The Royal show continues

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

Eicher Motors stock was up 3.2% on the back of 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 joint venture with Volvo. While consolidated sales grew 14% year on year to Rs 1,683 crore, Ebidta (Royal Enfield contributes 70% of consolidated Ebitda) was up 41% to Rs 157 crore. Adjusted profit after tax was at Rs 86 crore up 33%.

While the motorcycle sector growth has been flattish, the company has sold 60% more bikes in the September quarter as against the year ago quarter. Though the commercial vehicle venture is expected to struggle on the volume front given large discounting and poor demand, given annual production targets of 1.75 lakh and 2.5 lakh for CY13 and CY14 respectively expect motorcycles volumes to grow by 54% in CY13 and 43% 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-Rs 4 lakh bracket. The company has also lined up a new range of above 5 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 company 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.

Two wheelers outperform

The outperformance by the motorcycle segment has been the key highlight with volumes growing at 61% year on year. Volume growth over the last five quarters have been in the 45-60% range. Higher volumes which helped improve operating leverage as well as better product mix (more sales of its 500 cc bikes) as well lower costs helped the Royal Enfield division to record its highest Ebidta margin at 19.3%. This is over 420 bps more than the year ago margin number and 150 bps over the June quarter. Given the 6-month waiting period for its bikes, the company is focussing on ramping up its production at the Oragandam plant in Tamil Nadu.

Commercial vehicles resilient

While its motorcycles sales continue to be strong, commercial vehicle sales have been severely impacted by a slowing economy and drying up of demand. Though volumes fell by 13% year on year for the September quarter, the company managed to keep revenue growth in the positive territory up 1.3%. This was due to the rise in average selling prices which were up 16% year on year on the back of imported Volvo trucks as well as ramp up in the company's medium duty engine project.