Eicher Motors entering a challenging terrain; stock falls nearly 8%

Even as Royal Enfield’s volumes declined 16 per cent in FY20, it outperformed the sector that fell 18 per cent
The gains last week from the resumption of manufacturing operations and a partial reopening of the dealer network for the auto sector and Eicher Motors were short-lived. While the auto sector shed 5.5 per cent, Eicher fell by nearly 8 per cent on Monday. Though the company is expected to hold on to its market share in the premium segment and launch of cheaper variants are positive, near-term headwinds are hurting sentiment.

Even as Royal Enfield’s volumes declined 16 per cent in FY20, it outperformed the sector that fell 18 per cent. The company gained 145 basis points market share in FY20 to 26.5 per cent led by a low base (RE 650 twins) and downtrading in Pulsar volumes, believe analysts at Elara Capital.
The gains in the market share came despite an 8 per cent price hike on BS-VI compliant bikes. Initiatives like the launch of cheaper Bullet/Classic variants and the addition of over 500 smaller format stores supported volumes, according to Nomura. The expansion of its store network is expected to expand its reach, especially in rural areas.

 

 
The other trigger is the launch of motorcycles based on new platforms in the light-weight and higher displacement categories over subsequent quarters. Analysts at Emkay Research believe it will help widen the addressable customer base in both domestic and overseas markets.

While these factors are positive for the company, analysts say investors should adopt a cautious approach in the current environment. The first is the likely impact of customers putting off discretionary spends post the Covid-19 outbreak which will dent Eicher’s volumes, given the higher unit prices. 

Even in export markets, HDFC Securities believes that competition will increase over the medium term.
Aditya Makharia and Mansi Lall of the brokerage says that Harley Davidson and Triumph have announced partnerships to make 200-750 cc motorcycles. Makharia expects the mid-size lifecycle biking segment to become more competitive and it can be a hurdle for Eicher’s export ambitions. 

The competitors include Harley Davidson (Chinese joint venture), Triumph (Bajaj Auto), and M&M-backed Jawa Motorcycles. 

The rising exports, which currently account for 6 per cent of volumes, were a key trigger for the stock, given the medium-term expectations of volumes reaching up to a fifth of the overall sales. Investors may have to moderate expectations on this count.


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