For Eicher Motors, recovery gains already factored in

Near-term can see pressure on volumes due to demand as well as supply concerns

An aggressive launch pipeline, expanded distribution network, and strong order book for Royal Enfield are expected to help Eicher Motors benefit from a rebound in volumes once recovery takes hold.

Led by the Meteor 350, the company has pending bookings for over two months and is planning to launch a new model every quarter in FY22. It has also expanded its distribution network by 35 per cent; the company now has a presence in 1,750 cities. It added 104 large-size stores and 431 studio stores last year in India and strengthened its global footprint with new stores across 60 countries.

While an aggressive FY22 launch plan is positive, the company can face nearterm demand headwinds from rural, as well as urban markets, due to the second wave of Covid. Further, semiconductor shortages and supply chain disruption due to the pandemic can have an impact on volumes in the first quarter.

The company, which reported a 25 per cent increase in volumes in the March quarter, expects demand recovery to start from July this year. While the company has taken price hikes to the tune of 3-8 per cent last year to combat inflationary pressures, it may take calibrated hikes and reduce costs through value engineering projects.

It has significantly reduced the use of rhodium, a precious metal, to manage cost pressures. The operating profit margin at 22 per cent was 150 basis points lower on a sequential basis due to a lower gross margin and loss on account of vendor advances. Analysts expect the company to maintain its margin at around the 23 per cent mark on the back of price hikes.

In the commercial vehicle segment, the company gained market share last year, led by the BS-VI portfolio and expects the gains to continue. However, a revival can take longer as compared to the two-wheeler segment.

While analysts are positive about the company’s prospects, they believe the gains are factored into the stock. At the current price, the stock is trading at 25x its FY23 earnings per share estimates; investors can consider the stock on dips.