One-year forward price-earnings multiple has fallen from about 28 times a year ago to 21.6 times at present
The management has chalked out a strategy to introduce small-format stores to expand its distributor footprint
The automobile slowdown has not dampened hopes at Eicher Motors Ltd. Although the company, too, has been hit by sluggish sales of its flagship brand Royal Enfield (RE), the management has rolled out plans to grow twice as fast as the motorcycle industry over the next decade. But that has hardly stirred up the stock, though after a sharp correction of about 32% in the last one year, its price seems to have stabilized lately.
The management has chalked out a strategy to introduce small-format stores to expand its distributor footprint. The company wants to target under-penetrated states where its brand has lesser market share compared to its national average. The management also indicated that it will open a larger number of small-format stores and raise the store count from about 1,100 to 1,350 by FY20. Besides, it also plans to raise dealer profitability by increasing spare and accessory sales.
While all this sounds good, investors are still reeling from the disappointing news of a 16.5% year-on-year decline in volumes in May 2019. That was the highest among motorcycle manufacturers. Hero MotoCorp Ltd, Bajaj Auto Ltd and TVS Motor Co. Ltd reported growth ranging between -7.99% and +2.99%. Note further that Eicher Motors has taken price hikes in the premium bike segment, which seems to have hampered volume offtake lately.
Analysts though see the management’s strategy to counter the urban slowdown with a deeper rural push as a positive in the long run. But that may not be enough to rev up growth in the short run. “We do believe the 15% increase in the price of RE bikes, coupled with the economic slowdown, has impacted sales. We concur that the RE brand is very strong and going deeper into rural India with smaller store formats could offset the urban slowdown," said Kotak Institutional Equities in a note to clients.
That said, transitioning to the new BS-VI norms is not expected to come cheap and will add to the company’s cost structure. Hence, lower sales and rising costs could be a double whammy this year. In fact, analysts expect an earnings downgrades in the near term. “Operating margins are too high, which are likely to come down. We see earnings downgrades from the street due to the decline in EBITDA margin from current levels," said Kotak in the same note. Ebitda stands for earnings before interest, taxes, depreciation and amortization.
The earnings downgrade may also lead to further erosion in the stock’s valuations. Already, its one-year forward price-earnings multiple, as per Bloomberg consensus estimates, has crimped lower from about 28 times a year ago to 21.6 times at present. From the looks of it, that valuation may not be comforting just yet, with investors preferring to wait for volumes to rev up.
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