Royal Enfield sees the ongoing slowdown in the auto retail sales as an opportunity to evaluate the performance of its dealerships, fill in the gaps in aftersales services, clean up the processes, provide non-financial support to its dealers wherever required and replace the non-performing dealerships.
Siddhartha Lal, Managing Director, Royal Enfield, was talking about the dealer profitability coming under pressure during the declining sales in Q4 FY19 in an analyst concall.
“During the phase of excellent growth, all dealers drive with the tide. But when the market goes the other way, you identify the underperforming dealers. The slowdown is an opportunity to see the strong dealerships, which are continuing to perform and hold their own," he said on May 10.
Commenting on the non-performing dealerships, Lal added, “We help them with non-financial support such as skilling them to do better business and for better conversion ratios. We have a sophisticated dealer management system, which is in its implementation phase along with ongoing trainings and processes. We replace dealers, which are not able to rise to the right level of customer experience and sales."
The company’s dealership count in India stood at 950 as of 31 March 2019 along with 42 stores across 19 countries.
Royal Enfield reported sales of 197,567 motorcycles in Q4FY19, down 13% year-on-year (YoY) from 226,907 units in Q4FY18. The revenues from operations stood at ₹2,500 crore, down 1% YoY and EBIDTA was ₹685 crore, slipping 14% YoY during the January – March 2019 quarter.
However, at ₹545 crore, the company’s profit after tax (PAT) has reportedly grown by 18% YoY. It had reported PAT of ₹462 crore in the year-ago period.
For FY19, the company’s revenues grew by 9% YoY to ₹9,797 crore. Its EBIDTA stood at ₹2,903 crores, up 3% compared to ₹2,808 crores and PAT at ₹2,203 crores, up 12.4% YoY. For FY19, Royal Enfield’s sales grew only marginally to 822,724 motorcycles from 820,121 motorcycles sold in FY18.
The company has earmarked ₹700 crore as capex for FY20 to be spent on the ongoing activities under phase II expansion at its Vallam Vadagal plant, the all-new Chennai Technical Center, new products and commercial expenses.
The upcoming plant is expected to see commencement of operations from H2 FY20, the management suggested in the call.
Meanwhile, the company says that it has timely equipped its entire portfolio with anti lock braking system (ABS), a safety mandate that ensured all two-wheelers bigger than 125cc to compulsorily come fitted with the feature from 1 April 2019.
Lalit Malik, CFO, Eicher Motors said that 100% conversion to ABS has contributed to the sharp rise in the material costs in Q4FY19 and that as the ABS costs will settle in, the company will be able to preserve its margins, which it says will remain in 25% - 30% range this year.
Malik expects the margins from its 650cc models to improve as the volumes grow this year. “Generally, any new product will start with lower margin. It picks up as the volumes pick up," he said. Referring to a model from Royal Enfield’s Classic portfolio, Malik stated, “We started with about 20% margins, which went up to 40% when the sales picked up."
It rolled out about 3,500 units of the 650 Twins (Interceptor and Continental GT models) in April. This will be increased to 5,000 units in July, the management said.
Royal Enfield’s 650cc motorcycles have a 4-month waiting period at the moment.
Given the demand slowdown in the domestic market, the top management remains cautious about its production target of 9.5 lakh motorcycles in FY20 and has not given a clear picture of the same.