h e a d i n a h e a d We are in the business of competitive knack of venturing looking ahead, or rather, into unexplored territories has b e g i n n i n g w h e r e e v e n helped us retain our leadership imagination surrenders. A stance on a national and perception that clearly justifies international level. Hero Honda's thought process of not resting on past laurels Needless to say, our this year's and treating the consumer with annual rendition simply focuses virtually a new surprise every on how our organization is time. Since inception, our foreseeing tomorrow with today's perspective. c n t e n t s Corporate Profile | 2 4 | Wealth, Scale and Value Highlights | 6 8 |Message to Shareholders Board of Directors |16 19 | Management Discussion and Analysis Corporate Information | 42 45 | Financial Highlights and Key Ratios Economic Value Added Statement |46 47 | Directors' Report Corporate Governance Report | 51 73 | FAQ's Auditors' Report |76 80 |Balance Sheet Profit & Loss Account |81 82 | Cash Flow Statement US GAAP |113 c n t e n t s Corporate Profile | 2 4 | Wealth, Scale and Value Highlights | 6 8 |Message to Shareholders Board of Directors |16 19 | Management Discussion and Analysis Corporate Information | 42 45 | Financial Highlights and Key Ratios Economic Value Added Statement |46 47 | Directors' Report Corporate Governance Report | 51 73 | FAQ's Auditors' Report |76 80 |Balance Sheet Profit & Loss Account |81 82 | Cash Flow Statement US GAAP |113 l e a d i n g t e w a y there are some roads that journey through the realms of horizon. l e a d i n g t e w a y there are some roads that journey through the realms of horizon. c o r p o r a t e r o f i l e When Hero Group of India and wheelers are sold and serviced Honda Motor Company of Japan through a network of over 2400 inked their joint venture in 1983, c u s t o m e r t o u c h p o i n t s , few could have imagined that the comprising a mix of dealers, two would go on to create history service centres and stockists and become the subject of case across rural and urban India. study at business schools, internationally. In a little over two Synergy drives Hero Honda. The decades, the world's largest two partners have been able to manufacturer of bicycles and the consistently draw on each other's global leader in automobiles have strengths. The Hero Group's deep created not only the world's single domain knowledge of the Indian largest two wheeler company but market and its supplier network also the most endearing and has combined with Honda's successful joint venture for Honda mastery over four-stroke engine Motor Company worldwide. The technology to create modern and company has sold over 15 million fuel-efficient machines at motorcycles; has consistently affordable prices for India’s middle grown at double digits since class. inception; and today, nearly every second motorcycle sold in the Hero Honda is an amalgam of country is a Hero Honda. winning relationships with internal and external stakeholders, Hero Honda has built two world- including investors, dealers, class manufacturing facilities in vendors and employees. These Haryana, at Dharuhera and relationships have helped the Gurgaon, with a combined company maintain a leadership production capacity of 3.9 million stance for the fifth year in a row. two wheelers annually. These two 2|3 c o r p o r a t e r o f i l e When Hero Group of India and wheelers are sold and serviced Honda Motor Company of Japan through a network of over 2400 inked their joint venture in 1983, c u s t o m e r t o u c h p o i n t s , few could have imagined that the comprising a mix of dealers, two would go on to create history service centres and stockists and become the subject of case across rural and urban India. study at business schools, internationally. In a little over two Synergy drives Hero Honda. The decades, the world's largest two partners have been able to manufacturer of bicycles and the consistently draw on each other's global leader in automobiles have strengths. The Hero Group's deep created not only the world's single domain knowledge of the Indian largest two wheeler company but market and its supplier network also the most endearing and has combined with Honda's successful