Eicher may face speed breaker on margin front

Hike in raw material costs adds to pressure

The Eicher Motors stock rose 4 per cent on Thursday, following a steady performance in the December quarter (Q3). It gained market share despite a 6 per cent year-on-year (YOY) fall in two-wheeler volumes, given the fall in peer volumes was sharper.

Growth was strong on a sequential basis, led by expansion of its network both in the large format as well as studio stores. The firm launched variants and offered customised options to improve volumes.

From a small base, export volumes jumped YOY, led by new products such as the 650cc twins and the Himalayan.

The firm is expanding exports to markets such as Brazil, thereby boosting the overall touch points to over 600 outside India.

While future volume growth depends on the ability of customers to absorb higher prices, analysts are sceptical on the company passing on the entire rise in costs across models.

A sharp rise in price of precious metals, used in the catalytic convertors, could put additional pressure. This is even as the firm looks to balance volume growth while maintaining margins.

The Volvo Eicher Commercial Vehicle business continues to be weak, with revenues falling 23 per cent in the quarter, on the back of a 27 per cent fall in volumes. This was largely in the medium-to-heavy truck segment.

Even though volumes have been weak, the firm gained market share as the sector’s volumes fell 37 per cent.

Eicher indicated there has been some pre-buying ahead of the BS-VI roll-out deadline. However, given the transition and higher prices of BS-VI products, analysts believe volume growth in commercial vehicles will be tepid.

The company, however, has indicated it has an edge over competitors as it has been making Euro VI engines for Volvo’s global operations. Analysts say Royal Enfield is better positioned than peers, given its smaller BS-IV inventory, an affluent customer base, and lighter competition in its product segments.