Eicher: Riding on robust volumes

Strong market share gains in the commercial vehicle JV and high margins at Royal Enfield bode well

Buoyed by strong volumes, both from Royal Enfield as well as the commercial vehicle (CV) joint venture with Volvo, Eicher Motors reported a better-than-expected operational performance for the December 2015 quarter. While volumes for Royal Enfield were up 53 per cent, those for the CV joint venture were higher by about 34 per cent. This coupled with higher realisations (up 1.3-5 per cent) helped consolidated sales grow by 45 per cent year-on-year. Consolidated margins came in at 15.8 per cent, up 260 basis points year-on-year. The operational performance coupled with doubling of other income to Rs 31 crore helped Eicher post a 76 per cent jump in net profit to Rs 270 crore.

While volume gains in the CV business were strong, the standalone Royal Enfield business still contributes 70 per cent to the consolidated operating profits and nearly all of net profit.

What stood out was the operating profit margins of Royal Enfield, which at 28.5 per cent were up by 500 basis points year-on-year. Margins were aided both by the volume performance (operating leverage) and gains on the raw material front. Raw material as a percentage of sales fell by a steep 500 basis points to 53.9 per cent in the quarter. The gains came in despite the production loss of 11,200 motorcycles due to Chennai floods. Demand for Royal Enfield bikes continues to be strong (sales in January up 65 per cent year-on-year) with a waiting period of 3-4 months.

Given Eicher's target of being a key player in the global medium sized (250-750cc) segment, it has expanded its base in Europe and South East Asia. In the near term, however, growth is expected to come from India.

The CV joint venture saw good traction with volumes especially in the heavy duty trucks where sales spurted 55 per cent. The light and medium duty trucks (nearly two thirds of its CV sales) volumes were up 29 per cent, with buses too reporting a strong 39 per cent growth. While company has gained market share in each of its key segments (overall 130 basis points gain), the level of discounting which has been plaguing the sector for the last two years continues to be high. Though realisations were higher in the quarter, intense competition means that the company will have little leeway as far as pricing is concerned. Margins for the joint venture which are estimated at 7.6 per cent (lower than expectations) would continue to be muted.

Post the strong show, sentiments for the stock that spurted 7 per cent on Friday, could remain elevated.