After headwinds, festival sales, new launches hold key for Eicher volumes

Multiple headwinds had dented the company's September sales and a volume uptick is critical for the stock to be rerated

Eicher Motors is down nearly 35 per cent from its highs over the last month on worries of slowing sales, higher product costs, production disruption and increased competition. The key worry is the near term volume pressures. While fiscal year-to-date sales have been healthy at 13 per cent, the company recorded a growth of just 2 per cent in September.

Floods in Kerala, which is its major market accounting for 11 per cent of volumes, labour unrest, worries over higher product costs for consumers due to upfront insurance payment and weak retail demand pegged back volumes last month. A section of its workforce at its Oragadam facility near Chennai did not report for work which has resulted in the production loss of about 10,000 motorcycles in the month. 

The near-term trigger in addition to volumes in the September quarter results. The company is expected to post 11 per cent growth in revenues in the quarter while margins are expected to fall by over 100 basis points due to higher marketing and staff costs.

While the two-wheeler growth has been in single digits, what is positive is the strong commercial vehicle volumes which were up 24 per cent in the quarter. Given the high growth and full capacity utilisation, the company is looking at increasing the commercial vehicle capacity by 44 per cent at an investment of Rs 4 billion.

The company believes it is in a good position to take market share given the technology it has and the transition to BS VI emission norms by 2020. 

In the two-wheeler business, the company is betting on the start of the festival season and the launch of two new motorcycles to improve its volumes. After launching Interceptor and Continental GT, two 650cc bikes (twins) in the US market in the last week of September, the company is expected to launch these in the Indian market later in the current calendar year. Analysts led by Vivek Kumar at JM Financial say that the twins are expected to be priced under Rs 270,000 as against the earlier expectation of Rs 280,000.

The twins are likely to increase sales of Royal Enfield in higher per capita income states by providing the existing riders with an opportunity to upgrade, they add.

The other tailwind is the receding worries of a sharp increase in funding costs on motorcycle purchases. Pressures on non-banking financial companies have eased a bit though it will be crucial to tracking loan rates for two-wheelers as lenders look to pass on the higher cost of funds.

Prospective customers could postpone purchases if loan rates spike even as running costs have jumped on the back of higher petrol prices.  

What should come as a relief ahead of the festival season, however, is the option of either short or long term personal accident covers as compared to the earlier regulation of compulsory long-term covers.

With the change in rules, users/customers can opt for one year plan which comes at Rs 750 as compared to the Rs 3,000 they had to pay earlier which was 6 per cent of the average vehicle price.

Analysts at Nomura believe that this is a big relief and comes before the festive demand begins from October 10 and will be positive for the two-wheeler sector. They expect price increases to be Rs 3,500 to Rs 4,000 as compared to an initial expectation of Rs 7,000 to Rs 8,000 for both personal accident and third-party coverage.

While stock valuations are not demanding after the recent correction, the street will be keenly watching out for the sales numbers in October before resetting their volume and growth expectations.