Eicher Motors’ investors tone down expectations as Enfield growth slows

Eicher Motors Ltd scored well on all counts in the March quarter, with the strong growth in truck sales being particularly impressive. Yet, it did little to appease investors and the stock inched up only marginally.

The company’s valuations have come off sharply from the dizzying 50 times one-year forward earnings about two years ago to about 30 times now. The drop in valuations traces the decline in sales growth of its premium motorcycle brand, Royal Enfield. March quarter sales of the flagship brand grew 23% year-on-year; but the fact remains that growth has fallen from 38% a year ago.

Meanwhile, the hype associated with the Enfield brand appears to be waning. The six-month waiting period is down to about a month-and-a-half, as a result of higher production capacity. Further, competition is increasing, as more foreign motorcycle manufacturers are willing to test the luxury bike market in India.

Be that as it may, analysts still remain confident about Enfield sales. A report by Jefferies India Pvt. Ltd recently upgraded the stock “despite concerns on greater volatility in growth as waiting periods disappear, due to better underlying industry outlook and sharp acceleration in contribution to Eicher’s sales from low penetrated states”.

Apart from the launches planned in the premium range of motorcycles, Enfield’s pricing power is impressive. In spite of stiff competition, realization on sales has been increasing. March quarter’s realization was 5% higher year-o-year.

Meanwhile, truck sales increased 33%, which added to overall revenue growth. As a result, consolidated revenue rose by 34% from a year back, to Rs2,528 crore. And thanks to benefits of operating leverage, operating margin expanded to 31.3%, the highest for the company so far.

Be that as it may, Eicher Motors’ valuations price in the estimated earnings growth of around 25% over the next two years. What could give investors a bonanza is any breakthrough in export markets and the response to its forthcoming new launches in the higher-end premium motorcycles. At the end of the day, Enfield accounts for nearly 90% Eicher Motors’ earnings
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