Hero Honda - Annual Report 07-08

8/6/2019 Hero Honda - Annual Report 07-08

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Hero Honda Motors Limited

34, Community Centre, Basant Lok,

Vasant Vihar, New Delhi-110 057, India

PH. 91-11-2614 2451, 2614 4121

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India and Bharat co-exist today. India comprises of fast-

growing cities and towns; Bharat is made up of villages

th

entering the economic mainstream. As we enter our 25year, we seek to walk and march with both India and Bharat.


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0203

HCONTENT

Corporate Profile

Chairmans Message

Board of Directors

Management Discussion & Analysis

Social Responsibility

Directors Report

Corporate Governance Report

FAQs

Auditors Report

Balance Sheet

Profit & Loss Account

Cash Flow Statement

US GAAP

04

10

14

16

18

24

28

32

36

43

47

71

74

78

79

80

115

Industry and Segment Dynamics

Results and Financial Analysis

Operation, Reach & Supply Chain

People And Environment


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In some ways, Hero and Honda are like

two volumes of a single book. What has

made the book a bestseller is the fact

that right from the outset, the co-authors

knew the script they had to write in order

to be successful in the Indian market.

Over the course of two and a half

decades, both partners have fine-

tuned and perfected their roles. As the

largest motorcycle producer in the

world, Honda has been able to

consistently provide technical know-

how, design specifications and R&D

innovations to its most prolific affiliate in

the world, Hero Honda. This has led to

the development of world class, value-

for-money motorcycles and scooters

for the Indian market.

On its part, the Hero Group has taken on

the singular and onerous responsibility

of developing the supply chain,

ramping up production facilities, setting

up distribution networks and creating

customers.

Since both partners are completely

focused on their respective skills, they

have been able not just to complement

each other, but also draw from each

others strengths. In the process, Hero

Honda has gone on to create history, by

becoming one of the most successful

joint ventures in the world.

Today, every second motorcycle sold in

the country is a Hero Honda. There are

more than 22 million Hero Hondas on

If your actions inspire others to dream more, learnmore, do more and become more, you are a leader.

CORPORATE PROFILE

Indian roads today. There are more

Hero Honda bikes on this country's

roads than the total population of some

European countries put together!

The company's growth in the two-

wheeler market in India is the result of an

intrinsic ability to increase reach in new

geographies and growth markets. Hero

Honda's motorcycles and scooters are

sold and serviced through a network of

over 3500 customer touch points.

These outlets comprise of a mix of

dealers, service centres and stockists

located across rural and urban India,

and with every passing year, the

network is augmented.

Hero Honda has built two world-class

manufacturing facilities at Dharuhera

and Gurgaon in Haryana. These two

units now churn out over 3 million bikes

per year. The company's third, and its

largest and most sophisticated plant at

Haridwar has also gone on-stream.

All this has happened in the span of just

two and a half decades!

Leaders create pathways where none

exist. In the 1980s much before

green became a fashionable word,

Hero Honda became the first company

in India to prove that it was possible to

drive a vehicle without polluting the

roads. The company introduced new

generation motorcycles that set

industry benchmarks for fuel thrift and

low emission.

0405

A legendaryFill it - Shut it - Forget it'

campaign captured the imagination of

commuters across India and Hero

Honda sold millions of bikes purely on

the commitment of increased mileage.

Today, as Hero Honda enters its silver

jubilee year, a riveting Dhak Dhak Go

sets the tone for India's Gen Next, its

emerging classes and its aspiring

classes.

The true test of champions comes

when the going gets tough. Champions

show the way by doing the basic things

right. In a particularly difficult year, when

the rest of the motorcycle industry

shrunk by 14 per cent, Hero Honda has

protected its turf and has actually grown

its market share, by re-establishing a

lead of more than one million bikes over

its nearest rival.

Not one to rest on its laurels, the

company believes the best is yet to

come. Today, Hero Honda i s powering

its way through a market that despite

the short term hiccuphasn't still

unleashed its true potential, since

barely 2 per cent of the population has

been penetrated so far.

Not surprisingly, the company is in no

mood to take its hand off the throttle. As

Brijmohan Lall Munjal, the Chairman,

Hero Honda Motors succinctly puts it,

"We pioneered India's motorcycle

industry, and it's our responsibility now

to take the industry to the next level. We'll

do all it takes to reach there.'


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0607


6/68

WE CELEBRATE

EVENTS AND WE

CELEBRATE TIME.

BUT OUR MOST

IMPORTANT

CELEBRATIONS, ARE

OF ACHIEVEMENTS.


7/68

CHAIRMANS MESSAGE

1011

Dear Shareholders,

As I sat on the stage during the

inauguration of our third plant in April this

year, a fleeting thought crossed myth

mind: have we really entered our 25

year?

I remembered vividly how we started a

quarter of a century ago: our first plant

came up in the wilderness. We used dirttracks to reach our factory. Yet here I

was, sitting in front of India's first

automobile factory that connects

vendors through conveyor belts!

Friedrich Nietzsche once famously

remarked: For a tree to become tall, it

must grow tough roots along the

rocks''. As we enter our silver jubilee

year, we have shown how.

As interest rates climbed during the

year, the industry went into de-growth,

a ga ins t a l l ex pec t a t ions a nd

projections. Domestic motorcycle

sales shrunk by 12 per cent and for the

first time in more than a decade,

motorcycle's share of the overall two-

wheeler pie actually came down by

around 2 per cent.

For most of the two-wheeler industry

therefore, managing 2007-08 was like

trying to grow on rocky terrain. The sub-

soil was far from nourishing and the

business climate was harsh. Yet, strong

companies, like strong trees, learn to

adapt and adjust. They grow tough

roots along the rocks.


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Marching with India and walking withBharatthis, I believe, should be ourleitmotif in our silver jubilee year.

We chose to see 2007-08 like a glass ofhalf-full water; and we were able tomake the most of adversity. Yet I would

like to stress that the road ahead won'tbe entirely smooth.

Throughout the year in review,customers in the entry and executivesegments began to postpone buyingdecisions. By the middle of the fiscal,effective interest rates for the two-wheeler industry hovered around 20 percent.

Being motorcycle-centric, we were alsoaffected. The high rates led to large-scale delinquencies and defaults in anumber of regions. This in turn forcedfinanciers to withdraw loan facilities in anumber of dealerships.

High interest rates continue as I writethis, but these are beyond our control.Nevertheless, the management isconvinced it can, to an extent, controlrampant delinquencies by partneringNBFC lenders with regional strengthsand strong grassroot connections,instead of depending entirely onnational level banks.

Though much smaller in size, regionalnon-banking financial companies areable to leverage their excellent domainknowledge on local borrowers. This

ensures extremely low levels of non-performing assets. These NBFCscould be our ideal finance partners,especially in smaller towns and ruralareas, where national-level banks havepoor distribution networks. We tied upwith a regional financier during the yearand hope to sew up more regional tie-ups in the months to come.

Inflation is another concern. While it istrue that double-digit inflation of 11-12per cent would certainly upsethousehold budgets and postponecertain purchases, the rise in auto fuelprices might actually turn out to be ablessing in disguise for the two-wheelerindustry. It is my belief that cost-effective and fuel-efficient modes oftransport will become more popular. Infact, I will not rule out the possibility of anumber of car-owning homes actuallybuying an additional two-wheeler to

reduce the impact of the monthly fuelbill on the household budget.

Since fuel prices are not expected tosoften in the near term, fuel-efficientindustries such as ours could bebeneficiaries.

We will continue to be confident andaggressive about the future, we will alsobe patient. I read somewhere thatpatience is waiting. Not passivelywaiting - that is laziness; but to keepgoing when the going is hard andslow - that is real patience.

Yours sincerely,

Brijmohan LallChairman

Luckily, we weathered the storm -- andactually surpassed our tally of theprevious year marginally. Moresignificantly, your company boosted itsshare in the domestic motorcyclemarket to more than 54 per centthehighest share in recent memory. As the

year ended, your company led itsnearest competitor in the domestictwo-wheeler market by more than 1million units.

I think it would be safe to summarise2007-08 as the year in which wemigrated from schemes to themes.Despite difficult market conditions, weresisted the temptation to bump upsales artificially through comprehensivefestival-related discounts. Instead, weinvested in new models and upgrades.

Our performance in the domesticpremium segment gives me specialsatisfaction, since our share increasedfrom 15 per cent to nearly 24 per cent. Inmy last message, I talked about ourplans to consolidate our presence in

this part of the market; we are cle arly ontrack.

In my last message, I had said that we

were taking measures to ensure thatare profitability gets back on track.

Near-stagnant topline performance

forced us to look inwards: at processefficiencies, at our supply chain and atour sales frontline. We tweaked,changed and rationalised wherepossible and managed to increase ouroperating margins from 11.9 per cent to13.1 per cent.

