Eicher Motors – Can the King make a comeback?
Eicher Motors – Can the King make a comeback?
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Eicher Motors has been the top gainer in the Indian auto sector as it grew 3500% over the last 10 years.

Eicher Motors operates across 2 verticals in the auto industry. One is the Commercial Vehicle (CV) segment in which Eicher has formed a JV with Volvo (VECV) and the other segment is under its flagship brand, Royal Enfield which hardly requires any introduction.

Around 90% of its revenue is derived from Royal Enfield (RE) while the rest is from the CV segment. It also exports its products to a few countries, but 96% of the revenues are from the domestic front.

Royal Enfield is an extremely popular brand in India selling bikes in the mid-sized segment (250cc-800cc). It sold ~8.2 lac bikes in FY19 which grew 7x in the past 7 years. Royal Enfield has consistently held >90% market share in India in the Mid-Sized Motorcycle segment over the last few years. It has ~2.4 million web searches in a month on average, which is more than that of its top 3 competitors combined. This alone showcases the allure of the brand amongst Indians. It has a cult-like following and has formed a community of Royal Enfield enthusiasts which has gone a long way in building its brand image.

Royal Enfield has 939 large format stores in India which are mostly based in Tier-1 cities. It also has around 500 studios, which are essentially smaller stores for semi-urban and rural areas, and has plans to add 200-300 more studios in FY20. Such a strong distribution network has helped the company dominate in its segment, especially in the metro cities. It has >30% overall market share, which includes the mass market as well, in Kerala and Goa. Company is now focusing on under-penetrated states like UP, Bihar, Madhya Pradesh, Rajasthan, Orissa where it has a market share of less than 6%.

A lot of success of Royal Enfield can be attributed to 1 bike – Classic 350. For the past 4 years, >60% of the revenue of Royal Enfield has been from Classic 350. Company has made this possible by reducing the waiting time from 7 months in FY13 to 0 months in FY20. RE ventured into higher-priced 650cc bikes by launching 2 models. 55% of buyers of these Twins were upgraders from RE itself and 55% of total sales were from metro cities. This can be credited to rising discretionary spending levels in India which grew from 59% in FY10 to 67% in FY20.

RE has targeted countries similar to India in terms of economic development for exports. It exports to Thailand, Argentina, Colombia, Brazil and even North America among others. Brazil has the highest potential in international markets as it is the largest mid-sized motorcycle market globally (except India). Mid-Sized motorcycle market in Brazil has 12% market share and the country has a thriving motorcycling culture as well.

Eicher Motor’s CV volumes strongly grew till FY19. It is a dominant player in Light-to-medium duty Vehicles and has a market share of ~28% in India. It also has ~14% market share in the bus segment in India. In 9MFY20, Eicher’s CV segment saw decline in volumes year on year, but still managed to gain marketshare, reflecting the intensity of slowdown faced by the sector in the country. VECV volumes dropped 30.7% year to date, compared to the industry drop of 41.6%.

Eicher has amongst the best margins in the industry and has been able to operate with zero debt. It has consistently outperformed its peers by posting superior return on equity (RoE) and return on capital employed (RoCE). Its volumes grew 40% CAGR over FY10-FY18. But after FY18, company has posted stunted growth with de-growth in recent quarters. In 9MFY20, sales volume of RE fell by 15% YoY. CV sales also dropped considerably while exports volumes dropped as much as 50% YoY. Realizations growth has stunted and operating margins have continuously deteriorated as it fell to 25% from 31% two years ago.

Risks:

Competition: Royal Enfield has enjoyed almost a complete monopoly in the Mid-Sized motorcycle segment. But recent entries of strong players like Jawa, Harley Davidson (Tie-up with Hero), Husqvarna etc. can capture RE’s existing market.

Slowdown: New regulations like ABS norm, BS6 introduction, Insurance policy rulings etc. have increased the prices in the auto sector which is already undergoing a slowdown.

Studios establishment: Royal Enfield bikes cater to people with higher incomes. Failure of studios in rural areas where mass segment bikes are popular will strongly affect the domestic growth aspects of the company.

Final Thoughts:

Eicher Motors has posted phenomenal growth under its very competent management team. It has outperformed the industry and created a brand which is a moat in itself. Now, this momentum has stopped and COVID lockdown has the potential to make matters worse as it will affect discretionary spending in India which will affect the company at least in the short-term. But the company has shown in the past its ability to bounce back. With its price falling by more than 35% in the last 3 months, it provides an attractive entry point.

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