Graphic by Sarvesh Kumar Sharma/Mint
Graphic by Sarvesh Kumar Sharma/Mint

Post Q3, muted volume outlook may mean a road rough for Eicher Motors

  • There is no solace on Eicher’s commercial vehicle business, thanks to the prolonged slowdown in the industry
  • Eichers’ consolidated revenue rose a marginal 1.3% to 2,371 crore

Eicher Motors Ltd’s shares fell by 3% on Friday on NSE, partially reversing the gains of Thursday, when the auto manufacturer announced its December quarter results.

“It is possible that investors are disappointed with the management’s cautious commentary on the demand outlook on its earnings call conducted after market hours on Thursday," said an analyst requesting anonymity.

According to analysts at Motilal Oswal Financial Services Ltd, Eicher Motors’ Q3 FY20 operating performance was weak, which is a reflection of volume weakness in both Royal Enfield (RE) as well as VECV (Volvo Eicher Commercial Vehicles Ltd).

Eichers’ consolidated revenue rose a marginal 1.3% to 2,371 crore. Emkay Global Financial Services Ltd said volumes fell 2% year-on-year to 189,143 units, primarily due to a 5% fall in below-350cc motorcycles.

Higher input costs hit hard. Raw material costs as a percentage of revenue spiked meaningfully, leading to a 350-basis point decline in gross profit margin. A basis point is one-hundredth of a percentage point.

Ebitda (earnings before interest, tax, depreciation and amortization) margins contracted 400 basis points to 25%. Ebitda declined by nearly 13% over the same period last year to 592 crore. Ebitda performance was also impacted by higher other expenses.

Going ahead, volume outlook is also nothing to write home about. Kotak Institutional Equities’ analysts wrote in a report on 6 February: “The company posted an in-line quarter, but sustainability of volume uptick in FY2021 is difficult in our view." The brokerage firm added that Eicher also did not reveal any plan to launch a new bike platform, which could limit volume growth upside in FY21.

Further, it doesn’t help that scope for margin expansion appears limited as well. Emkay expects Ebitda margins to contract by 350 basis points over FY19-22E due to the adverse mix, partial absorption of regulatory costs and high marketing spends.

And then, it would also have to deal with intensifying competitive pressures. “Competition remains a cause for concern with five launches lined up by other OEMs over the next two years," added Emkay analysts in a report on 7 February.

Meanwhile, there is no solace on Eicher’s commercial vehicle (CV) business, thanks to the prolonged slowdown in the industry. VECV’s truck sales fell by 27% during Q3. “The share of profit from associate (VECV) reduced 60% year-on-year to 16.6 crore on account of a steep fall in CV volumes and contraction in margins," said Emkay analysts.

Investors seem to be aware of all the factors. After all, the Eicher stock has declined nearly 16% from its 52-week high of 26 November. The shares currently trade at about 23 times estimated earnings for FY21, based on Bloomberg data.

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