Going forward, I expect our supplychain to become even leaner asongoing online projects go live. I amhappy to report that our online vendorconnectivity program which seeks tolinks our plant with vendor premises ona real-time basis-- has made rapidprogress, with more than 70 per cent of

vendors seamlessly integrated.Likewise, dealer management systemsoftware is also rolling out on a nationalbasis very shortly.

In my last message, I had also said thatthe slowdown would be temporary. Thisyear, when conditions are even moretrying, I continue to hold this view. Thiscompany has coped with high interest

rates before. This company has copedwith double-digit inflation before. Sowhat we are seeing today is nothingextraordinary.

Of course, good times do not lastforeverperhaps years of 30 per cent

growth will become rare in the future.But just as good times don't last forever,nor do bad times. The current de-growth in the industry is also anaberration caused by external factorsoutside the control of the auto industry.It is not driven by fundamentals.Indeed, the ground conditions thatdrove this country and this companyhave not changed.

Two Indias exist today. Both excite meequally. By the end of this decade, Indiais expected to have an urbanpopulation of 173 million. This issignificant, since urbanisation rises withGDP per capita in a hockey stickfashion.

I am equally excited about rural India.Government development schemesare finally showing signs of working at

the grassrootslandless farmers fromUt tar Pradesh and Bihar who

traditionally migrated to Punjab to workare now demanding higher wages tocome, since there is work available athome, for the first time. In 1990, forevery Rs. 4300 earned by an Indianvillager, an urbanite made Rs. 3526more. Today, the difference hasdropped to Rs. 2408. This is a clearsign of progress.

Increasingly, the rural economy is amicrocosm of the national economy.Today, India's 700 million villagers nowaccount for the majority of consumerspending in the country, more than Rs.4300 billion a year. Millions step intoconsumerism each year, graduatingfrom the economics of necessity to theeconomics of gratification, buyingthemselves products we make.

We in Hero Honda are actively seekingto be part of this miracle. In December2007, we launched a unique nationallevel rural connect program called HaarGaon, Haar Aangan (every village,every house). It is my belief that thisprogram, as it gains critical momentumin the years to come, it will sustain thiscompany well into the next decade.

1213


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BOARD OF DIRECTORS

For more information please visit www.herohonda.com

COMMITTEE OF DIRECTORS

Audit Committee

Pradeep DinodiaChairman

Gen. (Retd.) Ved Prakash Malik

Member

Dr. Pritam SinghMember

SHAREHOLDERS'

GRIEVANCE COMMITTEE

Dr. Pritam Singh

Chairman

Pradeep DinodiaMember

REMUNERATION

COMMITTEE

Gen. (Retd.) Ved Prakash MalikChairman

Pradeep Dinodia

Member

COMPLIANCE OFFICER

Ilam C. KambojG.M. Legal & Company Secretary

SENIOR MANAGEMENT TEAM

Ravi SudSr. Vice President & CFO

Anil Dua

Sr. Vice President-Sales,

Marketing and Customer Care

Vikram S. KasbekarPlants Head-Operations

and Supply Chain

Dr. Anadi S. PandeVice President-HRM, Corporate

Planning and Strategy

Vijay SethiVice President-Information Systems

1415

Brijmohan Lall MunjalChairman

Pawan MunjalManaging Director & CEO

Toshiaki NakagawaJoint Managing Director

Sumihisa FukudaTechnical Director(w.e.f. June 01, 2008)

Pradeep DinodiaNon-Executive and IndependentDirector

Gen. (Retd.) Ved Prakash MalikNon-Executive and IndependentDirector

Dr. Pritam SinghNon-Executive and IndependentDirector

Analjit SinghNon-Executive and IndependentDirector

Om Prakash MunjalNon-Executive Director

Masahiro TakedagawaNon-Executive Director

Sunil Kant MunjalNon-Executive Director

Takashi NagaiNon-Executive Director(w.e.f. May 11, 2007)

Ms. Shobhana BhartiaNon-Executive and IndependentDirector

Sunil Bharti MittalNon-Executive and IndependentDirector

Meleveetil DamodaranNon-Executive and IndependentDirector(w.e.f. June 16, 2008)

ALTERNATE DIRECTOR

Satoshi Matsuzawa(Alternate Director to Mr. Takashi Nagai)

OUTGOING DIRECTORS

Tatsuhiro Oyama

Non-Executive Director

(upto May 11, 2007)

Dr. Vijay Laxman Kelkar

Non-Executive and Independent Director

(upto December 31, 2007)

Yutaka KudoWhole-time Director

(upto May 31, 2008)

Narinder Nath VohraNon-Executive and Independent Director

(upto June 24, 2008)


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MANAGEMENT DISCUSSION & ANALYSIS

Industry And Segment Dynamics

Performance Across Segments

Results And Financial Analysis

Operations, Reach & Supply ChainManufacturing

Vendor Mangement

Distribution Network

Rural Network

People And EnvironmentThe Human Touch

Information Systems

Environment

Cautionary statementStatements in this management discussion and analysis describing the Company's objectives,projections, estimates and expectations may be 'forward looking statements' within the meaningof applicable laws and regulations. Actual results might differ substantially or materially fromthose expressed or implied. Important developments that could affect the company's operationsinclude significant changes in political and economic environment in India or key marketsabroad, tax laws, litigation, labour relations and interest costs.

1617


11/68

In the previous year, there were early

signs that growth in the two wheeler

industry was slowing. Within the space

of a year, the pace of the fall has been

quite dramatic, and perhaps for the first

time since economic reforms started in

1991, India's domestic two wheeler

market entered a period of de-growth.

The industry clocked total volumes of

8.03 million during the year in review, afall of nearly 5 per cent compared to the

previous year. The picture was bleaker

in the domestic market, where the

industry clocked sales of 7.19 million, a

decline of 8 per cent.

While the motorcycle industry continues

to dominate the structure of the two

wheeler industry, this category's

contribution to the domestic two

wheeler industry actually declined

during the year from 83 per cent to a l ittle

over 79 per centa clear symptom of

the ongoing slowdown. In fact, this is

the first time since the early nineties

since motorcycles share of the two

wheeler market has actually declined;

reversing a consistently growing trend

from the previous year.

In contrast, there was another trend

reversal during the year. After appearing

to go into decline since the early 1990s,

the scooter market clocked a revival of

sorts during the year. After suffering at

the hands of motorcycles for many

years, scooter sales in the domestic

market as a percentage of motorcycle

sales actually increased from 12.4 per

cent to 14.8 per cent.

As in previous years, the three price

points in the motorcycle segment

continued to grow at different paces.

Dark clouds had started gathering in the

entry segment during the previous year,

with sales of entry level bikes growing at

just 5 per cent. During the year in review,

the entry segment in the domestic

market shrunk visibly from over 36 per

cent of total motorcycle sales to around

30 per cent. In just two years, the entry

segment's share in the total motorcycle

mix has declined by 10 percent.

This sharp decline shows the clear

impact of interest rates on two wheeler

buyers at the entry level. Interest rates

started firming up in early 2007, and

have shown no signs of letting up ever

since; the slump in the entry segment

has coincided with this rise. This is an

indication that the entry segment is very

interest elastic, and buyers in this

segment (SEC B and C) react to higher

interest rates perhaps by either

postponing or cancel l ing their

purchase decisions.Rising interest rates impacted the

deluxe segment of the motorcycle

industry as well, albeit to a lesser extent.

It was a matter of some irony that even

where all the major players in the

executive segment clocked an overall

decline in numbers, the executive

segment's share of the domestic

motorcycle market actually increased

by 4.4 per cent. The executive segment

now makes up nearly 57 per cent of the

motorcycle segment, compared to

52.5 per cent in the previ ous year. Quite

obviously, the decline of the entry

segment has been so sharp, that the

absolute reduction in executive

segment sales has translated into a

relative increase in the executive

segment's overall share in the

motorcycle mix.

The premium segment was the only

category of motorcycles that managed

to actually increase absolute sales in a

sharply declining market. Sales in the

domestic market for this segment

actua l ly increased by 2.2 per

centwhile the premium segment's

overall share of the motorcycle market

increased from 11.1 per cent to 13 per

cent. This shows that of the three

segments the interest effect has

affected premium buyers the least. This

isn't surprising, considering that buyers

in the premium segment mostly fall in

the SEC A category, who are the least

likely to postpone purchase decisions

on account of an increase in the EMI.

At a broader level, there is no real cause

for alarm in the executive segment or

the premium segment, despite the

current decline and slowdown.

According to the National Council of

Applied Economic Research (NCAER)

in 2001-02, there were 61 million

Indians belonging to families that

A leader leads by example, whether he intends to or not.

