Eicher Motors faces margin squeeze even as high realisation drives Q3 profit

Domestically, there has been a 15-16% uptick in enquiries and an 11% increase in bookings for Royal Enfield products
Domestically, there has been a 15-16% uptick in enquiries and an 11% increase in bookings for Royal Enfield products

Summary

  • Higher freight costs due to the Red Sea crisis and stiff competition from global giants such as Harley-Davidson and Triumph are expected to dampen the company’s operating margins in the coming months.

Eicher Motors Ltd is riding high on tailwinds from improved realisation, which fuelled the 13% year-on-year standalone revenue growth for the December quarter (Q3FY24), beating analysts’ expectations. A superior product mix, led by the introduction of new two-wheelers, has boosted realisation. Net realisation stood at 177,758 a unit, registering nearly 10% growth. Softer raw material costs supported operating profitability, with Eicher’s Ebitda increasing by 27% to 1,090 crore in Q3.

Exports volumes (6.4% of the total in Q3) were a big drag, falling 24% year-on-year, while domestic volumes were up 5.6%. Exports were beaten down largely because of a substantial slowdown in Europe amid weak macro factors. Despite exports falling, Royal Enfield sustained its market share in relevant categories in key geographies.

Although management expects export volumes to rebound, this may take two to three quarters. Apart from a potential economic recovery, the recently launched 650 Shotgun motorcycle (for the export market) should also drive volumes. Domestically, there has been a 15-16% uptick in enquiries and an 11% increase in bookings for Royal Enfield products. The commercial vehicle business, a joint venture with Volvo, achieved remarkable 14% volume growth, supported by strong market-share gains across product categories.

While management foresees a temporary slowdown in the CV business due to the upcoming Lok Sabha elections, they remain optimistic about sustained robust demand over the long term, driven by infrastructure development and replacement demand from the phasing out of older BS-III and BS-IV trucks.

Analysts at Yes Securities expect Royal Enfield’s overall volumes to grow at about 8% CAGR over FY24-26E (versus -7% CAGR over FY20-22) despite competitive launches. “Recent launches could be an inflection point for Royal Enfield as a completely new and improved platform should drive efficiencies. On the other hand, VECV is approaching a cyclical decline in volumes and profit, in turn restricting consolidated profit after tax CAGR to 4% over FY24-26E." CAGR is the compound annual growth rate.

Turning to profit margin, the favourable impact from commodities is expected to continue in the upcoming quarter. Raw-material costs, which accounted for 54% of sales in Q3FY24, have remained steady sequentially, and dropped 4% year-on-year. While steel prices have remained constant, there has been a softening in precious-metal prices.

However, the Red Sea crisis will increase shipping charges by 25-30%, raising freight costs. Intensifying competition is expected to increase expenditure on branding and marketing initiatives, further dampening operating margins. “Aggressive pricing from competitors will constrain Royal Enfield’s pricing power in the medium term," said analysts at Elara Capital.

The company’s loss of market share in the premium two-wheeler segment is also under the spotlight. According to the latest data from automobile industry body SIAM, Eicher Motors's market share in the domestic premium motorcycle segment dropped to 28.7% in Q3FY24 from 32.7% in Q3FY23, while Bajaj and Hero saw theirs increase.

Global companies such as Triumph and Harley-Davidson have launched premium bikes at aggressive price points in India, in partnership with Bajaj and Hero, respectively. This has dampened Eicher Motors's dominance in the segment, and this may continue in the coming months.

“Royal Enfield has faced competition in the past, but this time it is different as the competition is from global iconic brands – Harley-Davidson & Triumph – and the products will be supported by established mass-market players that have both financial and distribution muscle," said analysts at Dolat Capital Market.

Against this backdrop, it’s hardly surprising that Eicher’s shares have underperformed the Nifty Auto index over the past year. The company has a substantial lead in dealership networks with nearly 2,000 outlets (Harley-Davidson and Triumph are expected to have 100 each by the end of FY24), but this alone may not be enough to cheer up investors.

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