Honda Cuts Motorcycle Outlook for India After Growth Cools

May 21, 2014 5:22 am ET

(Updates with closing share price in eighth paragraph.)

May 21 (Bloomberg) -- Honda Motor Co., the world’s biggest motorcycle maker, cut its forecast for India’s two-wheeler market after economic growth in the country cooled.

Industry deliveries in India will probably expand to 20 million to 25 million units by 2020 in India, fewer than Honda’s earlier projection of 30 million, Shinji Aoyama, operating officer in charge of motorcycle operations, said in an interview yesterday. Motorcycles accounted for more than 20 percent of the Tokyo-based company’s operating profit last fiscal year.

While two-wheelers were the only vehicle segment in India that expanded in the year through March, with deliveries rising 7.3 percent to 14.8 million units, the growth fell short of Honda’s prediction, Aoyama said. Incoming Prime Minister Narendra Modi’s election victory has prompted some economists to raise forecasts for the country’s growth, which had slumped to a decade low in the year ended March 2013.

“We thought about three years ago the Indian market could reach 16 million to 18 million units by now,” Aoyama said at Honda’s headquarters in Tokyo. “The market is not growing as fast as we expected, even though Honda sales are in line with our own projections.”

He declined to comment on India’s economic outlook.

Modi’s plans to attract investment and build more ports, roads and bridges have prompted Morgan Stanley, Citigroup Inc. and Nomura Holdings Inc. to project faster expansion in India the next few years.

Higher Growth

Gross domestic product will expand at a four-year high of 6.5 percent in the 12 months through March 2016, according to Morgan Stanley’s prediction, compared with a previous estimate of 6.2 percent.

Honda gained 0.2 percent to 3,407 yen as of the close in Tokyo trading, narrowing its loss this year to 21 percent.

The company’s sales in India rose 37 percent to 3.6 million units last fiscal year, making it the second-largest two-wheeler maker in the country, after former partner Hero MotoCorp Ltd. Its market share rose to 26 percent in the quarter ended March, from 12 percent for the full year in 2009.

The carmaker plans to open a fourth motorcycle plant in India in 2015. The factory, in the western state of Gujarat, will increase Honda’s motorcycle capacity in the country to about 5.8 million units a year, Aoyama said.

Honda will have 3,400 sales and service dealers in India by March 2015, and the figure will probably increase to 5,000 in a few years, he said.

Honda’s global motorcycle business posted a 50 percent jump in operating profit to 165.6 billion yen last fiscal year, on revenue of 1.66 trillion yen. That translates to an operating margin of 10 percent, compared with 4.4 percent for cars.

The automaker intends to maintain margins by streamlining production as material costs rise and the company invests more on engine technology to meet emissions standards, Aoyama said.

“We need to keep 10 percent margin when business is operating normally,” he said. “Otherwise we can’t guarantee a certain level of profits when there’s some unexpected crisis.”

--With assistance from Siddharth Philip in Mumbai.