Eicher navigates growth potholes
The shares of the listed parent of Royal Enfield (RE), Eicher Motors Ltd, need a boost. In the past one year, its shares have risen by just 4%, significantly lagging the Nifty Auto index’s 26% returns, despite RE being a beneficiary of the ongoing premiumization trend in the automobile industry. What gives? The intensifying competition in premium segment poses new risks to RE’s market share, following the entry of vehicles by Bajaj Auto and Hero MotoCorp in collaboration with Triumph Motorcycles and Harley Davidson, respectively. The impact on RE can be fully assessed only after the companies scale up their new launches in the coming months.
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“While their ambitions are likely to be much higher, even if both the peers together can ramp up to 10% of RE volumes over 6-9 months, it will cap RE’s future growth potential,” said Aniket Mhatre, an analyst at HDFC Securities in a report on 13 November. In the September quarter (Q2FY24), RE’s wholesale volume clocked five-year compound annual growth rate of only 2% to 229,280 units. This is despite the new launches such as Hunter 350, as well as the upgraded Bullet.
Sure, more new launches by peers cannot be ruled out as the lucrative gross margin makes premium products attractive. For perspective, in Q2, RE’s gross margin stood at about 46%. For Bajaj Auto, TVS Motor Co. and Hero MotoCorp, it was in the range of 26-31%.
Eicher appears to be unperturbed, for now. In its Q2 earnings call, Eicher acknowledged that rising competition may lead to market share loss for RE. But new launches may aid growth in the market size, which is a positive.
“We believe that the >250cc market has potential for two-three well-established players where RE occupies 90% share,” said a report by Nomura Financial Advisory and Securities (India) on 13 November.
The brokerage notes that RE’s market share has started dipping and its festive retail growth at 13-14% is below peers – Hero’s at 15% and Bajaj Auto’s about 30%.
Amid this, RE’s margin trajectory calls for attention. “Given the competitive aggression, we believe that RE would be forced to reconsider pricing/brand strategy quickly, which will in turn drive margin pressure,” said Mhatre.
In Q2, however, RE put up a decent margin show even as the mix was hurt by muted exports. Consolidated Ebitda margin was up by 81 basis points sequentially to 26.4% helped by moderating commodity cost and price hikes. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
The company said macro challenges weighed on its exports and the recovery is likely to be gradual at best. In Q2, RE’s export volume was down by almost 5% sequentially.
To be sure, in order to protect its market share, RE plans to expand its portfolio.
Here, the upcoming launch—Himalayan 450—would help. Eicher noted that the initial response for this vehicle has been encouraging.
Meanwhile, the Eicher Motors joint venture with Volvo group, VE Commercial Vehicles Ltd, gained market share in Q2. Demand continues to be healthy in this segment led by spending on infrastructure. However, considering the rising competition from the likes of Tata Motors and Ashok Leyland, volume growth should be monitored. Overall, sentiment for Eicher Motors’ stock could get a boost if RE’s volumes grow along with the industry’s even in the face of rising competition. Meaningful upsides in the stock would be driven by the success of new models as well as the automaker’s ability to hold on to its margins.