INDUSTRY ANDSEGMENT DYNAMICS

1819


12/68

earned more than Rs. 2 lacs a year; by

2005-06, that number had crossed 100

million. In 2009-10, this number is

projected to increase to 173 million. It is

safe to assume that the bulk of the

buyers from these segments will opt for

either entry or deluxe segment

motorcycle offerings. On the other

hand, it has now been established

beyond doubt that a large chunk of

entry segment buyers will continue to

react when there is a spike in interest

rates. In other words, two wheeler

makers have few options but to ride out

the difficult times.Performance Across Segments

Hero Honda's sales in the entry

segment declined by over 6 per cent;

the same as the rest of the motorcycle

industry. However, even in a declining

market Hero Honda's share of entry

segment went up from 28.7 per cent to

36.6 per centa clear indication that

sales of manufacturers in the entry

segment shrank substantially. In

contrast, Hero Honda was able to limit

the damage and in the process

increased its market share. Hero Honda

now finds itself in a situation to turn a

position of relative weakness into a

position of strength.

Hero Honda's story in the executive

segment was similar. Compared to the

previous year, sales of executive

segment bikes in the domestic market

were down 1.18 per cent. However, the

company still maintained its iron-grip inthisthe largest segment of the two

wheeler market -- by increasing its

share from 68.9 per cent to 71.5 per

cent.

Hero Honda turned in its best

performance in the domestic market's

premium segment, where its sales went

up by a whopping 69 per cent

compared to the previous year. In 2006-

07, Hero Honda had grown 25 per cent

in this segment.

In the course of a single year, the

company increased its share of the

overall premium motorcycle segmentby more than 8 percent; the company's

premium bikes now account for 23.5

per cent of the total premium pie. Given

the pace of growth of this segment

against the backdrop of a young and

affluent middle class. There is no doubt

that this segment will drive Hero

Honda's growth in the future.

2021


13/68

FOR US, EVERY

CELEBRATION IS

ENJOYABLE BECAUSE

IT IS DIFFERENT.

WHAT MAKES THEM

MEMORABLE, ARE THE

PEOPLE WE

CELEBRATE WITH.


14/68

Sales :

Despite a slow down in the two

wheeler industry, the annual sales

of the Company grew at 0.01 per

cent. Hero Honda clocked sales

volume of 3,337,142 units in 2007-

08 compared to 3,336,756 units in

2006-07. In value terms total sales

(net of excise duty) increased by

4.4 per cent to Rs.10332 crores

from 9900 crores in 2006-07.

Profitability :

The Company's earnings beforeinterest depreciation and taxes

(EBITDA) margins increased from

11.9 per cent in 2006-07 to 13.1 per

cent in 2007-08 and the Operating

profit (PBT before other income)

increased by 16.0 per cent from

Rs.1056 crores in 2006-07 to

Rs.1225 crores in 2007-08. The

improvements on the margins was

accomplished through better sales

realisations and effective cost

rationalisation measures which

included better control over

Material cost, Marketing cost,Overheads apart from sharp focus

on operational efficiencies.

Other Income :

Other income marginally declined

by 2.3 per cent from Rs. 190 crores

in 2006-07 to Rs.185 crores in

2007-08.

Cash Flows :

Despite the nominal growth in sales

turnover, better efficiencies in the

working capital management has

improved the cash flow from

operations from Rs 625.05 crores

to 1211.78 crores. Cash flows

before working changes have also

improved from Rs 1227.60 crores

to Rs 1392.56 crores on account of

better EBITDA margins.

The Company spent a total of

Rs.781 crores in investing activities,

which included capacity expansion

and investment in financial assests.

There was also an outflow of

Rs. 432 crores on account of liberal

dividend outflows.

Capital Expenditure :

During the year the Company

incurred a capital expenditure ofRs.375 crores. The funds were

used towards setting up of new

plant at Haridwar in Uttrakhand. The

aggregate capital outlay for the new

production facility is estimated at

Rs.460 crores which has been

funded over the last two financial

years.

Raw Material Costs:

Due to softening metal prices

particularly Aluminum & Nickel in

s e c o n d h a l f o f t h e y e a r

accompanied with better sales

realisation in comparison to the

previous year the share of material

costs has reduced the overall cost

structure. Raw material costs as a

percentage of total sales declined

from 72.5 per cent in 2006-07 to

71.6 per cent in 2007-08.

Current Asset Turnover:

This ratio, which shows sales as a

proportion of average current

assets, marginally decreased from

11.4 to 11.2, on account of higher

average inventory & bank balance.

DEBT STRUCTURE

Hero Honda has been a debt free

company for the last 7 years. The

unsecured loan of Rs.132 crore from

the state government of Haryana on

account of sales tax deferment, is

interest free and has no holding costs.

Net interest payment by the company

has been negative during the last few

years.

2425

OPBT - PBT before other income PBT - Profit before tax PAT - Profit after tax

PATOPBT

RESULTS

AND

FINANCIAL

ANALYSIS

DIVIDEND POLICY

Over the years, the Company has

consistently followed a policy of paying

high dividends, keeping in mind the

cash-generating capacit ies, the

expected capital needs of the business

and strategic considerations. For 2007-08, the board has recommended a

dividend of 950 per cent which is higher

than 850 per cent declared in the

previous year. The payout ratio has for

the year been pegged at 45.9 per cent

vis-a-vis 46.3 per cent in the previous

year.

WORKING CAPITAL MANAGEMENT

Hero Honda has always endeavored to

efficiently use the various components

of working capital cycle. Despite the

adverse conditions in the two wheeler

industry, the Company has been able

to effectively control the receivable and

inventories enabling it to continue to

operate on negative working capital.

As a part of its cost rationalization drive,

the Company aggressively availedcash discounts from vendors by

making payments before due dates.

This not only helped us improve

operating profit margins but also

allowed the Company to deploy the

surplus funds in the core business.

NOTES ON WORKING CAPITAL :

The average of inventory, receivables andpayables have been taken for thecalculations of inventory period , operatingand cash cycle.

Table 1: WORKING CAPITAL MANAGEMENT & LIQUIDITY RATIOS

2005-06 2006-07 2007-08

Operating Cycle (Days) 14.9 17.9 21.2

Current Ratio 0.74 0.84 0.68

Inventory Period (Days) 10.5 10.4 11.9

Cash Cycle (Days) (23.9) (12.2) (10.6)

Acid Test Ratio 0.54 0.59 0.45

Table 2: Key Indicators of Profitability

2006-07 2007-08

OPBT/Sales (%) 10.7 11.9

PBT/Sales (%) 12.6 13.6

ROACE (%) 51.6 49.0

OPBDIT/Sales (%) 13.1

PBIT/Sales (%) 12.4 13.3

PAT/Sales (%) 8.7 9.4

ROAE (%) 38.3 35.5

11.9

Net Cash Flow From Operations(Rs. in Crores)

03-04 04-05 05-06 06-07 07-08

800

600

400

200

1000

0

1200

1400

1253

9711

076

8109

07

728

1056

858

04-05 05-06 06-0703-04 07-08

1225

968

1200

900

600

300

0

PROFITS(Rs. in Crores)

1500


15/68

WITH EVERY STEP,

WE EMBRACE THE WINDSOF CHANGE.

AT EVERY BEND,WE RIDE UPON THE

GROUND OF OPTIMISM.

FOR US, LIFE IS A

CELEBRATION.


16/68

OPERATIONS, REACH& SUPPLY CHAINPrice is what you pay. Value is what you get

Manufacturing

Hero Honda commissioned its third,

plant at Haridwar during the year, with an

initial installed capacity of 500,000 units.

With this new capacity expansion,

HHML now has an overall annual

capacity of 4.5 million two wheelers.

With this, the Company has become a

global-scale manufacturer.

The Haridwar complex is the largest ofthe three Hero Honda plants, spanning

about 275 acres.

The plant has lean manufacturing and

practices that ensure efficiency. It is

connected with vendors through

conveyors so that the material canavoid multiple handling and is delivered

on time.

The Haridwar plant is one of the

greenest automobile plants in the

country. Effluents are minimised, and

there is zero discharge on liquid

effluents. All waste is treated and

consumed within the factory.

The plant has 70 per cent of its area as

green open spaces, and approximately

45,000 square metres of the plant roof

area is being converted into a green

roof.

Vendor Management

Vendor management is critical to Hero

Honda, as nearly 73 per cent of the

production is currently made up of

material cost. During the year, the

company managed an average cost

reduction of Rs. 343 per vehicle despite

volatility in metal prices.

A national network of 256 vendors- including 36 ancillaries - forms the

backbone of its plant operations.

To improve plant efficiencies and

inventory turns, Hero Honda has

extended "Just in Time (JIT) beyond

the shopfloor. Vendors are also making

critical investments in quality and

capacity in collaboration with the

Company. For example, the online

vendor connectivity program has made

rapid progress. Three years ago, the

Company had only 46 vendors

connected online to the company's

factories. By the end of 2008-09, it is

estimated that 72 per cent of the

vendors and their supplies would be

connected online.

