Eicher’s strong show fails to impress

A slowdown in the Royal Enfield business can put pressure on the stock valuations, unless the CV business measures up on profitability


Photo: Bloomberg
Photo: Bloomberg

Eicher Motors Ltd’s strong growth in the March quarter failed to impress investors. The stock lost steam after the company released its earnings on Thursday and closed with a marginal loss, compared with a small gain for the Nifty index.

Revenue at the consolidated level increased 46.6% from a year ago, slower than the 50%-plus growth the Street was forecasting. The miss is largely due to the commercial vehicles (CVs) division—VE Commercial Vehicles Ltd (VECV). The business continues to see high discounts, Siddhartha Lal, Eicher Motors managing director and chief executive officer said. Add to this an unfavourable product mix and realizations fell from both the year ago and on a sequential basis, Religare Capital Markets Ltd’s calculations show.

The silver lining is the division had one of the best quarters in recent years. Volumes are up 41% and the business gained market share in buses and medium, light and heavy duty trucks. The strong volumes led to the belief that realizations and economies of scale will see significant improvement. But contrarily, Ebitda (earnings before interest, taxes, depreciation and amortization) margin at the CV division is estimated to have risen by less than a percentage point to 8%, pointing to competitive pressures. Three brokerage firms had forecast the division’s margins to expand in the range of 1.4-2.9 percentage points.

The motorcycle business on the other hand lived up to expectations. Revenues at the stand-alone level jumped 60.7% on an almost similar rise in volumes. Margins expanded 3.8 percentage points to 29.9%. This helped expand consolidated margin to 17%, driving up Ebitda and net profit by 75% and 71%, respectively.

Investors will do well to prepare for growth moderation in the motorcycle business. From around five months in early 2015, the waiting period for the company’s popular selling model has reduced to three months now. But then, the reduction is partly explained by increased production. A production plan of 675,000 units in 2016-17 translates to a growth of 33% (based on previous year sales). Sales in 2015-16 were up 53%. The company is giving a strong push to two new models—Continental GT and Himalayan. But the models are yet to take off in a big way. That raises question about valuations, which at 30 times the current fiscal year earnings estimate is the most expensive automobile stock to own.

To be sure, Eicher continues to expand its addressable market. It plans to ramp up its Himalayan model in coming months and improve its international reach.

While the results of these initiatives will be seen in coming quarters, a slowdown in the motorcycle business, the key earnings driver for Eicher, can put pressure on the stock valuations, unless the CV business measures up on profitability.

The writer does not own shares in the above-mentioned companies.

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