Faster Than A Bullet, Enjoy A Royal Ride With Eicher Motors

Automobile industry in India is one of the largest and most competitive ones among all the countries in the world. It contributes over 7.1 per cent of the country's gross domestic product (GDP). Till March 2015, around 31 per cent of the small cars sold globally are manufactured in India. It does not cover 100 per cent of the technology or components required to make a car but it is giving a good 97 per cent.

Volume wise the two wheelers segment with 81 per cent market share is the leader of the Indian automobile market. The reason for huge percentage of share is country’s growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. The passenger vehicle (PV) segment has 13 per cent market share.

India is also a prominent auto exporter and has strong export growth expectations for the near future. During April-January 2016, exports of commercial vehicles registered a growth of 18.36 per cent over April-January 2015. In addition, several initiatives by the Government of India like Make in India and the major automobile players in the Indian market are expected to make India a leader in the two wheeler (2W) and four wheeler (4W) markets in the world by 2020.

Government of India encourages foreign investment in the automobile sector and allows 100 per cent FDI under the automatic route.  The industry has attracted Foreign Direct Investment (FDI) worth USD 14.32 billion during the period April 2000 to December 2015, according to data released by Department of Industrial Policy and Promotion (DIPP).

The Indian automotive sector has the potential to generate up to USD 300 billion in annual revenue by 2026, create 65 million additional jobs and contribute over 12 per cent to India’s GDP, as per the Automotive Mission Plan 2016-26 prepared jointly by the Society of Indian Automobile Manufacturers (SIAM) and government.

The growth opportunities for automobile sector are looks promising so in this analysis we took deep dive into the financials of Eicher Motors in detail.

Eicher Motors (Eicher) is a leading player in the Indian automotive space. Eicher also owns the iconic Royal Enfield motorcycle business, which leads the premium motorcycle segment in India. The oldest motorcycle company in continuous production world-wide, Royal Enfield has witnessed a huge surge in demand in the recent past, and is charting its course to be the leading player in the mid-size motorcycle segment globally. Its 50-50 joint venture with the Volvo Group, VE Commercial Vehicles Limited, designs, manufactures and markets reliable, fuel-efficient trucks and buses; and is leading the path in driving modernisation in commercial transportation in India and other developing markets. EML’s 50:50 strategic joint venture with the US-based Polaris Industries Inc., Eicher Polaris Private Ltd., is in the start-up phase currently designing and developing and will soon manufacture and sell a full new range of personal vehicles.
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Till December 2014 Eicher used calendar year for declaration of financials but in 2015 it changed it to financial year. So for the analysis we took trailing financials of last 4 quarter of 2015 and compared them with previous year.

Since 2010, Eicher has been leading the growth in the premium segment of motorcycle industry. It is the fastest growing segment within the motorcycle industry and Eicher has more than 90 per cent market share in this segment. This leadership position has been attained by the success of all motorcycles company has launched since 2010 - Bullet, Thunderbird, Classic and Continental GT.

The company’s Royal Enfield unit continues to grow strongly. It sold 3,02,592 motorcycles in the year 2014, 69.9 per cent growth over 2013 sales volume of 1,78,121 motorcycles. Of 3,02,592 motorcycles sold in 2014, 6,221 were exported, a growth of 46.2 per cent over 2013 volume of 4,256 motorcycles.

VE commercial vehicle (VECV) has been persistently working towards building its strengths, drawing from the Eicher Motors and Volvo Group lineage. VECV outpaced the industry in both 5-14 tonne Light and Medium Duty (LMD) and Buses segments. In LMD, VECV recorded its highest ever market share of 32.6 per cent for the year. In the Buses segment as well VECV posted its best ever market share of 14.9 per cent. This was despite the overall market for both LMD and Buses declining in 2014. VECV’s Volvo Trucks division also saw an impressive growth of 27 per cent with sales of almost 900 units for the year. VECV also had a tremendous year in international sales having sold more than 5,800 units, a growth of 77 per cent over 2013. This is a reflection of VECV’s growing acceptance in export markets.

In both businesses, Eicher makes a breakthrough via challenging the status quo and shifting the market to a different place, rather than competing in the stronghold of the established players. The company achieved this via sharp product-market offering and a great focus on nurturing brands, backed by a lean and agile business model.

As compared to peers, Eicher is one of the most profitable companies in the automotive business with no leverage and a consistently growing top line. At 22.5 per cent, Royal Enfield’s 2014 Earnings before interest and taxes (EBIT) margin is better than that of any other motorcycle company in the world, and possibly the highest level compared to any automotive brand globally as well. VECV’s EBIT margin at 3.7 per cent was the best amongst Indian CV companies in 2014; and VECV’s lean business model gives it the distinction of being the only CV company to remain profitable in every quarter during the longest downturn in the recent decades for the Indian commercial vehicle industry.

