Hero Honda Motors Ltd.

Financial Management at Hero Honda Motors Ltd. Case Study

Financial Management at Hero Honda Motors Ltd Case Study Solution

Q1. Is the financing policy of Hero Honda Motors satisfactory? How is the unlevered capital structure of the firm justified?

The financing policy of Hero Honda Motors Ltd. shows that its capital structure is mainly composed of equity and very less debt. This can be understood from a comparatively low debt-equity ratio of the company.

The debt equity ratio of hero Honda is continuously decreasing over the years. It is lowest in 2006, which is 0.09. As compared to the competitor Bajaj Auto ltd. the debt equity ratio is very low.

Debt Equity Ratio = Total Liabilities / Shareholder’s equity

This is a satisfactory policy, as company has lesser liabilities from outside and more of the finances from inside sources only.

The most common disadvantage to the use of debt is the financial distress that debt can exert on a company. Companies that have a high debt-to-equity ratio in their capital structure may see an increased risk in potential bankruptcy.  Hence the shareholder’s equity is more than total liabilities. Low debt equity ratio indicates low financial risk. Low liabilities shows that financial risk associated with the company in terms of fixed cost obligation of paying interest to outside parties is negligible. Unlevered capital structure firm is financed by equity only. The zero debt policy is compensated by large shareholder’s equity. Since Hero Honda Motors ltd. is very famous and profitable company, the number of shareholders is large in number. Since it is a Joint Venture, funds and financing activities both are needed in excess. In a joint venture the number of employees is large; hence more money is needed to feed them. But company has fulfilled it needs beautifully.

2. What are the factors that are favoring a zero debt capital for the company? Is it always beneficial to have a low debt in the capital structure?

A Zero debt company is one which has not borrowed any money from banks, financial institutions or others for long or medium term requirements or for working capital. Since there’s no debt, the company will have no commitment for repayment or servicing of interest The financing mix of Hero Honda has decreased from 2001 to 2006, which shows the company is doing quietly very well, whereas the debt equity ratio of competitive company Bajaj auto limited has shown increase in the successive years. A company’s reasonable, proportional use of debt and equity to support its assets is a key indicator of balance sheet strength. A healthy capital structure that reflects a low level of debt and a corresponding high level of equity is a very positive sign of investment quality. The factors that are supporting zero debt capital of the company are: 

• Sufficient amount of equity share capital.
• High profit earning, and an increasing rate every year, provide more money to the company. 
• The company has very less liability in the form of debt; hence whole profit can be easily employed back in the company.

3. Is investment policy driving the growth of the firm? What are the key issues that the investment policy of the company is trying to address?

Yes, we can say that investment policy is driving the growth of Hero Honda; as we observed from the case that finance managers use different combinations of various polices to meet the financial requirements of the company at least cost and risk and for the long term benefit of the company like expansion , increasing the plant capacity in case of to meet the market demand and sustain its market share and leadership in the automobile sector of India The key issues that the investment policies of the company addresses are: 

• Meeting the current growing market demand in short term.
• Increasing the plant capacity for expansion.
• Establishment of new plants in the country keeping in mind the long term demand in future. 
• To improve its efficiency and to cut down the cost, by investing for augmenting its welding capacity. 
• Investment in new and latest technology will enable, the company to cater to future market demand and consolidate its market.

5. Is the dividend policy of the firm appropriate? What factors determine the existing dividend policy of the firm?

Yes, the dividend policy of the firm is appropriate as there is an increasing trend in the price of the shares of Hero Honda Motors Ltd. which shows that the trust of the investors and the profit of the company are gradually increasing. The company has performed well increasing the shareholders’ value. The decisions relating to the Dividend of the Shares is justified as the company is rolling out 1000% dividend per share for the third year in succession. Also the dividend per share on the company’s share is 20. The company is following a liberal dividend policy.