Honda uses rights issue for increasing stakes in its Indian subsidiary

The auto maker from Japan, Honda Motors has invested Rs. 1,200 crore through wholly-subscribed rights issue for the purpose of enhancing its stakes in the Indian subsidiary Honda Siel Cars India. It has been speculated that the Indian partner of the company Shriram Industrial Enterprise will probably annul the partnership. About two weeks ago, the company issued around 20.99 crore equity shares of Rs. 10 each at a premium of Rs. 47.15 which on combining forms Rs. 1,999.99 crore. The returns of these shares are anticipated to be used in the expansion of the company’s capacity. Under the expansion plan the company is looking forward at establishing a manufacturing line at its Tapukara plant in Rajasthan and setting up an engine assembly unit.

The Honda Siel promoters Siddharth Shriram and Krishna Shriram did not comment anything on the rights issue and the position the company’s associates would take on this matter. The Shriram family has an investment company Usha International backing it up, if this company does not take any step on this rights issue its shareholding would come down to 3.16% from 5% and the stakes of Honda Motors would correspondingly go up to 96.84% from the current 95%. To maintain the 5% stake in Honda Siel Cars India, Usha International will have to dispense Rs. 60 crore in this issue; however, there have been no indication regarding the same.

Shriram Industrial Enterprise started a 40:60 joint venture with Japanese Honda Motors in 1995 and formed the Honda Siel Cars India (HSCI). Sometime later the Shriram group sold 38% stake in HSCI in order to meet the expansions plans. The company sold the shares with a buy back option but the Indian partner took advantage of HSCI for its expansion and by 2010 the company’s right to buy back reduced to half. The company then bought back 3% stake in HSCI to form the current share of 5%. It has been reported that the Indian partner of the Honda Siel Cars India is planning on exiting the partnership and the valuations for the same are being done by the two partners. According to an auto expert the head of Shriram Industrial Enterprise, Siddharth Shriram should start focusing and investing in the verticals of his core business rather than loosely holding on to its share of 5% in the Honda Siel Cars India.At present the best thing for Mr. Shriram to do is to exit after talking terms for a good valuation since the company has been facing losses and pressure on volumes because of the absence of diesel cars from its line-up, he added.

In the year 2009-10, Honda Siel registered a loss of Rs. 35.31 crore which increased six fold in the year 2010-11 to Rs. 212.83 crore. In 2010-11 Honda Siel Cars sales had seen a fall of 3.8% to 59,463 from the previous year’s figure of 61,815.  In the FY 2011-12 the company’s sales declined much further, the major reason for such a colossal loss was the earthquake in Japan and flood in Thailand as the company sources essential elements from these two countries. From April 2011 to February 2012 the company has touched the low-water mark in terms of sales which have waned by a humongous 22.32% to 43,411 vehicles. The company’s volumes have been overtaken by the Volkswagen and Toyota and the market share too has suffered a blow with a fall of 2%.

The absence of diesel cars in the company’s portfolio is also one of the reasons behind the losses incurred. With the increase in the gap of petrol and diesel prices the Indian car market has witnesses a drift from petrol cars to diesel and the company unfortunately could not bank on this opportunity. The new Honda City sedan and the Honda Brio hatchback have seen good reception with a waiting period of 4-6 weeks and order book of 2,500-3,000 units. The Honda Jazz is looking at a waiting period of 6 months and the bookings for the same have been stopped. The fate of the company is expected to take a 180 degree turn because of the success of Brio, Jazz and City. At the company’s plant in Greater Noida the component supply is getting normal again and a capacity of 1.2 lakh units per year is targeted. Honda Siel Cars India holds only 1% share in the global turnover of Honda Motors which is about $107 billion.