Declining volume trend, muted outlook to keep Eicher stock under pressure

Higher competition and more price hikes amid muted demand are near term headwinds

The declining volume trend of Royal Enfield’s two-wheeler business for the fifth month in a row, muted outlook in the near term, and higher competition will keep Eicher Motors stock under pressure.

Volumes, down between 6 per cent and 14 per cent between November-February, fell a steep 20 per cent in March. While most brokerages had expected volumes to be in the 68,000-70,000 range, the company posted sales of 60,000 units.

The declining volume trend is unlikely to see immediate reversal, given the muted demand environment and a high base in the year-ago quarter. Analysts believe that a weak broader demand environment as well as competition from Jawa Motorcycles (Mahindra & Mahindra) will keep sales under strain.

The reason for the lukewarm performance over the past few months has been the inability of customers to absorb the price hikes. Prices for its various models have been raised by Rs 25,000 per unit, which is 15 per cent of the price. Further high-volume markets such as Kerala, where Eicher has a 30 per cent market share, are yet to recover.

Enfield has raised prices to incorporate the cost of anti-lock braking systems (ABS), which include rear disk brakes along with dual-channel ABS. Higher insurance cost is another reason for the hike in prices of the bikes, as third-party insurance has been made mandatory for five years. 

In addition, the company could increase prices further, given the Bharat Stage-VI regulations, which will require it to incorporate fuel injection. This will entail a hike of up to Rs 10,000. In addition to the price rise, if Jawa, which has received 50,000 bookings, continues to gain traction, it could cut into Enfield’s share of the market. Competitive pressures will also make it difficult for the company to take more hikes and it may have to take a hit on margins to gain or retain share. 

While the company has been launching new products such as the Twins, especially in the higher engine category, globally, analysts believe the two bikes will take time to generate meaningful volumes, given the stagnating volumes in the developed markets. 

Analysts are positive about the appointment of Vinod K Dasari, erstwhile managing director and chief executive officer (CEO) of Ashok Leyland as CEO of Eicher, given the changing fortunes of the commercial vehiclemaker. “We would await the strategy changes under the new CEO for signs of a quick turnaround before revisiting our view on Eicher Motors,” said analysts at Nomura. 

It is not surprising then that brokerages have been downgrading the stock. Aditya Makharia and Abhishek Jain of HDFC Securities believe the earnings growth will moderate to 10 per cent over the FY19-21 period after witnessing a robust growth of 46 per cent between CY12-FY18. The moderation is on account of tapering off of lifestyle segment growth, higher competition, and the fact its export initiatives will take time to make an impact. 

What will keep profitability under pressure is the higher competitive intensity for the commercial vehicle segment, led by aggressive discounting. Volume growth for commercial vehicles in March was down about 8 per cent, compared to the year-ago period.

While the stock is down 12 per cent from its monthly highs, given the uncertainties both on the demand front as well as profitability pressures for two-wheelers and commercial vehicle segments, investors should avoid exposure to the stock at current levels.