Amid growing competition, Eicher may disappoint on growth expectations

A lot will depend on the company's ability to get traction both in India and abroad for its new launches

The Eicher Motors stock has shed nine per cent over the past month, and about 14 per cent since November, on worries that greater competition will eat into the company’s lucrative market. Further, when the falling order is falling and new models have not gained significant success, the company may not meet the Street’s expectations on growth in volumes. It is no surprise then that some brokerages have downgraded the stock. In fact, analysts at IIFL Institutional Equities have turned negative on the scrip. They highlight that Royal Enfield’s (RE’s) falling order book indicates weak order flows, declining benefits from network expansion, and lack of success of new models. These trends are much in contrast to the strong order book and near monopoly situation Eicher had not long ago.

RE’s volumes have been moderating and in the December quarter it reported a growth rate of about 18 per cent over the year-ago period. This was lower than analysts’ estimates. Given that waiting periods have reduced, the volumes will indicate the underlying demand for the company’s models. The reason analysts are not bullish about volume growth is two of its models, the Classic 350 and the Bullet 350, account for about 85 per cent of the volumes of Eicher, while sales of its other models are declining on a year-on-year basis.

Thus, while sales of its two popular models in December were up 20 per cent, the volumes of bikes with an engine capacity of more than 350cc were down 20 per cent compared to the year-ago period. 

A lot will then depend on the company’s ability to get traction both in India and abroad for its new launches. Among the last few launches for the company, which is eyeing a share of the global mid-size (250-750cc) motorcycle market, have been the Continental GT and Himalayan, which did not find much traction, say analysts. In November last year, it showcased the Interceptor INT 650 and Continental GT 650 and expects to target the markets in South-East Asia, the Americas, Australia, and Europe. The two brands will be launched in April this year. 

The other risk is the launch of models in the premium category by rivals, and that could eat into the company’s sales. Analysts at SBI CAP Securities say the expected increase in competitive intensity from iconic brands in the 250-500cc segment such as the Java Motorcycles, Bajaj-Triumph, TVS-BMW and the increasing brand fatigue for RE will mean significant risk to the Street’s expectations that RE’s high growth will continue in perpetuity. Given the headwinds in the business, analysts at IIFL believe that there will be a derating of the Eicher Motors stock, which is currently trading at 30 times its FY19 earnings estimates. 

While sales of commercial vehicles (housed under Volvo Eicher) are expected to see an uptick, the venture contributes little to the operating and net profits of Eicher Motors. Given the risks, investors should await further triggers, be it in terms of traction in overall volumes or the success of new models before considering this stock.