Eicher Motors Q1 net profit falls 22 pct

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Published: August 1, 2019 1:11:21 AM

Eicher Motors, the maker of Royal Enfield motorcycles, reported a 21.6% y-o-y decline in its net profit at Rs 451.77 crore, due to a near 20% y-o-y decline in volumes and higher expenses.

Analysts expect a flat growth for Royal Enfield in the next two years.

Eicher Motors, the maker of Royal Enfield motorcycles, reported a 21.6% y-o-y decline in its net profit at Rs 451.77 crore, due to a near 20% y-o-y decline in volumes and higher expenses. The profits fell short of Bloomberg consensus estimates of Rs 490.38 crore.

Operating profit margin fell by a massive 560 basis points to 25.8%, sharpest in many years, impacted by higher employee and other expenses. Consequently, the firm’s Ebitda declined 24% y-o-y to Rs 614 crore. While employee expenses rose 23.8% y-o-y, other expenses grew 9% y-o-y. This was the third consecutive quarter since March 2016, that the margin fell below 30%.

Vinod Dasari, CEO, Royal Enfield said the Ebitda margin was lowest in the last 2-3 years. “The sentiment is quite low as first it started with the lack of credit availability and then the overall economy started slowing down,” Dasari said in the post results conference call with the media.

Post Q4FY19 results, analyst at Kotak Institutional Equities had said pressure on margins may continue, given that demand is weak and cost of ownership is high for the Royal Enfield bikes. “We believe that the company would not be able to sustain its margins in the current scenario of declining volumes,” they wrote.

While revenue from operations during the April-June quarter fell 6.5% y-o-y, volumes of Eicher fell 19% to 181,966 units, hit by higher prices and limited availability of finance from the NBFCs.

Siddhartha Lal, managing director of Eicher Motors attributed the fall in profits to weak consumer demand for two-wheelers and commercial vehicles. “The two-wheeler and the CV industry continue to face headwinds on account of weak consumer demand,” Lal said.

Volumes of the company has been under pressure since November last year after the implementation of compulsory third party insurance cover for all two-wheelers. While the insurance regulation had shot up premiums, early price hikes taken by the company on account of new features provided to comply with safety norms from April 1, 2019, further impacted demand.

Although, the entire two-wheeler industry is witnessing a slowdown, the impact on Royal Enfield is higher because of higher ownership cost as the price of its vehicles are much more than the ones in the commuter segment. Analysts expect a flat growth for Royal Enfield in the next two years.

“We maintain our view of weak near-term demand for RE and the risk from rising competition from Jawa. Notably, RE’s flagship model Classic 350 has been declining by 30% y-o-y over March-April 2019 and thus we expect flat volume growth in FY20F-21F,” analysts at Nomura said. They further said cost pressures related to BS-VI and higher capacity will impact profitability.

On the outlook, Dasari expects the demand to revive during the upcoming festive season. “The government is mulling steps to accelerate demand. I think the festive season will revive demand and sooner rather than later, the market will turnaround,” Dasari said.

Profits of VE Commercial Vehicles (VECV) — Eicher’s joint venture with AB Volvo — fell 68% y-o-y to Rs 38 crore, while revenue declined 14% y-o-y to Rs 2, 255 crore.

The management attributed the fall to low replacement demand and lower availability of loads due to slowdown in economy.

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