Hero Motors, which has filed a draft prospectus with markets regulator SEBI for an initial public offer, has been in talks with a German auto component company for a joint venture to achieve vertical integration in manufacturing transmission systems. Also, it has signed a term sheet for another collaboration, also with a German firm, for a licensing agreement to manufacture dual clutch transmissions for passenger cars. This licence would be valid for markets in India, Nepal, Bangladesh, Thailand and Pakistan initially. In the first instance (of the proposed JV), the German partner is expected to bring “expertise in manufacturing processes, global customer needs and market dynamics”, Hero has said, adding that the proposed JV would help the company to enhance exports of transmission systems from India. “We plan to focus on exports and advanced technology, leveraging both companies’ strengths to manufacture components with reduced material waste and machining costs, ideal for aerospace and automotive industries. We expect the German company to offer expertise in manufacturing processes, global customer needs, and market dynamics, enhancing our foothold in India and their presence in Europe. Once the agreements are finalised, we aim to leverage economies of scale, new technology, and expanded portfolio to enhance our market penetration and accelerate our global growth,” Hero has said in the draft red herring prospectus. It has clarified that no definite agreement has been signed till now and the German partner with which it has been in talks has not been named.On the second alliance, for dual clutch transmissions, Hero has said that it has entered into a non-binding term sheet for a technology licence agreement to manufacture Dual Clutch Transmission (DCT) technology transmissions. And related to this licence, an engineering service and a sales and marketing service agreement is also part of the term sheet. The talks for this have been held “with one of the largest global automotive parts manufacturing and technology companies with expertise in delivering DCT solutions to OEMs worldwide. Once concluded, the licence will be exclusively for India, Bangladesh, Nepal, Sri Lanka, Pakistan, and Thailand, which can be extended to other ASEAN markets and encompasses manufacturing and sales activities within our designated territory,” Hero has said.Hero’s pursuit of more international alliances – it already has some others for tech transfer and market access in other product categories – underlines the emerging importance of India as a global parts’ supplier. ICRA has already projected that in FY25, its sample of 45 auto ancillaries with aggregate annual revenue of INR 2.7 lakh crore will grow by 5-7%. Though this is a moderation over the FY24 growth but several factors will aid the sector.
These include rising supplies to new platforms because of vendor diversification initiatives by global OEMs, higher value addition due to increased outsourcing by global Tier-I companies and the OEMs, and aftermarket demand potential in overseas markets with the ageing of vehicles and increased sale of used vehicles.
In Fy25, ICRA also expects margins of the component makers to improve year-on-year to 11.5-12%, surpassing pre-Covid19 levels. And analysts at a Mumbai-based brokerage had said earlier that India’s auto component industry is expected to nearly double investments, to USD 6.5-7.0 billion over the next five years for capacity expansion and technology upgradation, compared to the USD 3.5-4.0 billion invested in the last five years.
Fund raise:
In the DRHP, Hero Motors has unveiled plans to raise INR 900 crore through the IPO via a combination of fresh equity issuance and an offer for sale by promoters. Hero Motors may also explore the option of a pre-IPO placement of INR 100 crore. It is an auto component maker led by Pankaj Munjal, a cousin of Hero MotoCorp Chairman Pawan Munjal, and one of the suppliers to the latter. The company provides powertrain solutions, for both electric and non-electric powertrains, to automotive OEMs in the United States, Europe, India and ASEAN countries. It also deals in alloys and metallics components. Hero operates six manufacturing and assembly plants across India, the United Kingdom and Thailand.
Hero Motors’ customers include manufacturers of two-wheelers, e-bikes, off-road vehicles, electric and hybrid cars, heavy-duty vehicles and electric vertical take-off and landing (eVTOL) aircraft. For the fiscal ended March 31, 2024, revenue from operations was INR 1064.4 crore.
Other alliances:
Hero has an ongoing alliance with Dutch company Enviolo International Inc, under which it plans to introduce an economical version of a co-developed CVT (continuous variable transmission) variant. This will address markets in India, the ASEAN as well as customers of economical e-bikes in developed nations. Then, in a joint venture with Yamaha Motor Co, called HYM Drive Systems, Hero manufactures and supplies electric motors and supplies began to local e-2w OEMs last year with plans to begin exports too, soon. Just as with the Enviolo JV, HYM has also been able to achieve cost reduction and will likely become a global supplier of these motors eventually.
In any case, Hero has also outlined its ambitious global expansion roadmap in the DRHP. The company says it plans to expand its manufacturing footprint, particularly in the ASEAN region and will be evaluating options to manufacture in other geographies, based on opportunities and proximity to customers.
