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Buoyed by strong sales in its two-wheeler business and market share gains in the commercial vehicles (CV) segment, the Eicher Motors stock price has gained 28 per cent over the last three months and over 80 per cent in the past year.
Its two-wheeler business, known by its Royal Enfield brand, has been registering strong sales over the last few quarters, compared with the sector which is struggling.
Analysts are betting that the high growth in the upper end of the two-wheeler segment and CVs is likely to help Eicher improve its volumes and revenue growth.
Jinesh Gandhi and Chirag Jain of Motilal Oswal Securities say with several projects (capacity expansion, new products, etc) coming on stream in 2013-14 and driving 32.5 per cent sales CAGR (compound annual growth rate) and 46.3 per cent Ebitda (earnings before interest, taxes, depreciation, and amortisation) CAGR over CY12-15E, the company is at an inflection point.
While the motorcycle business will benefit from capacity expansion, new launches and network expansion, the commercial vehicle subsidiary (a joint venture with Volvo) will benefit from the commencement of medium duty engine project and ramp-up in heavy commercial vehicles.
At the current price, the stock is trading at 16 times its 2014 earnings estimates. About 55 per cent of analysts, according to Bloomberg, have a buy rating on the stock.
While the company does not have a strict comparable peer, two-wheeler stocks trade at 15-17 times, while Ashok Leyland trades at 11 times FY14 estimates. Given that the stock has seen a sharp run-up since April this year, investors could consider the scrip on dips.
Riding the bullet
For the March quarter, the company saw a 45 per cent jump in volumes on a low base and it was able to cater to demand on the back of debottlenecking of its existing plants.
Lower overhead costs in the two-wheeler business helped the segment achieve its highest ever Ebitda margin of 17.7 per cent.
Given the 8-10 month waiting period, the two-wheeler business average volume growth over the last five quarters has grown at 41 per cent.
The company will look to sustain this volume growth and meet demand with recent launches such as the Thunderbird 500 and the Continental GT, to be launched in the current calendar year.
The company’s new two-wheeler plant in Chennai has commenced operations in April. The target capacity in phase 1 is 150,000 units annually, which is expected to rise to 500,000 units gradually over the long term.
With rationalisation of production, the company expects the combined capacity from the old and new plants to reach 175,000 units in 2013 and 250,000 in 2014. For 2012, the company achieved volumes of 113,000 units.
With over half of the sales coming from the top 10-12 cities, the company’s focus will continue to be on the urban markets with Bangalore being the largest market.
Sluggish CV growth
CV volumes fell 13 per cent in the March quarter, the third straight quarter of slide.
The outlook for CV volumes, according to the management, is expected to be muted during the rest of the year.
The company’s CV business, however, managed to increase its market share in the March quarter to 13.9 per cent from the year-ago number of 11.1 per cent.
However, given lack of demand, pressure on volumes and higher discounts, the Ebitda margin for this segment fell to 6.4 per cent, compared with 9.1 per cent in the year-ago quarter.
On a sequential basis, the company managed to maintain margins due to a favourable product mix (lower share of Volvo trucks and higher bus sales).
Going ahead, the Street will keep an eye out for the progress on the company’s engine project to start production from the September quarter, the launch of new CV range towards the end of 2013 and the joint venture with Polaris, which will come up with a four-wheeler for personal use by 2015. These should help increase volumes and growth of this business.
