Eicher Motors bets on festive season, new launches to prop up sales

Multiple headwinds have dented the company's September sales

Eicher Motors’ shares are down by a fifth from their last month highs on worries of slowing sales, higher product costs, production disruption and rising competition. The key worry for the maker of Royal Enfield motorcycles is the near-term volume pressure. While fiscal year-to-date sales have been healthy at 13 per cent, the company recorded a growth of just two per cent in September. But, if Eicher can turn around the recent volume trend, investor sentiment could also revive given the drop in stock valuations.  And there is hope, say analysts.
 
Floods in Kerala, its major market (accounting for 11 per cent of volumes), labour unrest, worries over higher product costs for consumers due to upfront insurance payment and weak retail demand hit volumes last month. A section of its workforce at its Oragadam facility near Chennai did not report for work. This has resulted in production loss of about 10,000 motorcycles in the month, and a resolution with workers is still awaited.
 
In addition to volumes, the near-term events to watch include the September quarter results. Eicher is expected to post 11 per cent growth in revenues in the quarter, while margins are estimated to fall by over 100 basis points due to higher marketing and staff costs. While two-wheeler growth has been in single digits, what is positive is the strong commercial vehicle (CV) volumes which were up 24 per cent in the quarter. Given the high growth and full capacity utilisation, Eicher is looking at increasing the CV capacity by 44 per cent at an investment of Rs 4 billion. The CV business is in an equal joint venture with Volvo group. Eicher believes it is in a good position to improve market share, given the technology it has and the transition to BS VI emission norms by 2020.
 
The road ahead
 
In the two-wheeler business, Eicher is betting on the start of the festival season and the launch of two new motorcycles to improve its volumes. After launching Interceptor and Continental GT, two 650cc bikes (twins) in the US market in the last week of September, the company is expected to launch these in India later in the current calendar year.
 
Analysts led by Vivek Kumar of JM Financial said that the twins are expected to be priced under Rs 270,000 against the earlier expectation of Rs 280,000. The twins are likely to increase sales of Royal Enfield in higher per capita income states by providing the existing riders an opportunity to upgrade, they add.
 
The other tailwind is the receding worries of sharp increase in funding costs on motorcycle purchases. Pressure on non-banking financial companies has eased a bit though it will be crucial to track loan rates for two wheelers as lenders look to pass on the higher cost of funds. Prospective customers could postpone purchases if loan rates spike even as running costs have jumped on the back of higher petrol prices.
 
What should come as a relief ahead of the festival season, however, is the option of taking either short or long term personal accident covers as compared to the earlier regulation of compulsory long-term covers. With the change in rules, users/customers can opt for one-year plan, which comes at Rs 750 as compared to the Rs 3,000 (or 6 per cent of the average vehicle price) they had to pay earlier for longer-term covers. Analysts at Nomura believe that this is a big relief and comes before the festive demand begins from October 10 and will be a positive for the two-wheeler segment. They expect price increases to be Rs 3,500 to Rs 4,000 as compared to initial the expectation of Rs 7,000 to Rs 8,000 for both personal accident and third party coverage.
 
Meanwhile, the Street will be keenly watching the sales data of October before resetting its volume and growth expectations.