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Eicher: 2-wheeler biz continues to zoom

May 14, 2013

Eicher Motors declared its results for the quarter ended March 2013. While the company reported a 3% YoY growth in consolidated net sales, its consolidated net profits declined by 11% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone business' (Royal Enfield) revenues rise by 51% YoY during 1QCY13 (December ended accounting period) led by a 45% YoY increase in two-wheeler volumes.
  • Operating margins expand by 3.8% YoY to 17.7% on the back of lower other expenses and raw material expenses, while profits rise by 114% YoY on the back of a strong operating performance coupled with higher other income.
  • Overall commercial vehicle volumes of the company decline by 12.7% YoY as compared to corresponding quarter last year.
  • Consolidated revenues rise by 3.4% YoY, while net profits decline by 11% YoY.

Financial snapshot
  Standalone   Consolidated  
(Rs m) 1QCY12 1QCY13 Change 1QCY12 1QCY13 Change
Net sales 2,214 3,338 50.8% 16,682 17,243 3.4%
Expenditure 1,907 2,747 44.1% 14,880 15,539 4.4%
Operating profit (EBDITA) 307 591 92.7% 1,802 1,705 -5.4%
EBDITA margin (%) 13.9% 17.7%   10.8% 9.9%  
Other income 264 682 158.0% 543 444 -18.3%
Depreciation 38 60 56.1% 177 275 54.8%
Interest 0 1 66.7% 9 6 -27.1%
Extraordinary items - -   - -  
Profit before tax 532 1,212 127.8% 2,160 1,868 -13.5%
Tax 79 240 204.3% 525 541 2.9%
Effective tax rate 15% 20%   24% 29%  
Profit after tax/(loss) 453 972 114.4% 1,634 1,328 -18.8%
Minority interest - -   539 348 -35.4%
Net profit after tax/ (loss) 453 972 114.4% 1,096 979 -10.6%
Net profit margin (%) 20.5% 29.1%   6.6% 5.7%  
No. of shares (m) 27.0 27.0   27.0 27.0  
Diluted earnings per share (Rs)*   72.8     115.8  
Price to earnings ratio (x)   44.8     28.2  
(*On a trailing 12-month basis)

What has driven performance in 1QCY13?
  • Eicher Motors' two-wheeler volumes (Royal Enfield business) grew by over 45% YoY during the quarter ended March 2013. It may be noted that the company also had taken a marginal hike of 1% during the month of February 2013.

  • Standalone margins expand by 3.8% YoY on the back of lower raw material costs coupled with lower other expenses. Operating profits rise by 93% YoY during the quarter. Further, standalone profits rise by 114% YoY. Apart from a strong operating performance, the company's profits got a fillip due to higher other income. Other income during the quarter includes Rs 408 m of dividend received from its subsidiary - Volvo Eicher Commercial Vehicles (VECV). On excluding the same, profit before tax would have increased by 51% YoY only. Depreciation costs rose by 56% YoY on the back of the company setting up a new two-wheeler facility at Oragadam.

  • Eicher Motors' consolidated revenues rose by only 3.4% during the quarter, while its net profits declined by 19% YoY (not adjusted for minority interest). Lower operating margins coupled with lower other income and higher depreciation charges led to a 14% YoY decline in profits before tax.

  • As per the company, it sold 12,388 units of commercial vehicles during the quarter, which is a figure lower by about 13% YoY. However, when compared to the overall CV volumes (5 tonne plus segments), it does not look so bad given that industry volumes declined by 31% YoY during the quarter. In the process, the company's market share moved up as well. In the 5-14 tonnes category, the company's volumes declined by 16% YoY as compared to the industry segment's overall volume decline of 19.5% YoY. Thereby Eicher's market share in this category improved to 31%. In the 16 tonne plus category, the company's volumes declined by 7.8% YoY as compared to the industry segment's volume decline of 39% YoY.

What to expect?
At the current price of Rs 3,263, the stock is trading at a multiple of 28.2 times its trailing twelve month consolidated earnings. Eicher Motors' performance in the standalone business has been moving along at a strong pace. The company continues to witness high demand of its two-wheelers. At the same time, the waiting period for the two-wheelers has been high as well. However, with the new plant coming up, the company is looking opening up its supply bottlenecks. The new two-wheeler plant at Oragadam has capacity to produce 175,000 vehicles (as part of its phase - I). The company plans to scale this up to 250,000 in the medium term and over the long term (5 to 8 years). The aim is to touch the plant's maximum capacity of 500,000 vehicles. The company plans to move into the export market - wherein it would be targeting emerging markets such as Latin America, South East Asia, Middle East, Africa, amongst others. It may be noted that in CY12, export volumes stood at 3,500 units only.

Further, the company is also making efforts to increase its reach, especially into the smaller cities and towns. Royal Enfield's dealership currently stands at about 260. At the end of December 2012, the figure stood at 249. The company is looking to expanding the same by about 5-6 every month, aiming to add a total of nearly 80 dealers in the full year 2013.

As for the commercial vehicles business, while the industry volumes continue to dwindle, the situation has been the same for Eicher, albeit in a lesser manner. This has led the company to increase its market share in the process. When the overall cycle will turn is a difficult question to answer. But the management is hopeful of things taking a turn for the better soon given that the CV market is at its bottom.

We came out with a report on Eicher Motors on 13 February 2013, when the stock closed at a price of Rs 2,620. While the stock had potential to move up, we suggested that investors should wait for the stock price to fall to Rs 2,300 or lower before buying it - in order to earn better returns on a compounded basis. The maximum the stock declined since then was to Rs 2,544. At the current price, the stock is up by nearly 25% on a point to point basis since the date of recommendation. In the process, the stock has only gotten more expensive, which is why we believe that investors should wait till the stock corrects.

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