Around 100 ancillaries will be setting up

their manufacturing base in Haridwar

over the next two years to ensure a fully

integrated supply chain. To begin with,

40 ancillaries will set up their facility in

the Industrial Parks that are beingspecially developed for Hero Honda

ancillaries. During 2008-09, Hero

Honda plans to work with vendors to

develop new vendor production

facilities. 3PL service providers have

also been identified for the Haridwar

plant a first for any two-wheeler

company in India.

2829


17/68

3031

As part of an ongoing exercise aimed at

quality control, members of senior

management visited vendor premises

for top quality audits. This has resulted

in the reduction of rejection parts per

million (PPM) by 20 per cent.

During the year, the company launcheda collaborative cost improvement

program with vendors. In this

programme the processes and

methods are continuously toned so that

the material cost can be managed

better. Hero Honda is also evaluating

horizontal deployment of third party

logistic services providers (3PL) to

manage costs along the supply chain

better.

In 2008-09, the Company plans to

further study and tactfully optimise its

supply chain. As part of this plan, raw

materials will be optimised so that the

best possible cost advantages accrue

to the company.

Distribution Network

The company has a conscious strategy

of penetrating new markets and

unrepresented territories through its

distribution network which is made up

of dealers, authorized representatives,

stockists and SSPs. In March 2001, the

company had 826 such customers

points in India. By March 2008, this

number went up to over 3500. On an all

India basis, 50 dealers, 150 SSPs, 267

dealers representatives and 45 city

work agents were added. All the four

marketing zones of the Company

showed a uniform increase in new

customers points during the year in

review.

Rural Network

During the year, Hero Honda's

ambitious rural connect program Har

Gaon, Har Aangan also got underway. A

total of 18,000 villages were covered

out of the targeted 23360 villages with a

population of 5,000 people. In all, more

than 100,000 opinion leaders in these

villages were approached. The rural

initiative was carried out by 500

specially trained rural sales executives

at the dealership level.


18/68

PEOPLE AND ENVIRONMENTPupils should not be taught. Instead, they should beprovided conditions in which they can learn.

The Human Touch

Hero Honda is continuously making

efforts to create a talent pipeline and to

develop potential leaders.

The Company encourages regular

feedback for phasing-in process

improvement and aligning employee's

goals with business objectives. The

detailed feedback process entered its

fourth year in 2007-08 through theGallup Q12 Employee Engagement

Study. The findings from Gallup have

already helped managers in building

mutual trust and foster teamwork. In the

process, this is helping make Hero

Honda a better workplace.

At Hero Honda's new plant at H aridwar,

a number of best practices have been

put in place. A flatter organization

structure has been created, policies

and guidelines have been framed and

communicated, and job rotation was

made mandatory for level migration. An

a ssessm ent cen t re wa s a lso

introduced to evaluate competency

during level migration.

During the year, an i-LEAP (Individual

Learning Excellence and Award

Program) was started for recognising

the best training projects, and to identify

internal trainers. A number of new in-

house programs were also rolled out, in

order to augment and upgrade existing

work-related and technology-related

skills.

Hero Honda has traditionally enjoyed

excellent industrial relations. Union

elections during the year went off

smoothly and the union body was

formed amicably. To ensure smooth

functioning at the plant, shop floor in-

charges were empowered to deal with

grievances and discipline issues. At

another level, a biometric attendance

monitoring systems (to avoid proxy

punching) has been started.

Information Systems

A number of key technology initiatives

were either initiated or completed in

2007-08. The application infrastructure

of the organization was extended to

support business processes at the new

production facility at Haridwar. This is

expected to be operational in 2008-09.

During the year, the organisation's entire

ne t wo rk wa s rev a m p ed a nd

redundancies were built to support

business users. The IT team also

deployed applications for sending real

t ime business alerts related to

production, sales, service notifications

automatically from the system using

SMS technology. This helped business

users immensely.

This real time system was also used by

business partners to manage their

dispatches and outstandings. To

improve productivity, a number of

applications with work flow capabilities

were developed or enhanced. Also

during the year, the entire information

security policies of the organization

were revamped in order to mitigate

risks.

A new eco-friendly state-of-the-art data

centre was set up and Hero Honda

migrated to a new technology

architecture that included blade servers

and virtualization. This would help

consolidate servers and storage as well

as reduce complexity.

To help Hero Honda prepare for the

future, two major strategic initiatives arebeing planned for 2008-09. The first is

Product Lifecycle Management

software. This will help the company in

managing the increase of complexity of

a diverse product portfolio and help

reduce cost and time for developing

new models. The new software is also

expected to improve and scale up

design-level collaboration with vendors

on an on-line basis. The software is also

expected to reduce warranty costs.

The second initiative comprised of

rolling out a Dealer Management

System software across the front end of

the supply chain. This will help Hero

Honda connect with its entire dealer

network. Once the project is complete,

it is expected to improve customer

service and supply chain performance

extensively.

Environment

For a number of years, Hero Honda has

b e e n o n e o f I n d i a ' s m o s t

environmentally sustainable firms. The

company believes that to create a

sustainable enterprise, it is critical to

3233


19/68

strike the right balance between

business, mankind and nature.

The Company has ensured complete

compliance with all applicable

env ironmenta l regula t ions and

practices. For its efforts, Hero Honda

was awarded for Safety Performance

and Best working condition and

Canteen facilities in the plant by the

Government of Haryana for 2007. The

Company has also been nominated for

the Green Manufacturer of the year

under the TERI Corporate Award

Scheme.

A green vendor development program

wa s la unched on t he W o r ld

Environment Day June 5, 2007. A green

charter was released giving specific

guidelines to the vendors and

suppliers. A total of 31 vendors were

selected in the first phase and in all, 256vendors will be covered and certified as

green vendors over a period of 5 years.

Each vendor will initiate EARN programs

in the areas of pollution prevention,

waste reduction, water conservation,

energy conservation and statutory

compliances. Each vendor will be

evaluated and certified cluster wise.

During the year, an environmental plan

to reduce hazardous waste from the

pol lut ion cont ro l faci l i t ies was

developed. As much as 30% of sludge

generated was reduced through a

sludge decanter system. The company

also increased the conversion rate of

paint sludge into useful primer from 15

MT to 25MT per month.

Hero Honda has also successfully

developed primer from the waste paint

sludge, which used to be incinerated

earlier. This development has been

demonstrated to the state authorities,

and the Company is seeking

authorization to use this practice on a

regular basis. The converted primer has

already been used on the products,

which has passed a l l qua l i t y

parameters.

To fulfill its commitment towards water

conservation, a recycling plant of 400KL

per day capacity with reverse osmosistechnology has been installed which

recycles the sewage effluent into the

process at the Haridwar plant. A similar

project has also under progress at the

Dharuhera plant and this is likely to be

completed in 2008.

The plant has been improved by adding

a forced draft ventilation system. An

additional local exhaust system was

provided in the weld shop and vehicle

testing area to minimize the effects of

airborne contaminants. Electrostatic

precipitators were also installed in the

machine shop to capture the aerosoles

at source and prevent exposure of theworkmen.

Since the state of Haryana is one of the

driest in the country, Hero Honda has

always emphasized heavily on ground

water recharging. During the year, 2

more injection wells were added,

covering an additional area of 4500 Sq

metres. In all, Hero Honda now as 25

injection wells in the plants. Also during

the year, an exhaustive feasibility study

was conducted to extend the Rain

Water Harvesting Scheme for Roads

and other pucca surfaces in the plants.

The project will be executed in 2008-09.


20/68

Hero Honda Motors takes considerablepride in its community relationships,especially ones at the grassroots thathave evolved over time. The Companyhas played a pivotal role in bringing aneconomically and socially backwardregion in Dharuhera, Haryana, into thenational economic mainstream throughdirect interventions in education,

healthcare, vocational training, creationof social and physical infrastructure,

and environment management.

Most of the group's social enterprises including the Rural DevelopmentCentre-- are planned and executed bythe Raman Kant Munjal Foundation.

To help local people, especiallywomen, Hero Honda has set up avocational training centre which runs a 6months Diploma Course for Tailoring,Embroidery and carpet weaving, etc.During the year in review, the Centrewas upgraded. It now trains 50 girls perbatch up from 25 & the duration of thecourse was increased from six months

to 9 months. The Centre has al so beenequipped with modern machines toprepare the girls for the Garment ExportIndustry, where placement is 100%.

Also during the year, women from fourvillages near the factory at Dharuherabenefit ted from food-processing

courses conducted at the Centre.

In February 2007, the Foundation hadset up a computer training & learningcentre in partnership with Microsoft. Atotal of 8 to 10 batches (boys and girls)are run simultaneously consisting of 18-20 students per batch. Till date, close to

400 students have been trained at thecentre.

