After a weak Q4, forecast of an uphill ride hits Eicher Motors’ valuations

Eicher Motors Ltd’s shares have declined by 5.5% since it announced the March quarter results. The company’s shares are now down by more than 37% in the past one year. Sales of its flagship Royal Enfield motorcycles have now declined for four consecutive months.

Initially, there was hope that the premium motorcycle segment will be insulated from the general weakness in demand for two-wheelers. But this hasn’t been the case. According to a post-results report by Motilal Oswal Financial Services Ltd, “RE (Royal Enfield) is seeing demand weakness for the first time since its renaissance in 2008. It is in a perfect storm with a weak industry environment and substantial cost inflation, with sales expected to remain under pressure till FY20.”

In the March quarter, motorcycle sales fell 13% year-on-year. But revenues declined only 1.2%, thanks to higher realizations. There has been an increase in vehicle costs due to higher regulatory expenses, besides new model launches at higher price points.

Even so, Eicher Motors reported a sharp drop in Ebitda (earnings before interest, tax, depreciation and amortization) margins, falling 410 basis points to 27.4% from a year earlier. Some analysts say that while margins have fallen as a percentage of revenues, they have been intact at around the same levels in absolute rupee terms for every vehicle sold.

Be that as it may, Ebitda dropped 14% year-on-year to ₹684 crore. After all, if Ebitda per vehicle is intact and if volumes are falling, the company’s profits will naturally fall.

Coming back to sales, the management has forecast production of 950,000 units in FY20. This looks like an uphill task, going by the sales figure of 820,000 units in FY19.

That’s not all. Truck sales in the domestic market are feeling the heat of the slowdown too, falling 12.7% even as exports were sluggish.

A key concern is whether Royal Enfield’s motorcycles are facing product fatigue, especially with increasing competition and new entrants in the premium segment. In FY19-21, single-digit sales growth is likely to pale in comparison to the scorching pace of 35-40% between FY13 and FY18.

No wonder, brokerage firm CLSA India Pvt. Ltd trimmed FY20-21 earnings per share estimates by about 12-14%. Most others have cut back profit margin estimates, too, as Eicher Motors is forging ahead with expansion of its dealer network and launch of new products. This will keep the cost metre high in the coming quarters.