Margins, valuation hurdles for Eicher Motors despite strong volume gains

The stock of two-wheeler major Eicher Motors hit its all-time high on Wednesday, capping the year with gains of about 52.7 per cent. It has comfortably outperformed its peer index, the Nifty Auto, which saw an uptick of 22.7 per cent as well as the benchmark Nifty that rose 10 per cent during this period.

 

While the September quarter results were in line with expectations, its ability to post more gains going ahead will depend on volume gains amid concerns on the margin front and valuations. 

The company continues to post strong volumes in its core segment of motorcycles with engine capacity over 250cc. The sector posted a 25 per cent growth in November and has gained 23 per cent in this segment on a year-to-date basis. Royal Enfield (two wheeler brand of Eicher) has been driving the growth of this segment and has reported a sales growth of 25 per cent year-to-date. 

Royal Enfield’s growth was primarily driven by the strong demand for Bullet 350 which saw a volume gain of 59 per cent Y-o-Y on a YTD basis. As it has grown faster than peers, the company has gained a market share of 120 basis points to 87.3 per cent in the over 250cc segment. Excluding Bullet, Royal Enfield’s growth was 17 per cent year-to-date. 

Nomura Research has upgraded the stock to neutral with a target price of ₹6,581. 

Kapil Singh and Siddhartha Bera of the brokerage note that Royal Enfield’s volume growth potential following GST cuts has improved ahead of estimates as premiumisation continues.

 

Competitors such as Bajaj Auto Triumph and Hero Harley face 40 per cent GST in their above 350cc models and will likely take time to rework their engines to include them in the below 350cc segment which has an 18 per cent GST. Thus, the risk of competition is lower for now.

 

The company is optimistic about growth, with festival retails in the September to October period rising 45 per cent Y-o-Y. This is expected to sustain in the second half of the financial year 2026 (H2F26) with GST-led demand tailwinds and a strong rural pickup. The company’s 350cc portfolio continues to be the key growth engine, aided by healthy online conversions and product refreshes though the 450/650cc portfolio saw a dip after September. Its 650cc portfolio is witnessing better signs of recovery on a relative basis.

 

Kotak Research expects the company’s volume growth to sustain over the coming quarters, led by brand-activation efforts

 

and newer product launches. Despite baking in a strong volume uptick, valuations at 34 times one year forward estimates for domestic 2-wheeler business remain expensive, says the brokerage.

 

While growth has been strong so far in FY26, brokerages believe that its benefits may not percolate down to margins given the focus on growth. Aniket Mhatre of Motilal Oswal Research points out that the robust domestic volume growth for Royal Enfield in FY26 so far has largely been a function of GST rate cut benefits.

 

However, demand seems to have normalised post an initial surge in pent-up demand. Further, given that management would continue to focus on “growth” over “profitability,” it would mean that margin upside is likely to be capped from here on.

 

The brokerage expects revenue and operating profit growth of 14 per cent each over FY25-28 while net profit is expected to grow at 12 per cent. Given the expected slower earnings growth, it does not see any reason for the stock to trade at premium valuations. It has a sell rating with a target price of ₹5,846.