Among a host of factors that took a toll on profitability, launch of two new Royal Enfield motorcycles—Interceptor 650 and Continental GT 650—fuelled costs. (PTI)
Among a host of factors that took a toll on profitability, launch of two new Royal Enfield motorcycles—Interceptor 650 and Continental GT 650—fuelled costs. (PTI)

Royal Enfield: Eicher Motors' thumper is now its drag

  • The launch of Royal Enfield's Interceptor 650 and Continental GT 650 take their toll on Eicher Motors' Q3 results
  • For the tide to turn as far as valuations go, Eicher investors must look at the sales performance of the new Royal Enfield motorcycles

For the first time in nearly three years, Eicher Motors Ltd’s Ebitda (earnings before interest, tax, depreciation and amortization) margin veered off the 30% mark. In the December quarter, its consolidated Ebitda margin fell 220 basis points to 29%, and short of the average estimate of 30% on the Street.

Among a host of factors that took a toll on profitability, launch of two new Royal Enfield motorcycles—Interceptor 650 and Continental GT 650—fuelled costs. Other expenses, which includes advertising and marketing costs, rose 11% year-on-year, even as employee costs soared by 27%. The company’s operating leverage was weak given a meagre 3.5% growth in net revenue. After all, revenue growth came from price hikes that led to a 10% jump in realizations. Royal Enfield’s volumes fell 6%. Ebit

Eicher Motors' Ebitda margin has fallen below the 30% mark in the December 2018 quarter (Q3) due to weak sales volume and high costs.
Eicher Motors' Ebitda margin has fallen below the 30% mark in the December 2018 quarter (Q3) due to weak sales volume and high costs.


Note that Royal Enfield had also suffered a setback on account of a labour strike that crippled production. Besides, competition in the 150cc and above motorcycle segment has risen, with aggressive strategies from international firms and incumbents. Consequently, Royal Enfield’s share in the premium segment has slipped by about 150 basis points year-on-year to 25% in December.

The upshot: Ebitda fell 4% year-on-year to 680 crore. This decline was, however, in line with the Street’s forecasts, with analysts factoring in the adverse impact on profits due to the strike and higher costs entailed due to new launches.

While all of this was enough reason to weaken investor sentiment, what has made things worse is a drop in commercial vehicle sales as well. Eicher Motors’ heavy-duty trucks have been no exception to the impact of axle-load norms, which have led to sales slowdown across the industry. The share of profit from the joint venture operations (Volvo Eicher Commercial Vehicles) has declined by 43% year-on-year to 42 crore as a result.

Note that the company’s shares have corrected 35% from their highs last April, given the rising competition in the premium motorcycle segment and the drop in commercial vehicle sales. Growth rates are bound to be under pressure as the base has ballooned as well.

Likewise, valuations have toned down from the dizzying levels of over 30 times one-year forward earnings. At the current price of 20,675, the Eicher Motors’ stock discounts FY20 earnings by about 20 times. For the tide to turn as far as valuations go, investors must look at the sales performance of its two new motorcycles, and whether that would improve operating leverage and profits in the quarters ahead. 

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