Eicher: Gaining from sharp product focus
Operating profit margin sustained at over 30 per cent; net profit continues to grow at 31 per cent
Even as the auto industry is headed for some readjustments in profitability as input costs are once again on the rise, Eicher Motors’ ability to sustain the 30 per cent operating profit margin in the March quarter (Q4) is commendable. This indicates if rightly invested in a good product line and quality is maintained, demand follows and customers tend to remain loyal. That’s the key takeaway from Eicher’s Q4 results.
Riding on a neat 20 per cent increase in volumes for its Royal Enfield motorcycles and 12.6 per cent growth for its commercial vehicles, net revenue at ~1,888 crore in Q4 grew by 23 per cent year-on-year (yo-y). Since revenue growth was strong, it supported the 15 per cent and 17 per cent increase in raw material costs and other expenses, respectively. Therefore, not just did the operating profit expand by 31 per cent y-o-y to ~585 crore in Q4, even operating margins at 31 per cent was better than 29.2 per cent a year ago. Q4 was the fourth consecutive quarter of 30 per cent-plus margins.
However, analysts say even if Eicher, given its leadership in the premium motorcycle space, could successfully pass on any price hikes if necessary, it could be ambitious to expect improvement to profitability. This is because the margin is down a bit from 31.4 per cent in the December quarter. Sneha Prashant of HDFC Securities says the increasing pressures on raw material prices and selling and advertisement expenses could limit the space for further increase in margins. That said, analysts say even a 50-100-basis point decline from the current levels may not be bad, as much of margin expansions so far have been due to lower commodity prices. They say that even after a slight moderation, Eicher’s profitability may remain one of the best in the industry.
The level of profitability is despite higher volumes of its entry-level product Classic 350. Going ahead, it would be interesting to see how competition between Bajaj Auto’s newly launched Dominar and Eicher’s Classic 350 shapes up. As efforts to hedge competition, analysts say ramping up of its Tamil Nadu plant by August 2017 (ahead of schedule) should augment the current waiting period of Classic 350 by at least two months, thus revving up the volume game against Dominar.
The contribution of VE Commercial Vehicles (VECV) was no less. Charting the industry trend, in a move to offload the inventory of BS-III vehicles, VECV’s sales volumes looked robust in Q4.
Buses and light and medium duty trucks contributing adequately to the volumes and also helped Eicher maintain the 30 per cent operating profit margin. Interestingly, the management, in a call with investors, stated that unsold stock of BS-III vehicles were much lower compared to peers and this should be comfortably sold in its export market. Therefore, the need to writeoff inventory doesn’t arise.
With these positives in place, analysts remain optimistic on Eicher. Prashant reiterates her ‘buy’ recommendation with a target price of ~30,113 (16.5 per cent upside).