Eicher Motors: Riders in the storm

While its two-wheeler biz continues to post 45% plus volume growth, commercial vehicles have held steady under pressure

Eicher Motors’ stock spurted four per cent after the company reported results that were ahead of expectations for the June quarter, largely driven by its Royal Enfield two-wheeler business which continues to buck the slowdown.

Volvo Eicher Commercial Vehicles (VECV), the 50:50 venture of Eicher and A B Volvo, also managed to improve its financials despite the commercial vehicle (CV) segment being the hardest hit in the slowdown. At a consolidated level, the company posted a 5.4 per cent year-on-year (y-o-y) sales growth at Rs 1,669 crore, compared to analysts’ estimates of three per cent growth. Eicher’s Ebitda grew 13.1 per cent to Rs 136 crore, again higher than expectations, resulting in margins improving 120 basis points (bps) to 10 per cent. Net profit growth was up at 21 per cent to Rs 92 crore against estimates of Rs 81 crore.

While the slowdown plagues its CV venture, the company continues to have good traction in the two-wheeler business. Growth is likely to come from the current product portfolio, expanded distribution network as well as Continental GT model, to be launched globally in September.

In the CV venture, the firm has been able to improve its realisations. VECV will continue to invest in rolling out new products (in the over-five-tonne category) and has lined up investments of Rs 1,200 crore over a two-year period.

At the current price of Rs 3,319, the stock is trading at 21 times its 2013 (calendar year or CY) estimates. Given the strong showing in the two-wheeler business and growth prospects  and improving margins in the consolidated business, most analysts have a ‘buy’ on the stock with a target price of Rs 3,600 to Rs 4,200.

Two-wheeler push
Revenues at the standalone level (Royal Enfield) came in ahead of expectations with sales at Rs 381 crore, a growth of 50 per cent over Rs 255 crore in the year-ago quarter, largely led by volume growth of 45 per cent. Ebitda margins, too, expanded from 15.3 per cent to 17.8 per cent, a jump of 250 bps, much higher than analyst expectations which pegged the margin improvement at 140-150 bps.

With the company being able to scale output and demand remaining consistently strong, operating leverage kicked in, helping the company record its highest Ebitda margins.

With the gradual scaling of its new Oragadam plant in Tamil Nadu, the company, which achieved sales volumes of 113,000 in CY12, hopes to manufacture 175,000 bikes in CY13 and 250,000 bikes in CY14.

Analysts expect the company to record a y-o-y growth of 55 per cent in CY13. While the order book remains strong, the company has been able to bring down the six-to-nine month waiting period for its bikes, aided by new capacity.

VECV: Performing well
The CV venture saw an improvement in gross margins at 28.4 per cent against 27.4 per cent a year ago. The management attributed this to a better product mix and price rise in the March quarter. While a majority of its competitors are offering large discounts, the management indicated it had been careful in this regard, with a few discounts helping the business report higher realisations.

Net realisations for the VECV business improved five per cent to Rs 11.5 lakh per unit. The management has indicated plans for introduction of new models in the heavy-duty segment and scaling of its medium-duty diesel engine capacity.

The Street will be eyeing progress on this, given the engine plant will be one of the sourcing hubs for AB Volvo.