Growth focus likely to keep margins under pressure for Eicher Motors

Eicher Motors posts strong Q3FY26 growth led by Royal Enfield volumes, but sustaining margins may be challenging amid commodity inflation and capacity expansion

Eicher Motors posted a strong Q3FY26, with consolidated revenue growing 22.9 per cent year-on-year (Y-o-Y) at ₹6,110 crore. Its two wheeler segment (Royal Enfield- RE) volume grew at 21 per cent Y-o-Y and 0.9 per cent quarter-on-quarter (Q-o-Q) to 329,000 units, with average selling price (ASP) at around ₹181,800 per unit, which was up 0.9 per cent Y-o-Y and 0.6 per cent Q-o-Q.

 

Gross margins contracted 65 basis points Y-o-Y, but were up 72 basis points Q-o-Q to 44.4 per cent, with about 100 basis points impact from onboard diagnostics second phase (OBD-2B) compliance, and 70 basis points impact attributable to commodity inflation. This was partly offset by better mix, benefits of value-engineering initiatives and price hikes.

 

The robust domestic volume growth for RE in FY26 has been a function of GST rate cuts, but demand may now normalise after an initial surge. While the market response to the results is positive, the margins may be hard to sustain, given a focus on volume growth. A slowdown in growth or a possible drop in margins could affect valuations adversely.

 

RE’s domestic demand was also boosted by festive sentiment, and tight channel inventories, with volumes led by the 350cc segment. In contrast, the higher than 350cc segment saw near-term disruption following the GST change. The 650cc platforms are normalising faster than 450cc, aided by recent launches. In VECV, revenue growth was driven by light and medium duty truck segment and heavy commercial vehicles, reflecting replacement-led buying and infrastructure execution, but bus volumes softened.

 

Management approved ₹950 crore brownfield expansion at the Cheyyar (Tamil Nadu) facility to scale annual capacity to 2 million units from 1.4 million by FY28. The investment is demand-led, with a focus on 350cc. Debottlenecking is underway, with capacity set to rise to 1.45 million units soon. India will continue as the primary manufacturing hub.

 

Gross margins declined Y-o-Y to 44.4 per cent (down -65 basis points Y-o-Y and up 72 basis points Q-o-Q). While there was commodity inflation, it was partly mitigated by value-engineering. There were price hikes in April and July last year along with a small hike in January this year.

 

Royal Enfield volumes grew 21 per cent Y-o-Y in Q3FY26, driven by strong festive demand, improving enquiry trends and higher conversion rates. Domestic volumes rose 24 per cent Y-o-Y. The company retained its dominant 89 per cent market share in the mid-size segment.

 

VECV delivered its best-ever Q3 volumes at 26,086 units (up 24 per cent Y-o-Y). Operating profit margin improved to 9.5 per cent vs 9.2 per cent Y-o-Y. Exports rose 72.5 per cent Y-o-Y, led by the Middle East, Bangladesh and Nepal. The company retained its top position in LMD trucks with 35 per cent market share. The parts business posted double-digit Y-o-Y growth.

 

Management expects demand momentum across both businesses in Q4FY26, supported by strong enquiries, with production running at high utilisation levels. The premium motorcycle segment is expected to grow by high single-digits in FY27, with RE to outperform. In exports, recovery remains market-specific, with Brazil a key growth driver, while developed markets are witnessing challenges from tariff negotiations. The medium-term CV outlook is constructive.

 

Assuming 13-14 per cent earnings growth per annum, valuation is at around 32 times FY27 estimates. Upside may come from successful new launches or higher-than-expected growth in exports. An increase in competitive intensity could impact the monopolistic market share of RE. Margins may come under pressure as Eicher plays the volume game.