Eicher’s Royal Enfield overshadows weak CV performance


The Eicher Motors Ltd stock continues its upward trajectory. It jumped 3% on Tuesday morning, in spite of the broader equity market showing a damp sentiment. October sales of its premium motorcycle, Royal Enfield, rose by 33% when compared to a year back, keeping the April-till-date growth ticking at the same momentum.

And, this comes on the back of a decent show staged by Eicher during the September quarter. Motorcycles stole the show, but commercial vehicle sales were a let-down, as low demand punctured profit margins of the business segment.

The quarter’s CV (commercial vehicles) sales came at the cost of profitability. Eicher sold about 19% more vehicles compared to a year back. But, it realized 7% less money on every vehicle sold, given that it offered price discounts during the quarter.

Fortunately, this matters little to Eicher’s overall performance as Royal Enfield’s motorcycle sales continue to post a strong double-digit growth at 30% year-on-year (y-o-y). That’s not all. The firm was able to hike prices in August, ahead of the festive season, given that there is still a waiting period of three months for its motorcycles. So realisations grew by 4%. No wonder, Royal Enfield’s net revenue grew by a heady 36% y-o-y, in spite of the high base.

Robust sales offset costs to boost profitability. Commodity costs were also contained when compared to the immediately preceding quarter. Operating margin rose by 415 basis points (bps) to 31.3%, topping Bloomberg’s analysts’ average of 30%.

In spite of this, investors turned cautious as the operating margin of the CV business retraced from earlier levels. This certainly raises questions on competitive intensity in the segment and the firm’s ability to hold the on vehicle prices during tough times.

Eicher’s stock closed flat after the results at Rs.24,021 on Friday, in spite of the 45% jump in consolidated net profit. And in the last few trading sessions, the stock also retraced substantially from the 52-week high of Rs.26,601 scaled. Even at its current market price, Eicher’s stock trades at about 37 times its FY2017 price-earnings multiple.

That is a heady valuation for an auto company. But then, there is room for earnings growth too, given that it is expanding motorcycle capacity steadily till FY2018. And growth momentum in its key vehicle category continues in top gear.