New Delhi: Operating margins of Eicher Motors Ltd contracted by 160 basis points to 29.2% in the December quarter (Q3) on a consolidated basis, the maker of Royal Enfield motorcycles reported Monday.

The contraction—sharpest in thirteen quarters or over three years—came on the back of muted demand in the domestic market and increase in prices of motorcycles that impacted sales and spike in overall input cost.

The contraction also mirrors the 26.9% decline in Eicher Motors's share price this fiscal—underscoring the current state of affairs in the most profitable automobile company in the world. During Q3, the New Delhi-based automaker's net profit rose 2.3% to 532.90 crore from Rs520.50 crore a year ago.

Eicher Motors has over the past year increased prices of its products by almost 15% due to higher commodity prices and introduction of new features—such as anti-lock braking system (ABS)—on its Royal Enfield motorcycles. This, in turn, impacted sales.

In April-January of FY19, Royal Enfield sales increased by 4% year-on-year to 655,779 units. During Q3, volumes fell 7% as retail sales during the festive season remained substantially muted.

As a consequence, Q3 revenue increased by just 3.4% year-on-year to 2,328.25 crore. Earnings before interest, tax, depreciation and amortization (EBITDA)—a measure of operating profit—also dropped by 3.8% to 680 crore from 707 crore in the year-ago period.

According to Siddhartha Lal, managing director and chief executive, Eicher Motors Ltd, the increase in prices due to introduction of ABS and other expenses have dented the financials of the company, and it will be very difficult to say if that will have an impact on the demand scenario in the future.

“Motorcycle sales during the quarter were down by 14% and for Royal Enfield it was down by almost 7%. The industry has shrunk overall as a result of the increase in prices. We also lost production of almost 30,000 units due to the protest by workers in one of the plants but that has been resolved now," said Lal.

Royal Enfield launched two 650cc motorcycles—the Interceptor and Continental GT—during the December quarter; the increase in other expenses during the quarter can be attributed to the marketing expenses incurred for these motorcycles.

Eicher Motors's commercial vehicle business—a joint venture with Sweden's Volvo AB—is also under pressure due to extensive discounting by competitors Tata Motors Ltd and Ashok Leyland Ltd, and an adverse product mix.

The revenue from operations of Volvo Eicher Commercial Vehicles (VECV) increased 9% y-o-y to 2,818 crore while profit after tax decreased by 43% y-o-y to just 76 crore. In Q3, sales of trucks and buses of the company increased by just 4% y-o-y due to lack of financing options available from non-banking financial companies and introduction of new truck axle norms which has increased the load carrying capacity of the vehicles.

“While the demand momentum continues in the commercial vehicle industry, sales were affected especially in (the) heavy-duty segment due to change in axle load norms and liquidity crunch. However, in Q3, VECV increased its market share in heavy duty trucks through focused market penetration and strengthening the product portfolio with new launches of our modernised ‘Value Trucks’ over the past year," said Lal.

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