Eicher Motors: The Royal Enfield show continues

Motorcycle sales once again cushion the impact of weak commercial vehicle performance

Eicher Motors stock gained about six per cent in three sessions after announcing better than expected performance from its Royal Enfield motorcycle division. The performance helped offset some of the volume concerns for the company's commercial vehicle (CV) joint venture with Volvo. While consolidated sales grew 14 per cent year-on-year to Rs 1,683 crore, Ebitda (Royal Enfield contributes 70 per cent of consolidated Ebitda) was up 41 per cent to Rs 157 crore. Adjusted profit after tax (excluding one-off items) was at Rs 86 crore up 33 per cent.

While the motorcycle sector growth has been flattish, the company has sold 60 per cent more bikes in the September quarter, against the year-ago quarter. Though the commercial vehicle venture is expected to struggle on the volume front given large discounting and poor demand, considering the annual production targets of 175,000 and 250,000 for CY13 and CY14, respectively, expect motorcycles volumes to grow by 54 per cent in CY13 and 43 per cent in CY14.   

On the new product front, the company is planning to launch its Continental GT motorcycle in India at the end of November. The company launched the bike globally (US, UK and Europe) in the September quarter and has been priced at $6,000 or in the Rs 3.6-4 lakh bracket. The company has also lined up a new range of above five-tonne trucks and buses going ahead.  

Given the strong margins of its motorcycles business and prospects going ahead, most analysts have a buy on the stock with a target price in the range of Rs 4,200 to Rs 4,400.

In additions to motorcycles, the key trigger for the company is the increased outsourcing of engines by the Volvo group from the joint venture's medium duty engine project. Macquarie analysts have an outperformer rating with a target of Rs 4,320 due to its multiple levers of growth – fast growth in leisure bikes, an expanding CV portfolio and the production ramp-up in the engine business. The recent run-up in the stock means near-term upsides are limited from the current levels of Rs 4,205. Hence, a correction could be a good entry point.

Two-wheelers outperform
The outperformance by the motorcycle segment has been the key highlight with volumes growing at 61 per cent year-on-year. Volume growth over the last five quarters has been in the 45-60 per cent range. Higher volumes (which helped improve operating leverage), better product mix (more sales of its 500 cc bikes) and lower costs helped the Royal Enfield division (motorcycles) to record its highest Ebitda margin at 19.3 per cent. This is over 420 basis points more than the year-ago margin number and 150 basis points over the June quarter. Given the six-month waiting period for its bikes, the company is focussing on ramping up its production at the Oragadam plant in Tamil Nadu.

Commercial vehicles resilient
In contrast, CV sales have been severely impacted by a slowing economy and drying of demand. Though volumes fell by 13 per cent year-on-year for the September quarter, the company managed to keep revenue growth in the positive territory, up 1.3 per cent. This was due to the rise in average selling prices, which were up 16 per cent year-on-year on the back of imported Volvo trucks, as well as ramp-up in the company's medium duty engine project.