Eicher Motors: stellar results support stellar valuations

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Mumbai: Eicher Motors Ltd’s stellar performance continues to support the soaring stock price, in spite of its rich valuation.

The June quarter’s consolidated net profit of Rs.376.3 crore was a 58.7% jump from the year-ago level, beating the street’s forecast. Of this, Rs.337.1 crore came from its premium motorcycle business, Royal Enfield (RE), which is there in the stand-alone results too. Here, the net profit jumped by a greater magnitude of 69.6%.

This came on the back of a 38.3% year-on-year (y-o-y) jump in motorcycle sales and a modest jump in realisation. Of course, capacity constraints are reflected in the flat sales when compared to the March quarter, notwithstanding the three-month waiting period. But that didn’t drag down profitability. Lower material costs and strong volumes pushed up operating margin to 30.8%, a jump of 470 basis points (bps) from a year ago. One basis point is one-hundredth of a percentage point.

Surprisingly, even the joint venture with Volvo that sells commercial vehicles (CV) fared better than expected. Gaining market share across CVs, the operating margin of 9.1% was not only 90 bps higher y-o-y, but was a positive surprise for analysts, most of whom expected a dip in profitability. Hope rests on its growth prospects for light and medium duty trucks, though on the whole, it sold 32.5% more vehicles during the quarter compared to a year ago.

With both cylinders firing well, Eicher Motors stock closed 3.6% higher to Rs21,075 apiece, making it the most expensive auto stock on the Bombay Stock Exchange. The stock price discounts estimated FY 2018 earnings by nearly 32 times.

Be that as it may, investors must take note of the change in accounting norms to the Indian Accounting Standards. As opposed to the earlier system, where consolidated performance incorporated a line-by-line comparison of even its joint ventures and associates, the new system consolidated results on an equity share basis, only at the net profit level. Hence, only Eicher’s share of profit of Rs.46 crore in the CV joint venture is reflected in the consolidated results.

Analysts believe capacity constraints in motorcycles may moderate growth in revenue in the near term. But with capacity additions already under way, clouds should clear up soon.