Eicher Motors: Enfield rides demand wave

Two-wheeler segment registers record margins but higher discounting continues to hamper commercial vehicles arm's performance

For yet another quarter, Eicher Motors reported a robust growth in revenues and profits led by a strong show at its standalone entity, Royal Enfield (RE). Volumes for the motorcycle maker were up 45 per cent, which helped revenues for Royal Enfield move up 51 per cent year-on-year (y-o-y) to Rs 961 crore. Higher volumes boosted operating profit, which grew 71 per cent y-o-y to Rs 251 crore for the quarter.

Margins were up 297 basis points to a record 26.1 per cent, the highest for any two-wheeler maker. In addition to operating leverage, better rates from suppliers as well as price hikes helped improve the company’s realisations and margins. The operating numbers would have been better but for the sharp rise in other expenses, which spurted 73 per cent to Rs 111 crore due to higher freight costs, rentals and promotional expenses. Net profit at Rs 213 crore was up 33 per cent y-o-y pegged back by a 23 per cent fall in other income and a 40 per cent rise in taxes.

On the demand front, the management indicated that the order book for Royal Enfield bikes continues to be strong with an average waiting period of five months despite an increase in production capacity over the past year. While the company has indicated it is working on two new platforms with new products in the 250-750cc category, a new product launch is only likely in CY2016. While volume growth in CY2014 was 70 per cent, analysts expect volume growth to be at about 45 per cent in CY2015. Currently, about 85 per cent of the valuations for Eicher Motors is attributed to the standalone entity with analysts expecting the margins to further move up in the 25-30 per cent band.

Volvo Eicher Commercial Vehicles (VECV), a 50:50 joint venture between Eicher and Volvo, is benefiting from the revival in the medium and heavy commercial vehicle sales. VECV sales were up 10.4 per cent to 11,020 units. Although volumes are up, realisations and margins continue to be flattish owing to heavy discounting and product mix being in favour of heavy-duty trucks (16 tonnes and above), whose sales were up 29 per cent. However, the firm is losing market share in this segment as the sector is growing at a much faster pace, and discounting is the highest in this category. Sales in the light and medium category (5-14 tonnes) were flattish. The company has indicated that with the GST rollout, given its line-up sales of the company’s heavy-duty trucks (as well as the sector) will be strong. The company, however, is a small player in the overall commercial vehicle space with a market share under five per cent.

Given the strong performance of Eicher, most analysts continue to have a ‘buy’ rating for the stock, which rose nearly seven per cent on Friday to close at Rs 15,789 a share.