Product portfolio, expanding markets to drive gains for Eicher Motors

In addition to volume growth, margin gains hinge on raw material/freight cost movement

The stock of Eicher Motors was up 7.5 per cent in trade on Monday on expectations of robust domestic demand, scaling up of export opportunity and higher margins. Led by strong performance of its two wheeler business (Royal Enfield), the company’s March quarter performance was in line with analyst estimates.

The near term trigger would be volume growth improvement helped by the easing of supply chain constraints. While Royal Enfield volumes were down 9 per cent y-o-y in the quarter, new launches of Classic 350cc and Scram 411cc bikes during the year could drive growth going ahead. Revenues for the two wheeler business were up on higher realisations.

The company highlighted that domestic demand remains robust and Royal Enfield bookings (six weeks waiting period for new models such as Classic  350cc) will be aided by recovery in production as the supply constraints could ease over the next couple of months. The company has added additional vendors to its suppliers to ease the production shortages.

A key trigger for the stock going ahead would be the rising share of its international business. Analysts at Emkay Global Research led by Raghunandhan N L highlight that international business proportion has increased from 10 per cent in FY21 to 17 per cent in FY22 due to marketing expansion in Europe, Latin America and the Asia Pacific regions.  

Margin improvement would be the other key factor which could drive valuations. The realisations for Royal Enfield business improved 20.5 per cent y-o-y to Rs 1.72 lakh on the back of price hikes and better mix. In addition to this, stable raw material mix aided the gross profit margins for standalone operations by 240 basis points to 42.7 per cent. The improving mix is on account of higher export sales and non-motorcycle revenues. Share of non-motorcycle (accessories and allied products) revenues has increased to 15 per cent.

What could offset the margin performance is commodity and freight cost inflation which the company indicated could remain a near term concern.

For its commercial vehicle joint venture, Volvo Eicher Commercial Vehicles (VECV), gains on the volume front (10.6 per cent y-o-y) and realisations (up 8.1 per cent y-o-y) were offset by higher raw material costs. Operating profit margins were down 220 basis points y-o-y. Competitive pressures and raw material inflation could remain headwinds for the business and an improvement is dependent on the sharp volume recovery and increasing capacity utilisation.

Most brokerages have a Buy rating on Eicher Motors. Motilal Oswal Research has increased their earnings estimates for the next two years by 4 - 5.5 per cent on account of volume upgrades for VECV and improving margins for Royal Enfield. Say analysts led by Jinesh Gandhi at the firm, “The near-term uncertainties due to supply chain issues notwithstanding, the expansion of product portfolio on new improved platforms will help Eicher expand its addressable markets and drive the next phase of growth for Royal Enfield.”

Investors, however, should await a consistent volume recovery and margins before considering the stock which is trading at 25 times its FY23 earnings estimates.