider availability of finance.• Decreasing product life cycles • Increasing percentage of young population.

Time Series with Trend Line AnalysisTime Series with Trend Line AnalysisTime Series

2500000

3000000

13.71 %

1000000

1500000

2000000

Sale

s Sales (in nos)Trend Line

0

500000

1000000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Years

Sales Forecast for the year 2005-2006 would be 2842877.2 units, growth at 13.71 %.