Eicher Motors may see a smooth ride on easing competition concern

Eicher has sharply underperformed the Nifty50 index over the past one year with a return of -1.2 per cent while the benchmark is up 15.6 per cent during this period

The stock of Eicher Motors was the biggest Nifty50 gainer on Tuesday, up nearly 2.6 per cent to Rs 3,472 per share, on positive brokerage recommendations. 

The automotive company’s stock has underperformed sharply vis à vis the benchmark Nifty50 index over the past one year, with a return of -1.2 per cent, while the benchmark is up 15.6 per cent during the same period. Even though the stock has been lagging the market on worries that heightened competition will eat into its dominant position, some brokerages believe that issues on that front have eased. 

Nitij Mangal and Sagar Sahu of Jefferies India say that the launch of the new Harley and Triumph bikes has had a decent start (they have received 20,000-26,000 bookings since the launch in early July). However, search trends for new competing models are moderating after the initial launch excitement and channel checks also suggest that Royal Enfield has not seen any significant impact so far. 

Royal Enfield, which has sold 69,000 units per month in the April to August 2023 period, dominates the mid-segment (250cc-800cc) market with a share of 90 per cent. The segment accounts for annual volumes of 800,000 units and is expected to hit the 1-million mark by financial year 2025-26 (FY26). 
 

The company recently launched the new Royal Enfield Bullet 350 and has received a good response. A market expansion is expected due to multiple entrants and the company seeks to launch more products that will fill the gaps in its portfolios and tap adjacent segments. Brokerages expect the segment to grow at 10 per cent annually and Eicher Motors is looking to outperform the same with its portfolio and new models.

Jefferies India highlights that Eicher Motors has strong tailwinds of two-wheeler demand recovery, industry premiumisation and its potential to grow exports. While the company pushed down the pecking order earlier due to rising competition, the risk to Royal Enfield’s market share is now alleviating, say analysts. Jefferies has a ‘Buy’ rating on the stock with a target price of Rs 4,150 a share. 

Some brokerages, however, believe that in a crowded field, the company could face multiple challenges. Vivek Kumar and Ronak Mehta of JM Financial Research highlight that though the new entrants (8 now as compared to 4 in 2019) may help expand the segment, calculations suggest a volume growth and market share moderation for Royal Enfield. 

In addition to the moderation of Royal Enfield’s growth and market share, the analysts point out that pricing of upcoming launches can potentially impact mix and margin. JM Financial Research has a ‘Hold’ rating on the stock with a target price of Rs 3,450 per share. This comprises Royal Enfield’s valuation at 22 times price-to-earnings while its commercial vehicle arm Volvo Eicher Commercial Vehicles is pegged at 12 times enterprise value to operating profit.