Royal Enfield braces for 'next wave of growth' as market share flags

Seeking to build the widest network of premium brands in the country, Eicher Motors expects Royal Enfield to become a complete pan-Indian brand over the next five to seven years

Siddhartha Lal, managing director and chief executive officer at Eicher Motors, is not perturbed by the recent moderation in market share of the company’s motorcycle business, nor is he ruffled by the newer players bracing up to invade the company’s core middle weight segment (between 250ccc to 700cc).

“Royal Enfield’s (RE) unique positioning as a mass premium brand will be tough for rivals to replicate in India and globally and hold it in good stead,” Lal says.

Albeit on a low base, RE’s sales advanced at a compounded annual growth rate of 46 per cent through FY13 to FY18. With the base becoming larger, the iconic motorcycle brand has seen the rate of growth taper.

SBICAP Securities points out that the company’s growth in seven mature states has dropped to 6 per cent in the first quarter of FY19 from 11 per cent and 27 per cent in FY18 and FY17, respectively. Also, after several quarters of outpacing the premium motorcycle market, Enfield has been a laggard in the last two quarters, and its market share in premium motorcycles segment declined from 31 per cent in Q3 FY18 to 26 per cent in Q1 FY19.

“We see clear signs of brand fatigue, indicated by weakening underlying demand trends and reaffirmed through extensive dealer checks,” wrote Chirag Jain and Indarpreet Singh, analysts at SBICAP in the report. They expect RE’s volume growth to slow to 12 per cent and 8 per cent in FY19 and FY20, respectively. “With growth converging with that of mass market two-wheeler peers, we believe Eicher Motors’ de-rating will continue. We reiterate sell,” they wrote.

But Lal is not getting distracted by the blips and refutes there is any brand fatigue setting in. He is preparing the maker of the Bullet brand for the “next wave of growth”, which will include tapping large states such as Rajasthan, Madhya Pradesh, Uttar Pradesh and Bihar better. It also includes launching newer models in its core middle weight segment, which in turn will help RE in widening presence in global markets. 

RE is expecting to hitch a ride on an improving per capita income in these states to improve volumes, he says.

“Our entire objective is to strengthen the core,” says Lal, adding that he doesn’t mind losing some shares if his company can play the role of a catalyst of growth in expanding the middle weight segment from the current 1 million units per annum in India to 5 million over the next 10 years. 

“Even if my market share comes down to 65 per cent from the current 90 per cent, I will be delighted. Being a catalyst of growth is our priority, and focus is on India and the world. It’s not market share, but market position,” says Lal in an interview with Business Standard. 

Over the next five to seven years, he expects RE to be a complete pan-Indian brand as it seeks to build the widest network of premium brands in the country. The company will continue to pursue its “top-down” strategy and give volumes a big push in cities such as Lucknow, Indore, Jaipur, and Patna and follow in smaller towns. Presently, it has close to 850 RE stores in 600 towns. It will expand to 200 more towns over the next five years and continue to add an average of 100 to 120 RE stores every year. 

Meanwhile, RE plans to roll out the Continental GT 650 and Interceptor, which are based on a completely new platform and engine, in phases till December this year both in India and international markets. Besides strengthening the company’s position in India, the twin models are expected “do some heavy lifting” from 2020 onwards and account for over half of RE’s export volumes over a course of time, says Lal. It will help the firm in expanding its distribution in markets including Thailand, Brazil and Argentina, where it currently has a small presence.

“With such a large base, it is not possible for Eicher to maintain the high pace growth of previous years. Monthly average sales growth over the last five-six months was 15-16 per cent, and it’s inching towards the industry growth of 10-11 per cent,” says Bharat Gianani, analyst at Sharekhan.

Others like Deepesh Rathore, co-founder and director at Emerging Market Automotive Advisory (EMAA), says one shouldn’t read much into the market share loss as, unlike previously, the base is large. “It is no longer a smaller, niche brand and sells more in India than all the rivals, including Yamaha, Triumph, Harley Davidson, and Kawasaki put together,” he says. 

Competition from bigger brands will weigh down investor sentiment, says Sharekhan’s Gianani. Encouraged by the success of RE and an under-penetrated mid-segment market, most global motorcycle makers have the middle segment on their radar. While Harley Davidson has recently announced plans of getting into the mid-segment category, Triumph Motorcycles has teamed up with Bajaj Auto, and BMW Motorrad with TVS Motor to address the market.

EMAA’s Rathore says while one cannot take competition lightly, it will be governed by the kind of models they bring and how well they will be accepted. The only chink in RE’s armour is quality, says Rathore. “They need to bridge the quality gap they have with Japanese rivals at a fast pace if they have global aspirations,” he says.