Enfield leads the way for Eicher

While CV business languishes with subdued demand, motorcycle biz sees another record quarter of operational performance

Aided by another impressive performance from its motorcycle business segment, Eicher Motors reported better than expected results for the quarter ended December.

Sales for the consolidated entity, comprising commercial vehicles (CV) and two-wheelers, registered a 1.6 per cent year-on-year growth. This was largely due to the 78 per cent increase in revenue of the standalone business, housing the Royal Enfield brand of motorcycles. Consolidated margins were higher at 9.9 per cent as compared to 7.1 per cent in the year-before quarter. The improvement can be attributed to the record 20 per cent margin for the standalone business, although gains in CV also helped.

The improved operating performance helped net profit grow 32 per cent to Rs 96 crore, despite the 44 per cent fall in other income for the December quarter. Overall, while revenues were in line with analyst expectations, margins and net profit came ahead of expectations. The Street gave a thumbs-up to the performance, pushing the stock up by 9.2 per cent in trade on Thursday. Though CV contributes 64 per cent of revenue, it is the higher margins of the two-wheeler business which drives operational performance, contributing to 75 per cent of consolidated operating profits. Analysts believe the motorcycle business will continue to be the mainstay of the company’s performance. Ashvin Shetty of Ambit Capital believes the buy call on the company is largely due to the positive outlook on the volumes and margins for the Royal Enfield business. At Rs 4,825, the stock is trading at 16 times its CY15 estimates, with most analysts having a buy on the scrip, with the target price of Rs 5,100. Given the sharp run-up, investors could look at corrections to buy the stock.

CV a drag but improving
Compared to the good show by motorcycles, the CV segment which falls under the joint venture, Volvo Eicher Commercial Vehicles (VECV), continues to be a drag. Volumes for CV were down 30 per cent over a year, leading to a revenue fall by 15 per cent to Rs 1,152 crore in this segment. Despite this, realisations improved 22 per cent, helping the company improve VECV margins by 130 basis points (bps) over a year, to 4.9 per cent. The improvement was largely due to the ramping-up of its Medium Duty Engine Project business, whereby the company exports engines to the global operations of Volvo. Prospects of CV business are not expected to improve soon, given the slowing in the domestic economy.

Enfield racing ahead
The company’s two-wheeler segment saw volumes rise 72 per cent in the quarter; for CY13, the rise was 57 per cent. In addition to the highest ever volume, the company benefited from operating leverage and a richer product mix, which helped the standalone Ebitda (earnings before interest, taxes, depreciation and amortisation) margins reach 20 per cent for the first time. The margins were higher by 850 bps on a year-on-year basis and 70 bps sequentially.

The management has indicated the margins for Royal Enfield could see improvement, with the addition of capacities and high demand. With most bikes continuing to have an average of a three-month waiting period, the company has strong pricing power, believe analysts. A dominant player in the 250cc and above category of motorcycles, it is investing Rs 600 crore over the next two years in ramping up production and product development in the Royal Enfield business. Given the waiting period, it has raised its production estimate from 250,000 to 280,000 for CY14.