Analysts said pressure on margins may continue, given that demand is weak and because the Royal Enfield bikes are expensive and costly to maintain.
Eicher Motors on Friday reported a 16% year-on-year fall in adjusted consolidated net profit after tax to Rs 544.84 crore in the three months to March due to a fall in revenue. Earnings were driven down by a 13% year-on-year decline in two-wheeler volumes and fell marginally by 1% year-on-year.
The Gurgaon-headquartered firm’s operating margins contracted by as much as 410 basis points year-on-year to 27.4% due to factors including higher raw material cost and rising other expenses.
Raw material costs as a share of net sales rose 375 basis points year-on-year. This was the second consecutive quarter since March 2016, that the margin fell below 30%. Consequently, the firm’s earnings before interest, tax, depreciation and amortisation (Ebitda) declined 14% year-on-year to Rs 685 crore in Q4FY19.
Analysts said pressure on margins may continue, given that demand is weak and because the Royal Enfield bikes are expensive and costly to maintain. “We believe that the company would not be able to sustain its margins in the current scenario of declining volumes,” analysts at Kotak Institutional Equities wrote.
Siddhartha Lal, managing director, Eicher Motors, said the fourth quarter had been challenging and that the company witnessed subdued demand after several years of high sales growth. “The latter half of 2018 was a challenging period for the two-wheeler industry in India with a revision in insurance cost, increase in prices on account of new safety norms which affected consumer sentiment,” Lal said.
Royal Enfield, the two-wheeler division of Eicher Motors, sold 1,97,567 motorcycles in the quarter, a decline of 13% from 2,26,907 units it sold in Q4FY18. Volumes have 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 pushed 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, there has been a weak demand for the entire two-wheeler industry, Royal Enfield particularly has borne the brunt because its bikes are pricier than those in the commuter segment.
Analysts expect weak demand and high ownership costs to affect volumes. Royal Enfield has raised prices more aggressively than the increases in costs, which has impacted affordability. “We expect further 6-7% price increase from 4QFY20 due to a switch-over to BS-6 emission norms, which may impact demand in FY21 as well,” analysts at Nomura said.
Profits of VE Commercial Vehicles (VECV) — Eicher’s joint venture with AB Volvo — declined 22% year-on-year to Rs 139 crore, hit by decline in volumes since the second half of FY19. VECV’s revenue from operations too fell 3% year-on-year to Rs 3,209 crore as purchases got postponed due to the general elections and slowdown in infrastructure projects.
Analysts said relaxation in load axle norms continues to impact demand despite healthy traction in the tipper segment. The government last year hiked the loading limit for CVs, as a result of which fleet operators got more bandwidth to load goods and new purchases are getting postponed.