Eicher better placed than peers in two-wheeler sector, stock gains

Presence in niche segment to keep earnings growth strong for Royal Enfield business

The stock of Eicher Motors, the parent company of Royal Enfield, have been an exception among major two-wheeler stocks, gaining 5 per cent, when its peers have shed 8-12 per cent over the last month. While intense competition and new launches across categories have pegged back sentiments, brokerages believe that Eicher would be able to better withstand the competitive intensity plaguing the sector.

Ashish Nigam and Ronak Sarda of Axis Capital believe that Eicher is immune to the current scenario in the sector.   

"Current pricing woes in Indian two-wheeler space makes one appreciate Royal Enfield's strong pricing power even more. Competition from Harley-Davidson or Triumph Motorcycles is still a couple of years away. Even after volume growth moderates to 15 per cent, Eicher is still a 25 per cent earnings growth story."

Analysts observe that steady growth from current stores as well as network expansion from 840 to 950 by the end of 2018-19 should help post 15 per cent plus volume growth. The other volume trigger is new launches such as the Thunderbird X and two 650cc bikes. JM Financial says there is sizeable opportunity owing to network and portfolio expansion as well as exports.

Strong volume growth in Uttar Pradesh, Bihar, Odisha, Jharkhand, Madhya Pradesh, and West Bengal, which accounts for only 25 per cent of Royal Enfield sales, shows there is scope for increasing the firm's share in these markets. Further, while its volume market share is estimated to rise form 6.4 per cent over 7 per cent by FY2020, its value share - given the rapid growth of the premium market and realisations - will increase to about 17 per cent. This, according to JM Financial, will make it the second-largest player after Hero MotoCorp in value market share. 

The worry is over Volvo Eicher Commercial Vehicle (VECV) joint venture, which could see some impact from the implementation of axle load norms. While so far there has not been much impact, management believes VECV trucks are better placed as they generate more torque and power. 

Currently, the stock is trading at 26 times its FY19 earnings, and factors in the moderation in growth rates as the high-based effect kicks in. Given the 25 per cent-odd earnings growth ahead, it could fetch good returns in a two-three year period.