Despite significant volume erosion, Eicher Motors, the maker of Royal Enfield motorcycles, reported a 4.3% year-on-year (y-o-y) increase in consolidated net profits to Rs 572 crore for the July-September quarter, aided by lower tax expenses and higher other income.
The profits would have fallen over 20% y-o-y in Q2 FY20 but higher other income and substantially lower tax expense helped the automobile firm arrest that and beat the Bloomberg consensus estimates of Rs 458 crore. Tax expenses fell 89% y-o-y to Rs 28 crore as the company switched to the lower corporate tax rate introduced in September. Eicher shares rose 2.5% after the results announcement. It finally closed at Rs 21,700.85, up 1.29% on BSE.
Operating profit margin fell 560 basis points at 24.7%, sharpest in over three years, impacted by higher raw material costs, employee expenses and lower volumes.
Consequently, the firm’s earnings before interest, tax, depreciation and amortisation (Ebitda) declined 26% y-o-y to Rs 541 crore. Raw material costs as a share of net sales rose 120 bps in Q2 FY20. This was the fourth consecutive quarter since March 2016, that the margin fell below 30%.
Revenue from operations declined 9.3% y-o-y to Rs 2,171 crore as motorcycle volumes fell 21% y-o-y to 163,390 units and sales of its commercial vehicle joint venture VE Commercial Vehicles (VECV) dipped 40% y-o-y to 11,370 units during the quarter.
Eicher Motors managing director Siddhartha Lal said the commercial vehicle industry continues to be challenging due to weak industry sentiment. “However, VECV gained market share in Q2 FY20 despite decline in total industry volume,” Lal said.
Volumes remained subdued for the fourth consecutive quarter, impacted by rise in prices and limited availability of finance from the non-banking finance companies.
Royal Enfield CEO Vinod Dasari said it was difficult to give an outlook for the full year and the year after that as the industry would move to BS-VI emission norms from April 2020. “One school of thought is there will be pre-buying and other is people may wait for BS-VI vehicles to be launched. We have been very nimble-footed and reduced our inventory to just about three weeks,” Dasari said at the post-results media call.
Analysts lowered Royal Enfield’s volume growth and margin estimates due to rising competition and expected increase in prices. “We lower our volume estimates for FY20 and FY21 by 4% and 1%... as there is further risk from the price hikes due to BS-VI norms and competition. Margins are likely to remain under pressure,” analysts at Nomura said.
Profits of VECV — Eicher's joint venture with AB Volvo — fell 89% y-o-y to Rs 15 crore while revenue from operations dipped 32% y-o-y to Rs 2,004 crore. VECV CEO Vinod Aggarwal said the CV industry continues to go through a challenging phase, with extreme slowdown in demand.
“In the first half of this year, industry volumes have declined by 36% with an even higher drop of about 50% in the second quarter.”