Eicher Motors’ raw material costs rose more than 50% y-o-y in Q3FY21, while volume growth was lower at 2%
Considering the ongoing rise in commodity prices, it was known that cost inflation was catching up with the automobile sector. So, analysts had pencilled in around 60-80 basis point (bps) margin contraction for Eicher Motors Ltd in the December quarter. But the motorcycle and commercial vehicle maker’s Ebitda margin at 23.5% declined 170 bps on a year-on-year (y-o-y) basis in Q3FY21. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
In a post-earnings conference call, the company’s management said increase in commodity prices and precious metals hurt margins. The impact of high raw material cost on margins was around 80-100bps in Q3, which was partially offset by tight control on fixed costs, the management added.
Investors should note that Eicher’s raw material costs rose more than 50% y-o-y in Q3, even though volume growth was much lower at 2%. Further, employee cost also rose due to salary increments, the management said.
In a bid to mitigate this impact, the company took a price hike of 2-3% in January and February for its Royal Enfield Classic 360 model. This was in addition to price hikes taken in April and September 2020. Eicher is also working on value engineering to reduce costs. However, the management expects prices of base and precious metals to be a headwind going ahead.
In short, cost pressure is here to stay. Analysts at JM Financial Institutional Securities Ltd are of the view that the price hikes taken so far are not sufficient to absorb the cost pressure.
In this backdrop, the rich valuation of the Eicher stock is discomforting, in spite of the management’s upbeat demand commentary. On-ground demand remains strong and the share of top 10 cities is now at around 25%, falling from 30% pre-covid, the management said.
Bloomberg data shows that the stock is trading at an expensive one-year forward price-to-earnings multiple of 32 times. Competitors Hero MotoCorp Ltd and Bajaj Auto Ltd are trading at multiples of 18 times and 22 times, respectively. So, some brokerages have downgraded the stock.
Analysts at Macquarie Capital Securities (India) Pvt. Ltd said in a report on 11 February that Eicher has been underperforming other two-wheeler companies on both volume growth and margin since FY18, yet it continues to trade at a significant premium to peers, which is unjustified. Macquarie has downgraded the stock from neutral to underperform.
Analysts at JM Financial add that despite a similar return of equity profile, the stock’s valuation is expensive compared to competitors Hero and Bajaj Auto. They feel the demand recovery is more than priced in and maintain a sell rating on the stock due to high valuations.