To enhance the value of rural youth inthe job market, a spoken Englishcourse was started during the year.Currently the course is being run in threeBatches during the day. It is proposedto train approx 120 students per year.The Foundation will make an effort to

SOCIAL RESPONSIBILITYLife laughs at you when you are sad; smiles at youwhen you are happy. But life salutes you when you

make others happy.

3637

place them with BPO/Call Centres,provided the students also have therequisite computer training.

A vocational centre for boys is expectedto start during 2008-09 and will run onthe lines of an ITI. The centre will providetraining in Fitter, Welding, Carpentry andPlumbing & Electrician Trades. It isplanned to train approx. 50 studentsevery year, and efforts will be made to

accommodate them in groupcompanies.

The Foundation also runs an AdultLiteracy Program, a marriage facilitationservice for underprivileged girls,besides doorstep healthcare programsand medical camps for the localpopulation. A graduate teacher from thetargeted village is appointed to teachthe elders. Approx 650 people havebenefited from this scheme spreadover 20 villages.

In every CSR Project undertaken, the

Foundation always involves either alocal NGO preferably the village itself orpanchayat members not only duringexecution but also for subsequentsustainability/maintenance of project. Incertain areas such as computer

learning by rural youth Udyan Care, areputed NGO has been made a partnerin association with Microsoft.

In Projects like Hygiene, Sanitation &Safe Drinking Water, Local GovernmentRepresentatives such as BlockDevelopment Off icers are alsoinvolved.


21/68

Statutory Auditors

A.F. Ferguson & Co.

Chartered Accountants,9, Scindia House,

Kasturba Gandhi Marg,

New Delhi 110 001, India

Tel : 011-2331 5884

Principal Bankers

ABN Amro Bank N.V.

Bank of America NT & SA

Canara Bank

Citibank N.A.

HDFC Bank Limited

HSBC Limited

ICICI Bank Limited

Punjab National Bank

Standard Chartered Bank

The Bank of Tokyo-Mitsubishi UFJ Limited

Cost Auditors

Ramanath Iyer & Co.

BL-4 (Paschmi), Shalimar BaghDelhi 110 088

Tel. : 011-27481904

Technical & Financial Collaborators

Honda Motor Co., Ltd.,

1-1, 2 - chome,

Minato - ku,

Tokyo 107-8556, Japan

www.world.honda.com

Registered & Corporate Office

34, Community Centre,

Basant Lok, Vasant Vihar,

New Delhi 110 057, India

Tel.: 011-2614 2451, 2614 4121

Fax : 011-2615 3913

www.herohonda.com

Registrar & Transfer Agents

Karvy Computershare Pvt. Ltd.

Plot No. 17-24, Vithlrao Nagar,

Madha Pur, Hyderabad 500 081

Tel.: 040-23420815-820

Fax : 040-23420814

Minami - Aoyama,

Dharuhera Plant

69 KM Stone,

Delhi-Jaipur Highway,Dharuhera, Distt. Rewari,

Haryana 122 100, India

Tel.: 01274-264 012-15

Fax : 01274-267 024

Gurgaon Plant

37 KM Stone,

Delhi-Jaipur Highway,

Sector 33, Gurgaon,

Haryana 122 001, India

Tel.: 0124-2372 123-134

Fax : 0124-2373 141-142

Haridwar Plant

Plot No. 3 Sector-10,

11E, SIDCUL,

Roshanabad,

Haridwar 248 001

Uttrakhand

Tel.: 01334 - 239513

Fax : 01334 - 239512

CORPORATE

INFORMATION

3839


22/68

FINANCIAL HIGHLIGHTS & KEY RATIOS

Financial Highlights(Rupees in crores)

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

Sales (Nos.) 2070147 2621400 3000751 3336756 3337142

Growth in sales (nos.) (%) 23.4 26.6 14.5 11.2 0.01

Total net income 5997 7559 8870 10090 10517

Growth in Total inocme (%) 15.5 26.1 17.4 13.7 4.2

Profit before tax 1072 1217 1412 1246 1410

Profit after tax 728 810 971 858 968

Share capital 39.94 39.94 39.94 39.94 39.94

Reserves and Surplus 1099 1453 1969 2430 2946

Total debt 175 202 186 165 132

Net fixed assets 589 715 994 1355 1549

Total assets (net) 1314 1695 2195 2635 3118

Market capitalisation 9797 10943 17781 13753 13869

Economic Value Added (EVA) 569 564 641 485 575

Key Ratios

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

Long term Debt/Equity Nil Nil Nil Nil Nil

OPBDIT*/Net Sales (%) 16.8 15.7 15.7 11.8 13.1

OPBT**/Net Sales (%) 15.6 14.6 14.4 10.7 11.9

Profit after tax/ Total income (%) 12.1 10.7 11.0 8.5 9.2

Return on average equity (%) 72.9 61.6 55.5 38.3 35.5

Return on average capital employed (%) 92.8 80.9 72.3 50.6 49.0

EVA/Capital employed (%) 49.3 37.5 32.9 20.1 20.0

Dividend per share (Rs.) 20 20 20 17 19

Dividend payout (%) 61.9 56.3 46.9 46.3 45.9

Earning per share (Rs.) 36.5 40.6 48.6 43.0 48.5

Market value/book value (times) 8.6 7.3 8.8 5.6 4.6

Notes:

*OPBDIT: Operating Profit before Depreciation, Interest and Tax

**OPBT: PBT before Other income

4041

A N N U A L R E P O R T 0 80 7


23/68

(Rupees in crores)

ECONOMIC VALUE ADDED (EVA) STATEMENT

2003-04 2004-05 2005-06 2006-07 2007-08

Avg Cap Employed 1,154 1,504 1,945 2,415 2,877

Avg Debt/Avg Capital (%) 2.2 1.8 1.3 1.1 1.1

Avg Equity/Avg Capital (%) 97.8 98.2 98.7 98.9 98.9

Cost of Debt (% post-tax ) 0.7 0.7 1.0 0.6 0.9

Cost of Equity

Beta 0.90 1.01 0.98 0.75 0.59

Cost of Risk Free Debt (%) 5.13 6.67 7.52 8.15 7.94

Market Premium (%) 10 10 10 10 10

Cost Of Equity (%) 14.18 16.74 17.32 15.65 13.83

EVA

Profit after Tax 728 810 971 858 968Add: Interest*(1-tax rate) 1 1 2 1 1

NOPAT=PAT + Interest*(1-t) 729 812 973 859 969

Cost of Capital 160 247 333 374 394

EVA 569 564 641 485 575

Return on Capital Employed (%) 63.2 54.0 50.0 35.6 33.7

Weighted Average Cost of Capital (%) 13.9 16.5 17.1 15.5 13.7

EVA/Capital employed (%) 49.3 37.5 32.9 20.1 20.0

ENTERPRISE VALUE

Market Capitalisation 9797 10943 17781 13753 13869

Add: Debt 175 202 186 165 132

Less: Financial Assets 1708 2044 2221 2010 2698

EV (Enterprise Value) 8264 9101 15746 11909 11303

EV/Yr. End Capital Employed (Times) 6.3 5.4 5.9 4.5 3.6

DIRECTORS REPORT

On behalf of the Board, I take immense pleasure on presenting the 25th Annual Report of the Company. The report is being presented along with the

Audited Statement of Accounts for the financial year ended March 31, 2008.

FINANCIAL RESULTS

For the year ended

March 31, 2008 March 31, 2007

Gross Sales 12,038.53 11,542.04

Net Sales and other Income 10,517.22 10,089.81

Profit before Finance charges

and Depreciation 1,534.79 1,362.89

Less: Finance charges (35.81) (22.99)

Depreciation 160.32 139.78

Profit before tax (PBT) 1,410.28 1,246.10

Less: Provision for tax

- Current 436.81 375.81

- Deferred 1.20 9.42

- Fringe Benefit Tax (FBT) 4.39 2.98

Profit after tax (PAT) 967.88 857.89

Add: Balance of profit brought forward 1,594.78 1,224.05

Balance available for appropriation 2,562.66 2,081.94

Appropriations

Dividend

- Proposed Final 379.41 339.47

Corporate Dividend Tax 64.48 57.69

Transfer to General Reserve 97.00 90.00

Balance carried to Balance Sheet 2,021.77 1,594.78

Dividend (%) 950 850

Basic and Diluted Earnings Per Share (EPS) (Rs.) 48.47 42.96

(Rupees in crores)

4243



24/68

4445

BUSINESS PERFORMANCE

Your Company defied a process of de-growth in the industry and

achieved cumulative sales of 33,37,142 units of two-wheelers. In the

process, Hero Honda consolidated its leadership position in domestic

two-wheeler market with more than 52 per cent market share. The

Company successfully launched seven new models including

variants during the year under review.

On the financial front, total income (net of excise duty) of the Company

grew by 4.2 per cent from Rs. 10, 090 crores in previous year to

Rs. 10,517 crores during 2007-08. The Company posted a net profit

(PAT) of Rs. 968 crores, compared to Rs. 858 crores in the previous

fiscal, a growth of 13 per cent. Despite the increasing pressure on

inputs, your Company was able to maintain EBIDTA margins at 13.1

per cent, compared to 11.9 per cent in the previous year.