Royal Enfield enjoys high credibility and has seen phenomenal growth over the years. The company’s focused marketing efforts, improved product quality and expanded distribution network have enabled the brand to expand its reach to a much larger customer bases.

Demand for Royal Enfield continues to remain strong on increasing acceptance of premium segment bikes in India. Royal Enfield is the direct beneficiary of pick up in the leisure biking trend. Currently, the segment just accounts for about 3 per cent of the motorcycle industry and has tremendous demand potential. Eicher enjoys virtual monopoly in the space commanding a market share of 95 per cent on back of strong brand image and appropriate pricing which is very difficult to replicate. The company has set its goal to be a leader in the global mid-size motorcycle market. In order to achieve this goal, the company will invest in increasing manufacturing capacity, strengthening supply chain, developing product development infrastructure and expanding distribution network. The company will invest in all these areas to seize the significant opportunities for growth that it believes lie in India and international markets.

Recently, the company launched its 400 cc (cubic capacity) tourer bike Himalayan which is likely to boost the demand in the upcoming period. The company continues to have an order backlog with higher number of orders being taken per month than the actual production despite huge capacity addition.

Further, after three consecutive years of downturn, the commercial vehicle segment is poised to recover over the next two to three years. Better economic growth and improvement in fleet utilization is expected to boost volumes.
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Eicher has been facing positive tailwinds with revenue increasing by compounded annual growth rate (CAGR) of 15.56 per cent over the period of five years. During the same period the company’s expenses increased by CAGR of 14.72 per cent. EBITDA (earnings before interest, depreciation and amortization) CAGR increased by 20.80 per cent. CAGR of operating and direct expenses saw hike of 14.72 per cent in last 5 years. CAGR of Profit after Tax (PAT) too saw a jump of 25 per cent in the last five years.

The company’s total revenue from operations for FY15 increased by 35.74 per cent and reached to Rs 12008 crore from Rs 8846 crores in the previous fiscal. The EBITDA also increased to Rs 1882 crores from Rs 1222 crore, representing a growth of 54 per cent year on year (YoY). The EBITDA margin stood at 15.67 per cent for FY15 compared to 13.82 per cent same period last year. The increase in EBITDA is on back of slow decrease in material consumed compared to growth in sales. The material consumed for FY15 increased by 31.37 per cent compared to 25.05 per cent a year before. It consists of 53.65 per cent of sales in FY15 compared to 55.44 per cent same period last year.

The net profit of the company stood at Rs 943 crores compared to Rs 615 crores in FY14 an increase of 53.30 per cent from the previous year. The net profit margin stood at 7.86 per cent in FY15 compared to 6.96 per cent same period last year. As compared to industry, the company enjoys as good as no debt burden. The debt of the company for FY14 stood at Rs 58 crores, which is just 0.91 per cent of total assets of company. This gives substantial upsurge to Eicher. This can be proved from the 1 per cent CAGR increase in interest expenses of company in last 5 years.

On quarterly basis the company’s net revenue reached Rs 3347 crores in Q4FY16 compared to Rs 2309 crores in Q3FY15 an increase of 45 per cent year on year (YoY). The EBITDA stood at Rs 539 crores this quarter compared to Rs 318 crores in Q3FY15, an increase of 69.35 per cent YoY. The EBITDA margin stood at 16.10 per cent compared to 13.78 per cent. The increase in EBITDA is on back of slow increase other expenses and traded good purchase which increased by 33.22 and 22.67 per cent respectively. The net profit for the quarter stood at 271 crores compared to Rs 154 crores same period last year, an increase of 76.11 per cent YoY. The net profit margin stood at 8.09 per cent this quarter compared to 6.66 per cent in Q3FY15.

Driven largely by volume growth the 2W business (Royal Enfield)’s top-line grew strongly by 55 per cent YoY to Rs 1,284 crores. The VECV segment’s revenues grew 39 per cent YoY, driven majorly by strong demand in the commercial vehicle (CV) segment and market share gains.

On valuation basis the stock of the company is trading at trailing twelve month (TTM) P/E of 56.03 compared to industry P/E of 65.95.

The demand for Royal Enfield enjoying high credibility continues to remain strong on increasing acceptance of leisure bikes. The recent new launch by company will also help company to attract new demand. As the order backlog is increasing every month the company is also looking for to increase production which will help company in long run. All in all, the future prospectus of company is really good and going ahead we recommend a BUY on the stock.