Figures for the last year may speak of declining two-wheeler sales, but Pawan Munjal, managing director of Hero Honda, India's largest manufacturer of motorcycles, believes that the current downturn is but a temporary blip which would reverse as soon as inflation is under control.

His comments assume significance amidst speculation that Hero Honda may have over-reached by opening a new factory at Haridwar which will have the capacity to manufacture 1.5 million motorcycles annually by 2010.

The company, which runs two plants near New Delhi, said it spent Rs.450 crore  ($113 million) on the latest facility. Many analysts feel that this is a case of overcapacity, especially when sales of motorcycles and scooters in India declined 8.6 percent in the 11 months through February.

However, Munjal feels that the situation will soon improve and cited his company's favourable results in March this year, when sales figures registered an impressive 15 per cent growth year to year. He said that the company plans to invest an additional Rs.250 crore in the plant before the end of this year. (See: Hero Honda reports 15 per cent increase in March sale)

An advantage of the new plant, which would reap immediate benefits for Hero Honda, is its location in a tax-free zone. The company can shift some existing production to the new plant and save on taxes. This is a strategy already adopted by its rivals Bajaj Auto and TVS Motors. Hero Honda will be entitled to excise and income tax rebates for 10 years.

Hero Honda will maximize output at the new plant and get 60 per cent of components supplied from near the factory to avail of the tax benefits, Munjal said in Haridwar today. The tax breaks will help to boost profitability, he added.

Hero Honda expects to maintain sales growth this year, Munjal said, adding that financing of vehicles is the ''biggest problem.''

The company will make the Splendor Plus and the Passion Plus models of motorcycles at the Haridwar plant. It introduced six new or revamped models in the last fiscal year.

Shares of Hero Honda closed 1.35 per cent down at Rs.740.00 on the Bombay Stock Exchange today, even as the benchmark Sensex fell 169 points. The shares have gained 6.4 per cent so far this year, compared with 23 per cent decline in the Sensex.