During the year, Hero Honda also retained, for the seventh year in a row,

its position as the World's Number One Two Wheeler Company. During

2007-08, your Company achieved another landmark of reaching

cumulative sales of 20 million bikes.

In the course of the year, your Company launched new models

(including variants) including Splendor NXG, Hunk, New Super

Splendor, New Passion Plus, Commemorative Splendor+ and a

refreshed version of Pleasure.

A detailed discussion on the business performance and futu re outlook

has been given in the chapter on Management Discussion & Analysis

Report.

DIVIDEND

Few manufacturing companies in the Indian corporate sector have a

better dividend pay out record than Hero Honda. We have

recommended a Dividend of 950 per cent i.e. Rs.19 per equity share of

Rs. 2 aggregating to Rs. 379.41 crores (exclusive of corporate

dividend tax) for your approval for the financial year ended March 31,

2008. The dividend, if approved, will be paid to the eligible members

well within the stipulated period.

Our dividend policy is in line with our strong and consistent belief that if

funds are not re-invested for capital investments, they should be

optimally distributed to shareholders.

TRANSFER TO GENERAL RESERVE

A sum of Rs. 97 crores have been transferred to the General Reserve of

the Company. This reaffirms the inherent financial strength of theCompany.

NEW MANUFACTURING FACILITY AT HARIDWAR

Your Company inaugurated its third plant - the "Shrine of Technology" in

the holy city of Haridwar in Uttarakhand. The plant has an initial

production capacity of 0.5 million units which would be scaled up to a

million units by 2008-end. The total capital outlay on the new

manufacturing facility has been around Rs. 375 crores. The new plant

will employ flexible production techniques enabling production of

different models in the Company's portfolio. In addition tomanufacturing for the domestic market, the plant will also cater to

export requirements.

MATERIAL CHANGES AND COMMITMENTS

No material changes and commitments affecting the fin ancial position

of the Company have occurred between April 1, 2008 and the date on

which this Report has been signed.

BOARD OF DIRECTORS

During the period under review, Mr. Tatsuhiro Oyama resigned from

directorship on May 11, 2007 and Mr. Takashi Nagai was appointed as

an Additional Director in Non-Executive Category on May 11, 2007.

Further, Dr. Vijay Laxman Kelkar has resigned from directorship on

December 31, 2007.

Mr. Satoshi Matsuzawa was appointed as an Alternate Director to Mr.

Takashi Nagai w.e.f. April 24, 2008. Mr. Yutaka Kudo, Whole-time

Director of the Company resigned from both the offic es i.e. Director &

Whole-time Director w.e.f. May 31, 2008. Mr Sumihisa Fukuda was

appointed as an Additional and Technical Director in the whole-timeemployment of the Company in his stead on June 1, 2008. Mr. M.

Damodaran was appointed as an Additional Director in the Non-

Executive and Independent Category w.e.f. June 16, 2008. Mr.

Narinder Nath Vohra has resigned from Directorship w.e.f. June 24,

2008.

The Board place on record their sincere appreciation and gratitude for

the work put in by the out going members, and wishes them a

rewarding and satisfying career ahead. The Directors also welcome

the new members on the Board and wish them a successful and fruitful

tenure with the Company.

At the ensuing Annual General Meeting, Ms. Shobhana Bhartia,

Mr. Sunil Bharti Mittal, Mr. Masahiro Takedagawa and Mr. Pradeep

Dinodia will retire by rotation and being eligible, offer themselves for

re-appointment in terms of provisions of Articles of Association of the

Company. The brief resume/details relating to Directors, who are to be

appointed and re-appointed has been furnished after th e Explanatory

Statement to the Notice of the ensui ng Annual General Meeting.

Your Directors recommend their re-appointment at the ensuing AnnualGeneral Meeting.

DIRECTORS' RESPONSIBILITY STATEMENT

To the best of their knowledge and belief and according to the

information and explanations obtained by them, your Directors make

the following statement in terms of Section 217(2AA) of the Companies

Act, 1956:

1. that in the preparation of the annual accounts for the year ended

March 31, 2008, the applicable accounting standards have been

followed;

2. that appropriate accounting policies have been selected and

applied consistently and judgements and estimates that are

reasonable and prudent have been made so as to give a true and

fair view of the state of affairs as at March 31, 2008 and of the profit of

the Company for the financial year ended March 31, 2008;

3. that proper and sufficient care has been taken for the maintenance

of adequate accounting records in accordance with the provisions

of the Companies Act, 1956 for safeguarding the assets of the

Company and for preventing and detecting fraud and other

irregularities;

4. that the annual accounts for the year ended March 31, 2008 have

been prepared on a going concern basis.

MANAGEMENT DISCUSSION & ANALYSIS REPORT

A detailed chapter on, 'Management Discussion and Analysis'(MDA),

pursuant to Clause 49 of the Listing Agreement forms part of this

Report.

CORPORATE GOVERNANCE

At Hero Honda, it is our firm belief that the essence of Corporate

Governance lies in the phrase 'Your Company'. It is 'Your' Company

because it belongs to you - the shareholders. The Chairman and

Directors are 'Your' fiduciaries and trustees. Their objective is to take the

business forward in such a way that it maximises 'Your' long-term value.

Your Company is committed to benchmark itself with global standards

for providing good Corporate Governance and has put in place an

effective Corporate Governance System which ensures that the

provisions of Clause 49 of the Listing Agreement are duly complied

with.

The Board has also evolved and adopted a Code of Conduct based

on the principles of Good Corporate Governance and best

management practices being followed globally. The Code is available

on the website of the Company www.herohonda.com. A report on

Corporate Governance along with the Auditors' Certificate on its

compliance is annexed hereto as Annexure - I.

INTERNAL CONTROL SYSTEMS

Hero Honda has a proper and adequate system of internal controls.

This ensures that all assets are safeguarded and protected against

loss from unauthorised use or disposition and those transactions are

authorised, recorded and reported correctly.

An extensive programme of internal audits and management reviews

supplement the process of internal control. Properly documented

policies, guidelines and procedures are laid down for this purpose.

The internal control system has been designed so as to ensure that the

financial and other records are reliable for preparing financial and other

statements and for maintaining accountability of assets.

The Company also has an Audit Committee, comprising of three

Independent, Non-Executive and professionally qualified Directors,

who interact with the Statutory Auditors, Internal Auditors, Cost Auditors

and Auditees in dealing with matters within its terms of reference. The

Committee mainly deals with accounting matters, financial reporting

and internal controls. During the year under review, the Committee met

nine times.

AUDIT COMMITTEE RECOMMENDATION

During the year there was no such recommendation of the Audit

Committee which was not accepted by the Board. Hence, there is no

need for the disclosure of the same in this Report.

RISK MANAGEMENT SYSTEM

Your Company follows a comprehensive system of Risk Management.

Your Company has adopted a procedure for assessment and

minimization. It ensures that all the Risks are timely defined and

mitigated in accordance with the well structured risk management

Process. The Audit Committee reviews periodically the risk

management process.

RATINGS

The rating agency ICRA Limited, has reviewed and reaffirmed the

ratings assigned to the Company for its Non-convertible Debenture

Programme as LAAA indicating the highest credit quality, A1+ for its

Non-fund based facilities and LAAA to Fund based facilities. These

ratings indicate the highest credit quality carrying lowest credit risk.

Another rating agency CRISIL reviewed and assigned AAA/Stable

rating to the bank loan and P1+ rating to the Cash Credit Limit & Let ter

of Credit Limit Facility.

Further, CRISIL also has reaffirmed the 'GVC 1' rating assigned to the

Company for the third consecutive time. This governance and value

creation (GVC) rating indicates that the company's capability with

respect to creating wealth for all its s takeholders while adopting soundcorporate governance practices is the highest. The rating reflects the

high standards of corporate governance practised by your Company.



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FIXED DEPOSITS

During the year under review, the Company has not accepted any

deposit under Sections 58A and 58AA of the Companies Act, 1956

read with the Companies (Acceptance of Deposits) Rul es, 1975.

AUDITORS

M/s. A. F. Ferguson & Co., Chartered Accountants, New Delhi, Auditors

of the Company will retire at the conclusion of the ensuing Annual

General Meeting and being eligible, offer themselves for re-

appointment. The Company has received a certificate from the

auditors to the effect that their re-appointment, if made, would be in

accordance with Section 224(1B) of the Companies Act, 1956.

The Board recommends their re-appointment.

AUDITORS' REPORT

The observations of Auditors in their report, read with the relevant notes

to accounts are self explanatory and therefore do not require further

explanation.

