Global Outlook

Eicher Motors Ltd in India is likely to continue its growth story in the coming years.

Contributed by Nirmal Bang

By Nirmal Bang

Incorporated in the year 1982, Eicher Motors Ltd (EML) is the flagship company of the Eicher Group and a leading player in the Indian automobile industry. It is present in various businesses like commercial vehicles (CVs), two-wheelers and related component and design services, with CVs being the key revenue driver.

Its 50-50 joint venture with the Volvo Group, VE Commercial Vehicles Ltd (VECV) designs, manufactures and markets reliable, fuel-efficient commercial vehicles of high quality and modern technology, engineering components and provides engineering design solutions. Eicher Motors manufactures and markets the iconic Royal Enfield motorcycles.

Subsidiary Companies

INVESTMENT RATIONALE

Eicher Motors Ltd has identified the following as its main growth drivers: two-wheelers - Royal Enfield (standalone), CVs and outsourcing opportunity for Volvo (through VECV).

Royal Enfield - Back With A Bang!

Historically, the Royal Enfield brand was being neglected due to various restructuring initiatives and the company’s focus on Heavy Commercial Vehicles.

Siddhartha Lal (promoter) relinquished his role as the CEO of VECV and assumed the role of the CEO of EML in order to focus on the two-wheeler business and reinforce the Eicher brand.

‘Made like a gun, goes like a bullet’ is the bike’s punch line and Royal Enfield is all about style and distinctiveness. Keeping in mind the perception of each individual’s relationship with the bike being unique and equally distinct, Royal Enfield was repositioned as a ‘rough and tough/sturdy’ model in order to target the muscular/heavy built class of people.

Moreover, reasons like rising income, coupled with favourable demographics, entry of global players like Harley Davidson and Kawasaki into the Indian markets further promoted this culture. The bikes of global players are too expensive and Eicher faces minimal competition in the 350+ cc bikes.

Due to the above mentioned reasons, Royal Enfield is well positioned to capitalize on the strong and growing demand (6-8 months waiting period).

The company is planning to increase the production capacity of its two-wheelers from 70,000 units to 1,50,000 units in CY13. In the period from January ’11 to September ’11, it has already sold around 55,615 bikes, which is much more than the annual sales of the current year 2010.

The run rate for Eicher’s mean machine Royal Enfield has increased to approximately 7,000 units per month from its earlier figure of approximately 4,500 units per month inthe year 2010.

We also believe that the introduction of new models, restyling of the existing products and addressing capacity concerns are likely to result in strong volumes for the company, going forward.

As far as exports for Royal Enfield are concerned, the company is already present in 30 countries. The immediate focus of the company is on the domestic market as themanagement sees potential growth in the markets in the  country. Exports form around 5% to 6% of the share and the company does not see any significant change in the share immediately.

Commercial Vehicles To Benefit From JV

EML witnessed a tough time between FY04 and FY08 when it entered the high tonnage segment and could not deliver desirable results, impacting the financial performance of the company.

Post this, it took corrective steps and in 2008, Volvo entered into a JV with EML (where EML holds a 54.4% stake) and EML’s CV business was transferred into a separate subsidiary (VECV).

We believe that VECV will now achieve success in the HCV space due to the collective strength of Volvo’s technological proficiency and high quality standards, together with Eicher Motors’ distribution as well as low-cost manufacturing.

The likelihood of achieving success is very high as the joint effort and roles of both EML and Volvo are well synchronised and have successfully developed a wide range of commercial vehicles to meet the varying needs of its customers.

The CV business of Eicher Motors under VECV contributes approximately 90% to its consolidated revenues. The consolidated EBITDA margin of the company stood at 10.4% while its standalone margin stood at 12.8% Q3CY11.

The CV business of the company is growing much above the industry growth rate and the company expects it to continue further.

The company intends to increase its monthly sales of around 700 units in the third quarter of CY11 to around 1,000 units by the end of CY11E and its CV capacity to 1,00,000 units in the next 3 to 4 years with a capital expenditure of Rs.500 crore.

EML’s market share in the heavy duty segment improved 110 bps from 2.1% to 3.2% in Q3CY11. The company has  reached approximately 700 units per month in this segment and has maintained its target of approximately 1,000 units per month in CY12.

The overall CV industry saw a buoyant growth of 35% and 30% in FY10 and FY11, respectively. However, currently this industry is facing a slowdown in line with the overall auto sector and concerns of lower economic growth.

Rise in interest rates and slowing industrial growth too have brought down the growth in the CV industry to 20% during April-September ’11.

As Eicher follows the calendar year, the overall impact of this slowdown will not be visible in its CY11 numbers. However, going forward, we believe that the company will also witness pressure in this segment in CY12.

Despite this, our long-term story remains intact. With recovery in demand in late CY12 and CY13 and enhanced capacity, we believe that Eicher is poised for strong growth in the long term.

One-Stop Centre

The project VE Powertrain (VEPT) is based on Volvo Group’s decision to make VECV’s plant in Pithampur the base for its futuristic Medium Duty Engine global platform  involving an initial investment of Rs.2,880 million in the industry. The 5- and 8-litre engines will be produced and assembled in India.

VECV is already producing about 40,000 engines per year at its existing Pithampur plant. The new investment in Pithampur will see the annual production capacity of the company increasing by 85,000 engines, starting 2013.

Of this count, Pithampur will also do the final assembly of 55,000 engines per year starting 2012, which will meet Volvo Group’s global requirements of Euro 3 and Euro 4 engines as well as VECV’s requirement of Eicher heavyduty commercial vehicles.

Also, out of this 85,000 count, 30,000 base engines will be sent from the plant at Pithampur to VPT’s plant in Venissieux, France where these base engines will be assembled for Volvo Group’s Euro 5 and Euro 6 requirements, starting 2013.

Strong Network

Eicher Motors’ after sales network has been further strengthened with the addition of new dealerships and also upgradation of existing dealerships.

Eicher Group’s products are brought to its customers through its strong network of around 213 dealers that are spread across the country. The company plans to further enhance it to 225 in CY11.

Royal Enfield added 24 new outlets in 2010, with full-fledged sales, service and spare facilities confirming to Royal Enfield showroom and service standards. Eicher has around 2,500 employees located at four manufacturing facilities all over India. Eicher is present in over 40 countries across the world.

RISKS AND CONCERNS

- A significant rise in the cost of input materials like steel and aluminium will certainly put the margins under pressure.

- The retail finance norms for the two-wheeler industry continue to be tough and limited numbers of financing options are available for customers, coupled with hardening of interest rates over the past few months.

- Inability of suppliers and plant production capacity to meet demand

- Vendor capacity constraints may limit supply.

- Further slowdown in the economy.

FUTURE OUTLOOK AND VALUATIONS

Although, the final results of the initiatives taken by the company will be clearly visible only from Q1CY13 onwards, we believe that the company has taken the right step in the right direction and the initial signs of success are already visible.

Considering the robust earnings growth and strong balance sheet, we believe that EML will continue its growth story  in the coming years. We see a significant potential upside in the stock for a long-term horizon and believe that the stock can be purchased on declines.