Volume over margins may weigh on automotive firm Eicher Motors earnings

The volume uptick was led by product interventions at attractive price points and brand activation and marketing efforts

Leading automotive firm Eicher Motors delivered a better-than-expected performance in the March quarter, driven by robust revenue growth. Despite strong volumes, the company fell short on the margin front. 

With ongoing investments in new product development and elevated marketing expenses, margins are likely to remain under pressure in the near term. As a result, earnings estimates have been revised downwards in view of profitability concerns. 

Given the stock’s 15 per cent gain over the past three months and its premium valuations, most brokerages remain cautious about its near-term prospects. 

In Q4, while standalone revenues came in below estimates, consolidated revenues reached an all-time high, surging 23 per cent year-on-year (Y-o-Y), thanks to a strong uptick in volumes. Volume growth, which stood at 24 per cent, was primarily led by Royal Enfield, the two-wheeler division. 

However, realisations per unit were slightly lower. The increase in volumes was supported by product interventions at competitive price points, along with sustained brand activation and marketing initiatives. 

The company launched six motorcycles in FY25 and unveiled two electric motorcycles (C6 and S6), which will be introduced in Q1 of 2026. 

It has also planned more launches and product refreshes in FY26 and hiked prices by up to 1.5 per cent on select models 

last month. 

Rural demand remains healthy, while urban demand has started recovering from April. 

Led by the ongoing premiumisation trend, slew of launches, and continued marketing efforts, the company expects strong demand growth in FY26. 

Its Q4 margins came in at 24.7 per cent, down 290 basis points Y-o-Y, as compared to Street expectations in excess of 25.5 per cent. The pressure on profitability was on account of adverse model mix, a surge in input costs, and provision for clearing old stock. 

“Despite all-time high volume in Q4FY25 for Royal Enfield, operating profit per vehicle slumped to an eight-quarter low of ₹44,581 and gross profit per vehicle was at the lowest in the past seven quarters. Also, the so-called one-off expense in Q3 did not provide any relief to the margins on a sequential basis,” analyst Jay Kale of Elara Securities said. 

The company has commanded a premium multiple versus other two-wheeler players, owing to its pricing power and ability to outgrow the industry, both on volumes and profits. 

However, Elara Securities believes the quality of volume growth for Eicher Motors in the past 6-8 months continues to be weak and hence, does not deserve multiples closer to historical levels. 

The brokerage has a “sell” rating on the stock with a target price of ₹4,603. 

Citing the focus on improving volumes and sacrificing margins, JM Financial has revised its volume growth assumptions upwards from 5 per cent to 9 per cent led by new launches and demand recovery. 

However, Saksham Kaushal and Sahil Malik of the brokerage expect margins to remain under pressure due to aggressively priced launches and elevated marketing spend. The brokerage has a “hold” rating with a target price of ₹5,500. 

Motilal Oswal Research factors in volume growth of 10 per cent over the FY25-27 period as the company plans to continue prioritising growth over margins. 

Aniket Mhatre of the brokerage expects margins to remain under pressure, as any benefit from an improving mix (higher spares and apparel sales) is likely to be invested by Royal Enfield in demand-generation activities. 

This is visible in the past two quarters, where volume has seen a healthy pick-up, albeit at the expense of margins. 

The brokerage expects Royal Enfield to deliver a much slower 7 per cent earnings growth over FY25-27. With earnings growth expected to be slower, the brokerage sees no reason for the stock to trade at premium valuations.