Motorcycles to buoy Eicher’s earnings growth

Eicher Motors Ltd’s two-wheeler sales have so far bucked the slowdown in the auto sector. A three to nine month waiting period across categories of the Royal Enfield brand bears testimony to this. June quarter sales soared by 48.1% from the year-ago period and 15.1% from the preceding quarter, to 27,519 units.

What more, analysts’ consensus points to at least 25% growth in volumes over the next two years, albeit on a low base. This is good news because the motorcycle industry growth rate is estimated to temper to 9-10% in fiscal 2013, from a scorching pace of 20-25% in the last couple of years.

Besides, fresh capacity and new motorcycle launches during calendar year 2013 will reduce the waiting period and improve sales.

According to a report by Bank of America Merrill Lynch, “The motorcycle business accounts for 12% of Eicher Motors’ consolidated sales and more than 25% of profit before minority interest. We do not see risk to demand, as it is a niche player with limited competition.”

Motorcycle sales, therefore, would buoy Eicher’s profits at a time when the commercial vehicle (CV) industry volumes are steadily slipping. The firm manufactures CVs through its joint venture with Swedish Volvo.

The firm on its low base has gained market share in the medium- and heavy-duty vehicles’ segment. But overall CV sales for the June quarter were only 8.7% higher than the year-before period and fell 16.4% compared with the March quarter. This is in line with industry trends—truck sales have fallen in the last couple of quarters despite higher discounts offered by the manufacturers because of falling cargo offerings and truck rentals.

However, Eicher’s expansion of CV capacity along with a new engine plant is on schedule. And its strong balance sheet, especially given that its peers are highly leveraged, is comforting for investors. Debt is down to Rs50 crore (as on December)—one-fourth of what it was in 2008.

All these factors seem to make analysts confident of Eicher posting a strong 20% growth in earnings for the next two years. But, this is already factored into its premium valuation of around 15 times one-year estimated earnings. The stock has outperformed both the Sensex and auto index on BSE Ltd by a wide margin. The rally may cool off though due to near-term pressures in the commercial vehicle sector.

Graphic by Sarvesh Sharma/Mint.

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