Eicher Motors: Dream run set to continue

Analysts expect Royal Enfield to become a million-unit franchise; earnings estimate for 2015 upgraded

The past few years might have been painful for automakers in India, with demand plummeting. However, the past three years have been nothing less than a dream run for Eicher Motors. The company's shares have risen 638 per cent over three years and 105 per cent in the past six months. While other two-wheeler makers are struggling with single-digit growth, Royal Enfield (the company's two-wheeler offering) has seen a year-on-year volume growth of 85 per cent (138,000 units) in the first six months of 2014. Clearly, the leisure biking segment is insulated from the slowdown plaguing the broader auto market.

There is an order backlog of five months, claim analysts, despite increase in supplies. Analysts and investors particularly like companies that can give a demand visibility and Eicher gives them just that.

Not only is the company going great guns in the domestic market, it is targeting new markets, too. Eicher has conveyed to analysts that it is increasing capacity in 2014 and 2015. Annually, production volumes should exceed 300,000 units in 2014 and 400,000 units in 2015. Edelweiss Capital believes Royal Enfield can be a one-million volume franchise and deliver 30 per cent plus margins. Given the capacity ramp-up in Royal Enfield, Edelweiss Securities has upgraded its two-wheeler volume estimate by six per cent/two per cent for CY14/15 to 309,000/460,000 units and margins by 90 basis points to 23.9 per cent/26.8 per cent. Reliance Securities expects the two-wheeler segment to witness strong volume growth of 54 per cent over CY2013-2015. Also, the brokerage says the company is planning to enter the Colombian market next year to push exports.

While Eicher's commercial vehicle segment has seen a volumes decline of seven per cent between January and July compared to last year, analysts expect a revival in this segment from 2015. Analysts have upgraded earnings estimate for calendar 2015 by 7-10 per cent, as both the two-wheeler and commercial vehicle business are set to perform. Edelweiss Securities has revised the target price to Rs 10,902 from Rs 10,367 earlier on a 'sum of the parts'-based valuation of 16 times price/earnings for the commercial vehicle segment and 25 times for the two-wheeler segment.