Higher competition could slow down Eicher Motors' cash cow; stock falls

Strong response to Jawa launches, muted volume growth to keep stock under pressure

The Eicher Motor stock is down about 5 per cent since its monthly highs, on worries that increasing competition and muted volume growth will dent its performance over the next few quarters. 

While the premium motorcycle segment is growing faster than the overall segment growth, new competition is expected to chip away at the company’s cash cow segment — the 350cc segment. While the company has bikes with higher capacity engines, the 350cc segment accounts for 93 per cent of the firm’s volumes and remains the mainstay for the company. 

Among its latest challengers, especially in the segment that matters for Royal Enfield, have been the two 300cc Jawa motorcycles launched by Classic Legends, a subsidiary of Mahindra & Mahindra. 

Chirag Jain of SBICAP Securities believes the strong response to the Jawa bikes within 40 days of its launch — at six months of production booked — indicates that Royal Enfield is struggling from brand fatigue rather than poor consumer sentiment, for its bikes. 

While sustenance of sales of Jawa bikes will be key, they believe that the launch, to be followed by more bikes in the future, clearly increases the challenges for Royal Enfield. 

Royal Enfield, however, continues to focus on new product launches to broadbase its portfolio and reduce dependence on the 350cc bikes segment. 

The company recently launched the 650cc twins —Interceptor and Continental GT — and would expect the bikes to add to incremental volumes. 

Amyn Pirani of Deutsche Bank believes the motorcycles may not add significantly to overall volumes but are important from a longer term business case of upgrade demand in India and export markets.

Royal Enfield will expect its new launches and market expansion to improve overall volumes that have been muted. 

 

Year-on-year volume growth in the April-November period has dipped to single digits (9 per cent). 

Its sales in November was down by 6 per cent to 65,744 units. Given that the strike is over and new launches are expected to have gained traction, the Street will be keenly watching out for an improvement in December both in the domestic as well as international markets. 

While growth should improve, it may not be anywhere close to the 46 per cent annual growth the company witnessed in the FY13-18 period. 

Analysts expect growth to be under 10 per cent over the next couple of years as compared to 23 per cent in FY18. Given the near-term headwinds, investors should await clarity on the volume growth front before considering an investment.