COST AUDITORS

The Board has re-appointed M/s. Ramanath Iyer & Co., Cost

Accountants, New Delhi, as the Cost Auditors of the Company under

Section 233B of the Companies Act, 1956 for the financial year2008-09 and necessary application for obtaining th e requisite approval

has been filed with the Government. The Cost Auditors' Report for

2007-08 will be forwarded to the Central Government in pursuance of

the provisions of the Companies Act, 1956.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION,

FOREIGN EXCHANGE EARNINGS AND OUTGO

Information required under Section 217(1)(e) of the Companies Act,

1956, read with Companies (Disclosure of Particulars in the Report of

the Board of Directors) Rules, 1988 is given as per Annexure - II and

forms an integral part of this Report.

LISTING

The shares of your Company are presently listed on Bombay Stock

Exchange Limited (BSE) and National Stock Exchange of India Limited

(NSE). The delisting application, was in-principle approved by the

Committee of the Calcutta Stock Exchange Association Limited, the

formal approval is awaited and is expected to be received in due

course of time.

PERSONNEL

As on March 31, 2008 the total number of employees on the records of

the Company were 4321.

Your Directors place on record their appreciation for the significant

contribution made by all employees, who through their competence,

dedication, hard work, co-operation and support have enabled the

Company to cross new milestones on a continual basis.

A detailed note is given in the c hapter "Human Resource Management"

of Management Discussion & Analysis, which forms part of this Annual

Report.

PARTICULARS OF EMPLOYEES

Information of Particulars of Employees as required under Section

217(2A) of the Companies Act, 1956 read with the Companies

(Particulars of Employees) Rules, 1975 forms an integral part of this

Report. As per the provisions of Section 219(1)(b) of the Companies

Act, 1956, the Report and Accounts are being sent to the shareholders

of the Company excluding the statement of particulars of employees

under Section 217(2A) of the Companies Act, 1956. Any shareholder

interested in obtaining a copy of such statement may write to the

G.M. Legal & Company Secretary at the Registered Office of the

Company.

ACKNOWLEDGMENT

It is our strong belief that caring for our business constituents has

ensured our success in the past and will do so in futu re. Your Directors

acknowledge with sincere gratitude the co-operation and assistanceextended by the Central Government, State Government(s), Financial

Institution(s), Bank(s), Customers, Dealers, Vendors and Ancillary

Undertakings. The Directors also place on record their appreciation for

the valuable assistance and guidance extended to the Company by

Hero Cycles Limited and Honda Motor Co., Ltd., Japan and for the

encouragement and assurance, which our collaborator has given for

the growth and development of the Company.

The Board, also, takes this opportunity to express its deep gratitude for

the continued co-operation and support received from its valued

shareholders.

For and on behalf of the Board

Brijmohan Lall Munjal

Chairman

New DelhiJuly 29, 2008

ANNEXURE - I TO DIRECTORS' REPORT

CORPORATE GOVERNANCE REPORT

Philosophy on 'Code of Corporate Governance'

Hero Honda's philosophy of Corporate Governance stems from its

belief that the Company's business strategy and plans should be

consistent with the welfare of all its stakeholders, including

shareholders. Good Corporate Governance practices enable a

Company to attract financial and human capital and leverage these

resources to maximize long-term shareholder value, while preserving

the interests of multiple stakeholders, inclu ding society at large.

Corporate Governance rests upon the four pillars of: transparency, full

disclosure, independent monitoring and fairness to all, especially to

minority shareholders. Hero Honda has always strived to promote

Good Governance practices, which ensure that:

A competent management team is at the helm of affairs;

The Board is strong with an optimum combination of Executive

and Non-Executive (including Independent) Directors, who

represent the interest of all stakeholders;

The Board is effective in monitoring and controlling the

Company's affairs;

The Board is concerned about the Company's shareholders; and

The Management and Employees have a stable environment.

We believe that the essence of Corporate Governance lies in the

phrase "Your Company". It is "Your" Company because it belongs toyou - the shareholders. The Chairman and Directors are "Your"

fiduciaries and trustees. Their objective is to take the business forward

to maximise "Your" long-term value.

The Securities and Exchange Board of India (SEBI) has specified

certain mandatory governance practices, which are incorporated in

Clause 49 of the Listing Agreement of Stock Exchanges.

Hero Honda is committed to benchmark itself with the best standards

of Corporate Governance, not only in form but also in spirit. This

section, along with the section on 'Management Discussion & Analysis'

and 'General Shareholder's Information' constitute Hero Honda's

compliance with the Clause 49 of the Listing Agreement.

BOARD OF DIRECTORS

Composition of the Board

As on March 31, 2008, the Company's Board of Directors consisted of

fifteen Directors. Four Directors, including the Chairman, are Executive;

four are Non-Executive and seven are Non-Executive and

Independent. The fifty per cent of the Board consists of Independent

Directors including Dr. Vijay Laxman Kelkar, Non-Executive and

Independent Director, who resigned from the directorship of the

Company w.e.f. December 31, 2007, the vacancy has been filled

within the prescribed 180 days with the appointment ofMr. M. Damodaran, as Non-executive and Independent Director,

therefore the composition of the Board is in consonance with the

Clause 49. Details of the composition of the Board, number of

meetings held during their tenure and attended by them et c., are given

in Table 1.



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Number of Board Attendance at Number of Committee Number of Committee Number of outside

M ee ti ng s h el d d ur in g l as t AGM M em be rshi ps Cha ir ma nshi ps he ld D ir ec to rshi ps he ld

his/her tenure and (including ChairmanName of Director attended by him/her ships) held

He ld A tt en ded ( ex cl ud ing P ri va te C om pan ies , Fo rei gn C omp an ies a nd

Section 25 Companies)

Executive Directors

Mr. Brijmohan Lall Munjal 6 6 Yes None None 8

Mr. Pawan Munjal 6 6 Yes None None 1

Mr. Toshiaki Nakagawa 6 6 Yes None None 1

Mr. Yutaka Kudo 6 6 Yes None None 1

Non-Executive Directors

Mr. Om Prakash Munjal 6 Nil No None None 10

Mr. Sunil Kant Munjal 6 5 Yes None None 14

Mr. Masahiro Takedagawa 6 3 Yes 1 None 2

1Mr. Tatsuhiro Oyama 1 Nil N.A. None None 1

2Mr. Takashi Nagai 5 Nil No None None Nil

Non-Executive and

Independent Directors

Mr. Narinder Nath Vohra 6 3 Yes 2 1 1

Mr. Pradeep Dinodia 6 6 Yes 7 5 8

Gen. (Retd.) Ved Prakash Malik 6 4 Yes 4 None 3

Mr. Analjit Singh 6 2 No None None 12

Dr. Pritam Singh 6 3 Yes 3 None 5

3Dr. Vijay Laxman Kelkar 5 2 Yes 4 None 13

Ms. Shobhana Bhartia 6 2 No 2 2 14

Mr. Sunil Bharti Mittal 6 1 No None None 8

TABLE 1: DETAILS ABOUT COMPANY'S BOARD OF DIRECTORS / ATTENDANCE RECORD DURING FINANCIAL YEAR 2007-08 Four Directors namely Mr. Brijmohan Lall Munjal (Executive Chairman i n

the whole-time employment of the Company), Mr. Pawan Munjal(Managing Director & CEO), Mr. Om Prakash Munjal (Non-Executive

Director) and Mr. Sunil Kant Munjal (Non-Executive Director) belong to

the promoter family of the Hero Group, which owns 26 per cent equity

in the Company. Four Directors namely Mr. Toshiaki Nakagawa (JointManaging Director), Mr. Yutaka Kudo (Whole-time Director),

Mr. Masahiro Takedagawa (Non-Executive Director) and Mr. Takashi

Nagai (Non-Executive Director) are nominees of Honda Motor Co.,

Ltd., Japan, which too, owns 26 per cent equity in the Company. Apart

from these, the rest of the Board constitutes of Non-Executive and

Independent Directors.

Board Meetings

During 2007-08, the Board of Directors met 6 (six) times on May 11,

2007; May 31, 2007; July 24, 2007; September 18, 2007; October 18,

2007 and January 31, 2008.

The longest gap between any two Board Meetings was f or a period of 3

months and 13 days.

Directors' Attendance Record and Directorships / Committee

Memberships

Details are given in Table 1.

As per Clause 49 of the Listing Agreement entered into with the Stock

Exchange(s), an Independent Director means a Non-Executive

Director who;

apart from receiving director's remuneration, does not have any

material pecuniary relationships or transactions with the Company,

its promoters, its directors, its senior management, its holding

Company, its subsidiaries or associates which may affect

independence of the director;

is not related to promoters or persons occupying management

positions at the board level or at one level below the board;

has not been an executive of the company in the immediately

preceding three financial years;

is not a partner or an executive of the statutory audit firm or the

internal audit firm that is associated with the company and has not

been a partner or an executive of any such firm for the last three

years and the legal firm(s) and consulting firm(s) that have a

material association with the entity.

is not a material supplier, service provider or customer or a lessor or

lessee of the company, which may affect independence of the

Director;

is not a substantial shareholder of the Company i.e. owning twopercent or more of the block of voting shares.

