High base effect catching up with Eicher

Margins can be retained at industry-high levels of over 30%

Eicher Motors’ March 2018 quarter (Q4) results were largely on expected lines, except for a onetime loss of ~1.9 billion due to closure of its joint venture, Eicher Polaris. Thus, consolidated net profit came flat year-on-year (yo-y) at ~4.62 billion. However, excluding the loss, net profit surged 38 per cent y-o-y in Q4, a tad ahead of estimates, supported by a 53 per cent jump in profit of VE Commercial Vehicle (VECV), a joint venture of Eicher with the Volvo Group.

Consolidated revenue grew 34 per cent y-o-y in Q4, led by a 5.2 per cent rise in realisation and 27 per cent growth in motorcycle volumes (Royal Enfield, its mainstay).

Notably, gross margin expanded by 124 basis points (bps) to 48.4 per cent, owing to three to five per cent price hikes, with control over raw material expenses. Raw material cost as a percentage of revenue came down to 51.6 per cent, from 52.9 per cent in a year before. Earnings before interest, tax, depreciation and amortisation (Ebitda) increased 56 bps to 31.5 per cent. Analysts expect margins to sustain at these levels. “Given the strong demand for Royal Enfield, Eicher can easily pass on input cost pressure to sustain margin,” says Prayesh Jain, assistant vice-president at IIFL Wealth Management.

The key challenge would be to accelerate volumes of Royal Enfield. “Even after considering management’s 16 per cent volume growth forecast (23 per cent in FY18), growth is slowing in Royal Enfield, mainly due to a heavy base. Exports will take some time to show some sharp uptick.” At 16 per cent, it would be the lowest annual increase in Royal Enfield volumes for many years.

The VECV segment should do well, given the potential demand for commercial vehicles, Jain adds. According to the management, Eicher’s latest range of modern Pro-Series trucks will be able to grow its market share further in the coming months.

Apart from the new bike launches in the last financial year, some more are planned in FY19, besides an ~8-billion investment to up capacity and to foray into new international markets. If Eicher can surprise on volumes, it will be easier to justify the current high price to earnings valuation of 38 times based on its FY18 earnings.