Eicher: Volumes rev up margins yet again

Operating profit margins expanded to the highest levels ever in the March quarter

In an industry where volumes matter the most, the rest tend to follow. Going by the March quarter numbers, Eicher Motors seems to be perfecting this art better than peers such as Bajaj Auto and TVS Motor Company. Led by strong sales growth in its Royal Enfield offering and commercial vehicles in the March quarter, consolidated revenues at Rs 3,765 crore shot up 47 per cent year-on-year. While this was a bit less than Bloomberg estimates of Rs 3,871 crore, analysts aren't perturbed as operating profit margins have improved again in the quarter.

From a year-ago level of 14.2 per cent, consolidated operating margin has risen to 17 per cent in the March quarter even as cost of goods sold (raw materials, purchased goods, inventories consumed) climbed up by 46 per cent year-on-year in line with revenue growth. Strong volume growth of over 57 per cent (operating leverage) has helped Eicher boost its margins; expenses other than raw material grew at a much slower pace.

On a stand-alone basis, which reflects the Royal Enfield performance, the story only strengthens with the March quarter revenues at Rs 1,545 crore, up 61 per cent year-on-year. Likewise, its net profit jumped 55 per cent to Rs 359 crore. While vehicles with up to 350cc engine continue to lead volumes (63 per cent year-on-year growth in the quarter), higher capacity motorbikes (over 350cc) have also posted a robust 31 per cent year-on-year growth, aiding margins for the Royal Enfield franchise to grow from 26 per cent a year ago to 30 per cent in the March quarter.

With margins becoming stronger every quarter, Jinesh Gandhi of Motital Oswal Securities says Eicher not meeting the Street's revenue estimates is not a worry. "Royal Enfield has done better than expected, though commercial vehicles have marginally disappointed. But, overall it is definitely a good quarter," he says. Commercial vehicles gaining market share by 100 basis points (bps) to 4.4 per cent and buses by 230 bps to 16 per cent in the March quarter also arrests concerns of earnings disappointment.

As a result, consolidated net profit was up 71 per cent year-on-year to Rs 335 crore in the quarter, almost in line with estimates of Rs 339 crore.

As input costs such as steel and aluminium stabilise, it needs to be seen if operating margins can be maintained at these levels. Gandhi points out that while raw material costs may go up, increasing operating leverage may put a check on costs, helping margins sustain at current levels. Also, as other expenses (mainly marketing costs) begin to moderate, maintaining margins should not be a trouble for Eicher.