Price hike, weak two-wheeler demand cloud outlook for Eicher Motors

After posting growth of 22% in previous quarter, volumes have been lower

The slowdown in the two-wheeler sector on the back of higher product costs, increasing competition and margin pressures took a toll on the performance of Eicher Motors in the December quarter. After posting a growth of 22 per cent in the June 2018 quarter, it’s volumes have been on the downtrend, with year to date (YTD) volumes up only 5 per cent. 

It posted a volume decline of 6 per cent in the December quarter. Siddhartha Lal, managing director and chief executive officer (CEO), Eicher Motors indicated the second half of 2018 was challenging, with increased insurance requirements, rising raw material costs, and price increases because of regulatory safety requirements impacting the sector's momentum. 

The company once again hiked prices this month, after raising them in the December quarter. The increase in product prices are on account of introduction of anti-brake locking systems, disc brakes and insurance cost. 

The combined-price effect of regulatory compliance has been around 14 per cent, and is applicable to more than 80 per cent of the product portfolio. 

The firm indicated customers may have been delaying the purchases, given the sharp increase in prices. In addition to price hikes, the lower growth rate is also on account of a higher base, with the waiting period falling significantly after the ramp-up of production. While its volume have been declining (6 per cent), the management indicated that the volume in the two-wheeler segment has falling faster at 14 per cent. 

The other worry is the rise in competition. Analysts at Emkay say the competition has increased in the cruiser motorcycles segment with the entry of Jawa motorcycles, which has provided an alternative to Royal Enfield's unique brand and offerings. Jawa has witnessed strong order bookings. Its existing production capacity is fully booked until September. Eicher, however, indicated it will be able to withstand new competition given its brand strength, distribution presence, service networks and residual value of the motorcycles. 

Though it has been hiking prices, the Street will also keep an eye on margins, which fell 270 basis points year on year to 29 per cent in the quarter. It indicated the fall in volumes, coupled with launch expenses, led to the dent in profitability. The concern for the Street would be the price hikes that need to be factored in the coming quarters, with the implementation of BS-VI vehicle emission norms in 2020.  

While the company is confident of volume growth going ahead, analysts have cut volume estimates by up to 8 per cent over the next couple of years, and factored in a cut of 200 basis points in operating profit margins. The impact is expected to be higher in FY20 and FY21, given the rise in competition and price rise due to the transition to BS-VI. 

On the commercial vehicle business, while the company has gained market share, the competition has gone up on the back of heavy discounting by peers. The company’s segment margins dipped over 200 basis points because of the discounting and adverse product mix.