Eicher Motors margins, volumes to remain under pressure: Analysts

Published: February 13, 2019 5:51 AM

Siddhartha Lal, managing director and CEO Eicher Motors said that the latter half of 2018 was a challenging period for the two-wheeler industry in India.

Siddhartha Lal, managing director and CEO Eicher Motors said that the latter half of 2018 was a challenging period for the two-wheeler industry in India.

by Pritish Raj

With Eicher Motors’ Ebitda margins falling below 30% in Q3FY19 for the first time in 9 quarters, analysts believe the company would not be able to sustain its margins in the current scenario of declining volumes. Volumes declined 6% y-o-y in the December quarter, while net profit grew marginally by 2.4% y-o-y.

The company’s operating margin contracted 220 basis points to 29%, led by higher staff costs resulting in negative operating leverage and Ebidta declined 4% y-o-y to Rs 680 crore in Q3FY19. For FY20 and FY21, analysts have trimmed the operating margin estimates by 60 basis points and 120 basis points, respectively.

Shares of the company fell around 2.5% to Rs 20,331 apiece after the earnings announcement on Monday on the Bombay Stock Exchange (BSE). On Tuesday, the stock closed at Rs 21,032.10, up 1.73%.

Analysts said price hikes due to new safety norms and shift to BS-VI from April 2020 could slow down volume growth for Royal Enfield (RE), the two-wheeler division of Eicher Motors.

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“We expect margin to remain under pressure as the company may also have to increase dealer margins to support dealers if volumes continue to decline,” analysts at Kotak Institutional Equities (KIE) said.

Siddhartha Lal, managing director and CEO Eicher Motors said that the latter half of 2018 was a challenging period for the two-wheeler industry in India.

“Factors like increased insurance requirements, rising raw material costs and the subsequent price increase due to regulatory safety requirements impacted the momentum of the industry,” he added.

During November and December months, volumes declined around 10% y-o-y. Analysts at Jefferies had earlier said seasonal weakness in November and December post the festive season peak, is likely to affect near-term volume growth given the absence of seasonality in the base for Royal Enfield.

Analysts at Nomura said steep price hikes taken by Royal Enfield in the past and expected in future may take on a toll on volume growth.
“The key risk to RE’s volume growth is steep price hikes, which could impact affordability and make it easier for competition to gain share,” they noted. The company had taken a 5% price hike in December-January period due to new anti-lock braking system (ABS) fitted in the motorcycle and 1% hike in February. Analyst at Nomura expect another 6-7% hike required when the company will launch the BS VI compliant bikes. The company’s 80% of portfolio has ABS now which has increased costs substantially ahead of time.

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