Eicher Motors needs to turn up the volume

Photo: Bloomberg
Photo: Bloomberg

Summary

Elevated commodity prices and weak product mix led to contraction of 300 bps y-o-y in Ebitda margin

After Monday’s bloodbath in the stock markets, the Nifty50 index was up 3% on Tuesday. Against this backdrop, shares of Eicher Motors Ltd rose more than 5%. Management commentary on the company’s outlook also helped sentiments.

As such, December quarter (Q3FY22) results were a mixed bag. Eicher’s standalone revenue grew by 1% year-on-year (y-o-y) to 2,838 crore. The 15% y-o-y drop in Royal Enfield (RE) motorcycle sales volume was partially offset by the 19% y-o-y rise in net realization per vehicle on the back of price hikes. Still, net realization is 5% lower sequentially due to a fall in the share of export volumes as a percentage of total to 11% in Q3 from 14% in Q2. In general, exports command higher prices but the festive season in India meant the company fulfilled more domestic orders.

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Overall, elevated commodity prices and weak product mix led to contraction of 300 basis points y-o-y in earnings before interest, taxes, depreciation and amortization (Ebitda) margin to 20.5%. One basis point is 0.01%. Sequentially, Ebitda margin rose a tad. As demand recovers, margins can be expected to improve.

Meanwhile, regulatory norms mandating electrification of higher engine capacity models seem too far at this moment. Kumar Rakesh, senior automobile and technology analyst at BNP Paribas India said, “Risk of EV in RE segment appears to be far lower than that faced by lower cc segments. Converting higher cc bikes to EV needs bigger battery pack, resulting in significant price increase."

That said, demand recovery is crucial for the stock which has underperformed Nifty Auto in the past year. With vendor addition and easing of semiconductor shortage issues, waiting period is expected to be lowered. The management said the order book is healthy and the new generation Classic 350cc is seeing higher demand in domestic and export markets. There will be a new launch every quarter, the management reiterated. This should support growth.

“RE should be a key beneficiary of potential revival in Indian 2W demand, especially in urban markets. It is also well-positioned to benefit from premiumization," said analysts at Jefferies India Pvt. Ltd in a report. Exports are another driver. “Its exports are up 130% y-o-y in YTD-FY22, contributing 14% of its total volumes versus just 2-6% over FY17-21," said Jefferies’ analysts. In the medium term, though, investors would do well to track the impact of increasing competitive intensity on the market share.

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