Eicher Motors loses mileage as Royal Enfield’s sales growth shifts to slow lane

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After scaling a 52-week high of Rs33,483 apiece in September 2017, shares of Eicher Motors Ltd have lost steam and underperformed the benchmark indices. The shares are down 18% since then, paling in comparison to the Sensex and BSE Auto index, which rose by 14% and 8%, respectively, during the period.

Coming at a time when the Street is ballistic on the India story and most stocks are racing up, Eicher Motors’ fall mirrors a rerating in its valuation. This is not without reason. In the last few months, sales growth of the premium motorcycle unit Royal Enfield, which accounts for nearly all its profits, has cooled off. From a scorching 25-30% year-on-year growth, Royal Enfield’s monthly sales growth is settling down at around 17-20%.

Importantly, analysts feel that Royal Enfield’s growth rates will remain at these levels in the future. While demand for premium motorcycles is increasing, the number of firms in the segment is increasing too.

True, it cannot be disputed that the growing aspiration levels will see the market for premium motorcycles expand. That said, Eicher Motors is losing its virtual monopoly in the segment. Many global manufacturers such as HD Motor Co. India (Harley Davidson), Triumph Motorcycles, Suzuki Motorcycles and India Kawasaki Motors are aggressively entering the market, even as domestic motorcycle makers Bajaj Auto Ltd and TVS Motor Co. Ltd have made plans for the segment.

Growing competition may impact Royal Enfield’s pricing power in the future, which in turn may push down realizations over the medium-to-long term. This may weigh on Eicher Motors’ operating margin, which at its current level of 31%, is among the highest in the listed auto original equipment manufacturers in the country. If at all, operating leverage coming from higher sales could support margins.

No doubt, the firm’s share in the commercial vehicle segment is inching up and there’s hope on the Street that with pollution norms becoming stringent, scrapping and replacement of old trucks could fuel sales too. Economic revival may translate into higher truck and bus sales too. Yet, the segment’s contribution is too small in the company’s consolidated profitability.

In other words, with little room to improve margins, Eicher Motors’ profit growth would track its revenue movement, which will moderate in the near term compared to the earlier quarters. Lower profit expansion may then temper the rich valuations of 30-35 times the one-year forward estimated earnings, which in turn will keep the stock price subdued.livemint