Eicher: Near term margin pressures, volume key metrics to keep track of

Product pipeline, network expansion should help tap the uptick in recovery

The September quarter (Q2) performance of Eicher Motors was a tad ahead of expectations, led by the recovery in volumes at its two-wheeler (Royal Enfield) and commercial vehicle (CV) unit. 

Following a 67 per cent decline in revenues in the June quarter, there was a sequential improvement, with the top line declining by 3 per cent in Q2.

While volumes for Royal Enfield were down 9 per cent year-on-year (YoY), the management indicated there was a relatively faster recovery in demand in the two-wheeler segment. 

This was aided by the opening up of tier-1 cities and metros. The company said bookings were better than last year and that the company had a backlog of 125,000 motorcycles, with a waiting period of a month. 

While there were supply constraints earlier, the company is ramping up production and the same has returned to pre-Covid levels. It also expanded its network across formats in Indian and international markets in the quarter, which should support sales as urban markets recover. 

The decline in two-wheeler volumes and transition to BS-VI led to a 260-basis-point (bp) impact on operating profit margins, which came in at 22.1 per cent. Realisations, however, were higher on a sequential basis thanks to price rise undertaken in September, and a better product mix.

The company is banking on new product launches to drive sales hereon. It launched the Meteor 350 bike this month — which received a strong response — and has a target of launching a new model every quarter. 

Its CV portfolio saw a 28 per cent decline in volumes owing to the weak demand, though it outperformed the sector that was down 46 per cent during the quarter. The company expects traction in the December quarter, as demand improves across key user segments. Operating profit was higher YoY, led by cost-reduction measures. 

Though margins were lower at both units, it hopes that better operating leverage in the December quarter, coupled with price hikes, lead to an improvement. The key concern is the rise in commodity costs, especially precious metals, which is being offset by keeping cost-control efforts. 

While the performance in the quarter, amid multiple challenges, has been steady and product pipeline remains strong, near-term margins pressures and volume trajectory will be key metrics to keep track of.