Stand-alone Q3 operating margin, which reflects the bike segment’s performance, fell 430 basis points year-on-year
Indeed, Eicher Motors’ strategy to start BS-VI transition is beginning to show results
Eicher Motors Ltd’s stock has fallen 23% since 1 January, steeper than two-wheeler companies such as Hero MotoCorp Ltd and Bajaj Auto Ltd. Apart from negative investor sentiment due to the Covid-19 epidemic, the twin challenges of stiff competition in premium motorcycles and the slowdown in commercial vehicle (CV) sales continue to drag its stock.
Indeed, Eicher Motors’ strategy to start BS-VI transition is beginning to show results. Sales of its cash cow and premium motorcycle maker Royal Enfield nudged 1% higher in February from a year ago. Most other two-wheeler makers recorded a double-digit sales drop. Better still, its inventory level of less than a week is relatively low compared to Bajaj Auto, Hero MotoCorp and TVS Motor Co. Ltd, which are holding about two-four weeks of inventory.
Further, Royal Enfield has been able to pass on rising costs from regulatory compliance to customers by way of new launches, along with price hikes. Meanwhile, FY20 exports so far have nearly doubled. This drove the stock up from the 52-week low of ₹15,200 hit in August.
However, it is prudent to bear in mind that Royal Enfield has a low base in sales as it underperformed the industry for four quarters from Q2 FY19 till Q1 FY20.
Importantly, the road ahead is rocky, especially for premium bikes. “Competition is expected to increase over FY20-22, with new launches in the mid-size lifestyle segment from Jawa, Bajaj Triumph and Harley Davidson (in international markets)," said a report by HDFC Securities Ltd.
Further, Royal Enfield’s marketing and sales efforts to combat competition may bump up sales at the cost of profitability. Note that in Q3 FY20, the stand-alone operating margin, which reflects the motocycle segment’s performance, fell by a huge 430 basis points year-on-year.
That apart, pain in CVs is still severe. So far in FY20, Eicher Motors’ CV sales are down 27% year-on-year. In any case, analysts forecast a sales growth in Royal Enfield only from the second half of FY21, as expected for most two-wheeler makers. FY20 is likely to end with a 14% year-on-year sales drop. Therefore, weak operating leverage and stiff competition will cap the increase in profit margins and stock prices.