Expect lower growth at Eicher

However, medium-term outlook remains strong; use stock correction as buying opportunity, say analysts

The Eicher Motors’ stock is down 17 per cent since the start of the month, on worry that the high growth rate of its two-wheeler business could come off.

In addition, note ban is expected to have a short-term impact on two-wheelers, which are largely cash purchases. A Nomura analyst estimates 67 per cent of (Eicher's) Royal Enfield purchases are through cash or bank accounts. Unlike passenger vehicles or commercial, vehicles where financing accounts for 80-95 per cent of sales, this share is much lower in two-wheelers. 

As Royal Enfield sold 59,000 units (a majority in the domestic market) in October (up 33 per cent over October last year), it could see an impact on roughly 100,000 units for November and December. Of the monthly rate, about 4,000 units are for vehicles with engine capacity exceeding 350cc, in the premium category and priced higher. The impact on this segment (about seven per cent of volumes) is expected to be lower than the smaller capacity (350cc) engine units. 

The key reason for the share price dip over the past month, however, is fear of a slowing growth rate. Based on demand projection and the planned capacity, the management had after its September quarter results, earlier this month, reiterated its earlier expectation of 900,000 units in FY19. This, say analysts at IIFL, implies 16 per cent volume growth annually over the next two years, a sharp deceleration from the 50-plus per cent rate over the past five years. The management indicated the wait period for the Classic 350 at three months; for the rest, at half that.  

Analysts at UBS, however, say Eicher remains the strongest growth story in the Indian automobile space, with 38 per cent annual earnings growth over FY16-19, despite building in a significant step-down to 20 per cent year-on-year volume growth in FY18 and beyond. The slower growth rate is largely due to the high base catching up. Premium motorcycles are expected to grow at double the overall segment growth. Royal Enfield would, with its strong brand pull and growing demand beyond tier-I cities, remain a key beneficiary of the strong medium-term growth outlook here. With the company significantly expanding its network into tier-II and tier-III cities, it should help tap into the demand for premium motorcycles, both for first-time buyers and upgrades.

While the company continues to grow faster than the premium segment growth, the Street will be keeping an eye for the impact of new-product launches, such as the 400cc motorcycle from Bajaj Auto, expected next month. Any significant impact on Enfield’s market share will not go down well with the Street.

In the medium and heavy commercial vehicle segment, the company has gained market share with a year-on-year growth of 23.5 per cent in the April to October period. The industry grew at 1.3 per cent. The company has been able to retain and grow its volumes in segments where it is the market leader, which are the 7.5-10 tonne and 10-12 tonne areas. However, the contribution of this business to Eicher’s profits is presently miniscule.

While the stock recovered a bit on Wednesday, it is now trading at 24.5 times its FY18 earnings. Given the outlook for its two businesses, investors could take exposure on dips