joint venture for Honda mastery over four-stroke engine Motor Company worldwide. The technology to create modern and company has sold over 15 million fuel-efficient machines at motorcycles; has consistently affordable prices for India’s middle grown at double digits since class. inception; and today, nearly every second motorcycle sold in the Hero Honda is an amalgam of country is a Hero Honda. winning relationships with internal and external stakeholders, Hero Honda has built two world- including investors, dealers, class manufacturing facilities in vendors and employees. These Haryana, at Dharuhera and relationships have helped the Gurgaon, with a combined company maintain a leadership production capacity of 3.9 million stance for the fifth year in a row. two wheelers annually. These two 2|3 w e a l t h , s c a l e a n d v a l e Profit After Tax (Rs. in Crores) Operating Profit (Rs. in Crores) 1500 1500 1000 1000 500 500 0 0 1985- 1990- 1995- 2000- 2005- 1985- 1990- 1995- 2000- 2005- 86 91 96 01 06 86 91 96 01 06 Over the last two decades, HERO HONDA MOTORS 1985-86 1.15 1985-86 2.14 LIMITED has consistently and systematically built scale, 1990-91 15.84 1990-91 17.46 delivered value, increased 1995-96 26.34 1995-96 39.96 market reach and maximized 2000-01 246.87 2000-01 398.69 returns to its shareholders. 2005-06 971.34 2005-06 1253.38 The charts shown alongside t r a c k t h e c o m p a n y ' s Return On Average Equity (%) performance since its inception Earning Per Share* (Rs.) 22 years ago, on key financial 60 100 and non financial parameters. 80 40 60 20 40 20 In December 2005, your 0 company received the Motilal 0 1985- 1990- 1995- 2000- 2005- 1985- 1990- 1995- 2000- 2005- Oswal Wealth Creator Award for 86 91 96 01 06 86 91 96 01 06 being the most consistent wealth creator for the period 1985-86 0.08 1985-86 9.63 1991-2005. 1990-91 0.79 1990-91 76.81 1995-96 1.32 1995-96 30.70 Your company's return on core- business, which is a true 2000-01 12.36 2000-01 46.91 reflector of the returns on the 2005-06 48.64 2005-06 55.46 company's two wheeler business, has remained consistently above 100 per Average Capital Employed (Rs. in Crores) Installed Capacity (Nos.) cent. 2500 4000000 during the year, was at 72.3%. ROACE declined on account of 2000 3000000 Creating shareholder wealth 1500 investments in capital assets. 1000 2000000 continued to be our prime The company's primary mission is 500 1000000 objective during the year, the 0 to maximize value, and we 0 Earning Per Share (EPS) grew 1985- 1990- 1995- 2000- 2005- continued to create value in the 1985- 1990- 1995- 2000- 2005- 19.8% to Rs.48.64 at the end of 86 91 96 01 06 86 91 96 01 06 a r e a s o f p r o d u c t i v i t y , March 2006. Return on Average EVA & ROACE (POST-TAX) competitiveness, revenue growth Equity (ROAE), measured as 1985-86 21.21 1985-86 120000 and profitability. This resulted in 2004-05 2005-06 ratio of PAT to average equity 1990-91 68.51 1990-91 150000 higher EVA realizations ((net profits during the year, was 55.5% in EVA 564 641 + interest) - cost of capital) in (Rs. in crores) 1995-96 134.97 1995-96 240000 2005-06. Return on Average absolute terms. EVA was Rs.641 EVA 37.5 32.9 2000-01 585.07 2000-01 1200000 Capital Employed (ROACE), (% of capital crores in 2005-06 as compared to 2005-06 1945.12 2005-06 3150000 measured as a ratio of PBIT to employed) Rs.564 crores during 2004-05. average capital employed ROACE 54.0 50.0 However, EVA as a proportion of (Post tax)(%) *On reduced face value of Rs. 2 each following share split in the ratio of 5:1 and no. of shares adjusted for bonus shares for all periods. Note: Financial year 1985-86 was of 14 months from 1st May'1985 to 30th June' 1986. 4|5 w e a l t h , s c a l e a n d v a l e Profit After Tax (Rs. in Crores) Operating Profit (Rs. in Crores) 1500 1500 1000 1000 500 500 0 0 1985- 1990- 1995- 2000- 2005- 1985- 1990- 1995- 2000- 2005- 86 91 96 01 06 86 91 96 01 06 Over the last two decades, HERO HONDA MOTORS 1985-86 1.15 1985-86 2.14 LIMITED has consistently and systematically built scale, 1990-91 15.84 1990-91 17.46 delivered value, increased 1995-96 26.34 1995-96 39.96 market reach and maximized 2000-01 246.87 2000-01 398.69 returns to its shareholders.