Eicher Motors may underperform auto peers in the near term

Response to new model below expectations, higher prices may dent volumes

After gaining 11.5 per cent since the start of September, the Eicher Motors stock slipped a bit over the last couple of trading sessions after brokerage downgrades, lower than expected volume performance and higher valuations. The key concern is the slow offtake of its new launch--the 2021 Classic 350 motorcycle which was introduced on September 1.

Amit Mishra and Udaykiran Paluri of Antique Stock Broking, who downgraded the stock, say that their checks with the company’s dealers on customer response to the new model have been below expectations. The Classic 350 is by far the single largest volume driver for Eicher’s two wheeler unit, Royal Enfield (RE) accounting for about two thirds of its sales. Given that volumes of Classic 350 have fallen by a third in the domestic market over the last three years, Mishra and Paluri of Antique highlight that it is critical for the brand to return to a high growth path on a sustainable basis.

The other worry given the increase in prices of its motorcycles as well as the price of the new model is RE brands eating into each other’s market and dent overall volumes. Say analysts at Nomura Research, “The price (and specification) differentiation between Meteor 350 and Classic 350 has reduced even further, which may lead to market cannibalization.”  

The company’s two-wheeler volume graph is another source of concern. Year-to-date in FY22, RE has sold 213,000 motorcycles with a monthly volume run rate of 43,000 units. This is below Nomura’s average estimates of 60,000 units for the full year. Further, the price of Classic 350 has increased Rs 9,000 since December last year which is much higher than the Rs 5,000 increase by competition; this may impact demand/volumes. Supply chain disruptions especially due to semiconductor shortage could dent volumes in the current (September) quarter though the situation is expected to improve in the second half of FY22.

The positive on the new launch front is the good response to Meteor 350 (November 2020) and new Himalayan (launched in February this year). Both brands enjoy a waiting period of over two months. New model launches in various segments over the next couple of quarters and the response to it could have a bearing on volumes going ahead.

While international sales are barely a tenth of revenues, the company which has received a good global response to 650 twins and the Himalayan, has a target of doubling international contribution to 20 per cent of sales. This should help diversify the revenue basket and increase volumes.

Given the downside risks and valuations which are at 27 times its FY23 earnings estimates, Eicher could underperform peers in the near term. Investors should await volume recovery trends before considering the stock.