BackStrong Royal Enfield volumes aid Eicher valuations
Sales of models with engine capacities up to 350cc jumped 80% in June, while in May, the category's sales rose by a robust 89%
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Its presence in niche businesses such as premium motorcycles is helping Eicher Motors Ltd’s valuations even as the core commercial vehicles business continues to be weighed down by subdued demand. The company’s motorcycle sales surpassed the 25,000-mark for the second consecutive month in June.
A bulk of the demand growth is seen for motorcycles with engine capacities up to 350cc (cubic capacity). Sales of models with engine capacities up to 350cc jumped 80% in June. In May, the category’s sales rose by a robust 89%.
Sales have been robust for some time now—up 85% in the first six months of the current calendar year. To keep up with the growing demand, the company is increasing capacities. But as it launches new products and taps export markets, supplies are estimated to remain tight. “However, large unfulfilled demand for Royal Enfield products, especially in the 350cc segment, makes us positive on the sustenance of growth but on a relatively slower growth rate. With newer product launches and export markets likely to be tapped, demand is likely to outstrip supply even with expanded capacities," ICICI Securities Ltd said in a recent note.
Strong demand trends are leading to volume and earnings upgrades. ICICI Securities has upgraded its volume estimates for the current and next calendar years by around 3% each. IDBI Capital Market Services Ltd also revised its volume estimates upwards. Antique Stock Broking Ltd expects motorcycle volumes to double in three years. “We are far from concluding that demand is set to be met by rising supply any time soon. We expect Royal Enfield volume to touch 0.5 million sales in CY16e (calendar year 2016, estimate) itself and that, too, without much push from exports," Antique Stock Broking said in a note. Royal Enfield sold 178,121 motorcycles in calendar year 2013.
The situation is creating a sweet spot for the company. As volumes increase, economies of scale are improving, helping margins and return ratios. IDBI Capital estimates the motorcycle division’s contribution to Eicher’s earnings to increase further. “We also raise Royal Enfield margin assumption by 180 basis points (we believe that this has further scope for improvement) to factor in operating leverage, cost efficiencies at new plant and better model mix," IDBI Capital said in a note. One basis point is one-hundredth of a percentage point.
The strong pricing power and operating profits have driven up the valuations of Eicher Motors. At around 35 times the current year’s estimated earnings per share, Eicher Motors is now one of the most expensive automobile stocks. While some analysts are becoming wary of the expensive valuations, improvement in commercial vehicles business (the other key business of the company) can aid the stock’s outperformance and valuations.
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