 "Eicher Motors: Still a Royal Enfield show, CVs yet to fire")
The tripling of Eicher Motors' stock price over the last year has largely been due to the spurt in volumes and margins of Royal Enfield motorcycles.
The company has been having a hard time coping with demand surge for its brands such as Bullet and Classic which have waiting periods of 4-5 months.
While the doubling of capacity to 300,000 units over the last two years has helped to halve the waiting period, volumes continue to surge.
For calendar year-to-date, the company has posted a volume growth of 81% to 192,000 units and has a target of achieving 300,000 units for the year.
Siddharth Lal, managing director and chief executive officer, Eicher Motors, said, ?We are certainly on track and to even better our 280,000 now performance for the year, it is probably closing in a 300,000 type of numbers that we are expecting.
Again it is subject to various, let us say, supply chain issue constraints being removed, but it is not a huge problem.
The company is looking at further ramping up monthly production from 25,000 units currently to 30,000 units in early 2015 to around 40,000 units by the end of the calendar year.
Analysts at IIFL believe that Royal Enfield volumes which have grown by a factor of six over the last four years could touch the one million mark (or more than treble) by 2020.
This could happen as positioning and usage becomes more main stream than niche and its under-penetrated dealer network doubles from current levels.
Eicher Motors is additionally working on developing a new platform to spin off products for global markets.
Lal informed, "There is a lot of starting with the Continental GT and then of course then we get in a new platform in the future and new products. We are working a lot on an India-out strategy on products that is we make a product in India and then try and send it everywhere else. The products have a global idea and (are) global in type of approach, but all products as we see in the future?are totally wedded in some sense to the mid-size segment in the foreseeable future? None of them are market centric products. So, they should sell well in developed and developing markets."
It is the volume surge, current and projected for Royal Enfield, coupled with improving product mix which has been helping Eicher Motors report a steady growth in margins for the two wheeler business.
From just under 14% at the end of CY12 margins are now at 24%.
Margins for its joint venture with Volvo (Volvo Eicher Commercial Vehicles or VECV), which manufactures commercial vehicles, is in single digits.
The importance of the two wheeler business can be gauged from the fact that though it contributes about a third of revenues, its higher margins are what drives 70% of the operating profit and about 90% of the consolidated bottomline.
Unlike the two wheeler business, volumes in VECV have been declining due to the severe downturn in the commercial vehicle space. For the calendar year-to-date, VECV volumes were down 10% year-on-year to 27,663 units largely due to 16% fall in sales of light to medium duty vehicles.
Lal said, "In the last few months, we have seen the market continues to be weak. We have seen very little sustainable traction in the market. There are one or two routes which are showing slightly better freight rates and all of that, but it is still sporadic. It is not like major shift is happening yet. We believe it is the bottom of the cycle, so things should start looking up, but we have not actually seen the traction."
After two and a half years of decline, analysts believe commercial vehicles are likely to see a revival growing 14% in the current fiscal and 30% in FY16.
Growth for VECV is expected to come from the December 2013 launch of Pro-series of trucks and buses helping the company gain market share.
Lal is positive about mid-term prospects.
"On heavy duties very clear, we have talked about it before where the downturn has, of course, put some dent in our aspiration of growth, because as the market has fallen from nearly 250,000 to 130,000 in heavy duty even to 90,000 (units). It is now half of the peak of course, it has also taken in a bit of dent to our market share aspirations because of the extreme position that everyone else has been," he said.
But Lal remain optimistic and is targeting Eicher to achieve 15% market share in the heavy duty segment in about 3-5 years. While these targets may not be easy to get given the high competitive intensity in the segment, the company is also focussing on the exports market to drive volumes of its heavy duty vehicles.
"Exports should also clock similar trajectory as immense effort has been poured into inducting the right manpower to develop its key markets," said Chirag Shah and Siddhartha Bera of Edelwiess in a report earlier this month. The two have factored in 450,000 and 620,000 unit sales of Royal Enfield motorcycles in CY15 and CY16, respectively, and have a ?Buy? on the stock with a target price of Rs 14,954.
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Volume growth and margin expansion in motorcycles and recovery in commercial vehicles, should according to IIFL analysts, help Eicher Motors grow its revenues by 32%, margins by over 800 basis points to 18.2%, powering consolidated earnings by 60% over the CY13-CY16 period.
At current levels of Rs 11,380, the stock is trading at 29 times its CY15 estimates and could see a re-rating if the commercial vehicle business rebounds.