None of the Director on the Board holds the office of Director in more

than 15 companies nor are they members in Committees of the Board

in more than 10 Committees or Chairman of more than 5 Committees.

Notes:

1. Mr. Tatsuhiro Oyama has resigned from his Directorship on May 11, 2007.

2. Mr. Takashi Nagai was appointed as an Additional Director on the Board w.e.f. May 11, 2007.

3. Dr. Vijay Laxman Kelkar has resigned from the Directorship on December 31, 2007.4. Mr. Yutaka Kudo has resigned from his Directorship and Whole-time Directorship on May 31, 2008.

5. Mr. Narinder Nath Vohra has resigned from the Directorship on June 24, 2008.

Further, there are no pecuniary relationships or transactions between

the Independent Directors and the Company, except for the sittin g fees

drawn by the Non-executive Directors and sitting fees and commissiondrawn by the Non-executive and Independent Directors for attending

the meeting of the Board and its Committee(s) thereof.

Shareholding of Non-Executive Directors

Name of the Director Category No. of shares held

Mr. Om Prakash Munjal Non-Executive 25,000

Director

Mr. Sunil Kant Munjal Non-Executive 32,500

Director

Apart from the above, none of the Non-Executive (including

Independent) Directors hold any shares (as own or on behalf of other

person on beneficial basis) in the Company.

Information Supplied to the Board

Board members are given agenda papers along with necessary

documents and information in advance of each meeting of the Board

and Committee(s). However, in case of business exigencies or

urgency of matter, the resolutions are passed by way of circulation. In

addition to the regular business items, the following items/ information

are regularly placed before the Board to the extent applicable:

Annual operating plans and Budgets, Capital budgets andupdates;

Purchase and disposal of major fixed assets;

Quarterly and half yearly results of the Company;

Minutes of the Audit Committee, Shareholders' Grievance

Committee, Remuneration Committee and Committee of

Director's meetings;

Information on recruitment and remuneration of senior

management just below the Board level including appointment or

removal of CFO and Company Secretary;

Any material defaults in financial obligations to and by the

Company, or substantial non-payments for goods sold by the

Company;

Fatal or serious accidents, dangerous occurrences, any material

effluent or pollution problems;

Transactions that involve substantial payment towards goodwill,

brand equity or intellectual property;

Materially important show cause, demand, prosecution and

penalty notices;

Details of quarterly foreign exchange exposures and steps taken

by the management to limit the risks of adverse exchange rate

movement;

Sale of material nature, of investments and assets, which are not in

the normal course of business;

4849



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Details of Joint Ventures and Agreements or variations thereof;

Quarterly Statutory Compliance Report;

Non-compliance of any regulatory, statutory nature or listing

requirements and shareholder's service such as non-payment of

dividend, delay in share transfer etc.;

Investments strategy/plan;

Any issue which involves possible public or product liability claims

of substantial nature, including any judgment or order which may

have passed strictures on the conduct of the Company or taken an

adverse view regarding another enterprise that can have negative

implications on the Company; and

Significant labour problems and their proposed solutions. Also,

any significant development in Human Resources/Industrial

Relations front like signing of Wage Agreement, implementation of

Voluntary Retirement Schemes etc.

Code of Conduct

We at Hero Honda have laid down a code of conduct for all Board

members and senior management of the Company. The code of

conduct is available on the website of the Company

www.herohonda.com. The code has been circulated to all the

members of the Board and senior management and they have

affirmed compliance with the code of con duct. A declaration signed by

the Chief Executive Officer (CEO) to this effect is attached to the Annual

Report.

Risk Management

We at Hero Honda have established an effective risk assessment and

minimization procedures, which are reviewed by the Board

periodically. There is a structure in place to identify and mitigate various

risks faced by the Company from time to time.

BOARD LEVEL COMMITTEES

AUDIT COMMITTEE

The genesis of Hero Honda's Audit Committee can be traced back to

the Audit Sub-Committee, constituted in 1987. Since then it has been

dealing with matters prescribed by the Board of Directors on a case to

case basis. In general, the primary role/objective of the Audit

Committee is to review the financial statements of the Company,

strengthen internal controls & look into all transactions having monetary

implications on the functioning of the Company. The nomenclature,

constitution and terms of reference of the Committee were revised on

January 16, 2001 and an Audit Committee was set up as per the

provisions of the Section 292A of the Companies Act, 1956 and Clause

49 of the Listing Agreement of the Stock Exchange(s).

As on March 31, 2008, the Committee had four Non-Executive andIndependent Directors in accordance with the prescribed guidelines.

Mr. Pradeep Dinodia, a leading Chartered Accountant, is the Chairman

of the Committee. The other members are Dr. Pritam Singh,

Gen.(Retd.) Ved Prakash Malik and Mr. Narinder Nath Vohra, all learned

personalities in their respective fields. The members of the Committee

have adequate knowledge in the field of finance, accounting, and law.The role and "terms of reference" of the Audit Committee includes the

following:

Overseeing

- the Company's financial reporting process and disclosure of its

financial information to ensure that the financial statements are

correct, sufficient and credible.

Recommending

- the appointment, re-appointment, replacement and removal of

the statutory auditor, fixation of audit fees and approving

payments for any other services.

Review ing

- with the management the annual financial statements with

primary focus on matters required to be included in th e Directors'Responsibility Statement, changes, if any in accounting policies

and practices and reasons thereof, compliance with accounting

standards and guidelines of stock exchange(s), major

accounting entries, qualifications in draft audit reports, related

party transactions & the going concern assumption.

- with the management, the quarterly financial statements before

submission to the board for approval.

- the adequacy of internal control systems and the internal auditfunction and reviewing the Company's financial and risk

management policies.

- the findings of any internal investigations by the internal auditors

into matters where there is suspected fraud or irregularity or a

failure of internal control systems of a material nature and

reporting the matter to the Board.

- the reports furnished by the internal auditors, discussion with

internal auditors on any significant findings and ensuring suit able

follow up thereon.

- Directors' overseas traveling expenses.

- foreign exchange exposure.

Complying

- with the provisions of listing agreement laid down by the Stock

Exchange(s) and legal requirements concerning financial

statements.

Discussing

- with external auditors before the audit commences, of the nature

and scope of audit. Also post audit discuss ion to ascertain any

area of concern. L oo ki ng

- into the reasons for substantial defaults in the payments to the

shareholders (in the case of non-payment of declared

dividends) and creditors.

The Sr. Vice President & CFO, Internal Auditors, Statutory Auditors and

Cost Auditors attend the meetings of the Committee on the invitation of

the Chairman. Mr Ilam C. Kamboj, G.M. Legal & Company Secretaryacts as the Secretary of the Committee.

During the year, 9 (Nine) meetings of the Audit Committee were held onApril 09, 2007; April 23, 2007; May 11, 2007; July 24, 2007; September

18, 2007; September 28, 2007; October 18, 2007; December 14,

2007; and January 29, 2008 in due compliance with the stipulated

provisions. The attendance record of members of th e Audit Committee

is given in Table 2.

TABLE 2: DETAILS OF THE AUDIT COMMITTEE

Name of committee Position No. of meetings No. of meetingsmember held held during attended

his tenure

Mr. Pradeep Dinodia Chairman 9 9

Gen. (Retd.) V.P. Malik Member 9 7

Dr. Pritam Singh Member 9 7

Mr. N.N.Vohra Member 9 7

REMUNERATION COMMITTEE

The Company had set up a Remun eration Committee on January 16,

2001 to review and recommend the payment of annual salaries,

commission, and finalise service agreements and other employment

conditions of Executive Directors. The Committee takes intoconsideration the best remuneration practices being followed in the

industry while fixing appropriate remuneration packages.

As on March 31, 2008, the Committee had three Non-Executive and

Independent Directors as its members in accordance with the

prescribed guidelines. Gen. (Retd.) Ved Prakash Malik, is the Chairman

of the Committee. The other members are Mr. Narinder Nath Vohra and

Mr. Pradeep Dinodia. Mr. Ilam C. Kamboj, G.M. Legal & Company

Secretary acts as the Secretary of the Committee.

During the year the committee did not meet, as there was no business

to transact.

Remuneration Policy

Remuneration paid to Executive Directors

The remuneration paid to Executive Directors is recommended by the

Remuneration Committee and approved by the Board of Directors, in

the Board meeting, subject to the subsequent approval by theshareholders at the general meeting and such other authorities, as the

case may be.

At the Board meeting, only the Non-Executive and Independent

Directors participate in approving the remuneration paid to the

Executive Di

Hero Honda - Annual Report 07-08

Documents

Transcript of Hero Honda - Annual Report 07-08