The Rs 35-crore transaction may take about four months to come through, but the two companies are expected to begin discussions in the coming weeks for the transfer of technology to Kinetic's planned four-stroke scooter.

Kinetic Engineering chairman and managing director Arun Firodia said the first model would roll out of the Pithampur plant by 2000, after which the firm would unveil a new product a year.

Officials in the office of Kinetic Honda Motor managing director H Tanaka referred all queries to Honda headquarters in Japan, but admitted that this may be the first instance where a minority partner is buying out Honda.

The deal involves the sale of Honda's 50.92 per cent,amounting to 77 lakh shares, at Rs 45 a share for Rs 35 crore, taking Kinetic Engineering's stake from its current 20 per cent, including the 1.02 per cent held by friends and relatives, to over 70 per cent.

A relaxed and smiling Firodia said the Rs 35-crore payout would not pose a problem to either Kinetic Honda or Kinetic Engineering, since the two firms together would be able to raise up to Rs 70 crore with ease. He pointed to Kinetic Honda's net worth of Rs 43.4 crore, as on September 1, its total long-term borrowings of Rs 20 crore and nil short-term borrowings. If it were to have a equity debt ratio of 1:1.5 (from its current 1:0.5), it can borrow a total of Rs 60 crore. Of which, it has already raised Rs 20 crore, which means that it can raise another Rs 40 crore. Long-term borrowings of Rs 40 crore will increase the firm's interest costs by Rs 3 crore a year.

Kinetic Engineering is expected to call an extraordinary general meeting of its shareholders on October 3 to seek an approval to raise thefirm's stake in Kinetic Honda as also to increase its investment ceiling--subject to the centre and the Reserve Bank clearances. Kinetic Engineering has a surplus of Rs 80 crore.

Firodia admitted that the balance sheet has been "cleaned up" in the first five months of the current fiscal. High inventories of raw materials and finished goods as also backlog of dues from dealers have been cleared. The dual effort has yielded Rs 43 crore, bringing down Kinetic Honda's borrowings from Rs 63 crore, as on March 31, 1998, to Rs 20 crore on September 1. On an annualised basis, this will lead to a savings of Rs 7 crore in interest costs, alone. Compounded with prudent financial management and cutting overhead costs, Kinetic Honda will be able to save costs to the tune of a few crores.

Firodia said R&D expenditure would go up from the current level of 0.19 per cent of turnover to 1 per cent by 2000, while its ad spend would also rise dramatically to Rs 10 crore in the current year. Annually, this would go up by Rs10 crore, peaking at Rs 30 crore in two years.

Firodia denied that Kinetic Honda, under the new management, will reduce the price of its existing products. However, future products, aimed at the premium segment but not "the premium, premium" range, could be priced lower, since they will incorporate lower costing at the design stage.

Kinetic Honda's current product range has an import content of 20 per cent, comprising raw-material costs. This is expected to continue. The Pithampur plant, with an installed capacity of 1.75 lakh scooters per annum, produces 10,000 scooters a month. Firodia said this would go up to 16,000 a month in two years time, when the major scooter market in the country, the north, would be targeted.

Kinetic Honda scooters have a 2 per cent share in the northern market, amounting to 2,000 scooters. Efforts to push the figure to 16,000 a year in the next two years will be made. Among the first measures to be adopted will be an `exchange mela'. Other features will include increasingsales targets for dealers to 800 a month. Kinetic Honda has 200 dealers in the north, which is unlikely to be increased.

While the joint venture will be dissolved, Honda will continue to supply technology. Since there will be no financial risk for them, Firodia said the decision-making process would be faster. Moreover, Honda will sell scooters manufactured in Kinetic Honda under the `Honda' name in all overseas markets.

New name after approval

The name of the company will change once approvals are in place. Firodia ruled out `Kinetic Scooters' since this would limit the manufacturer. One name, which could curry favour, could be Kinetic Hind Motor. Apart from the obvious `swadeshi' image, which Firodia is very keen on, it helps the company retain its acronym: KHML.