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Low demand: Royal Enfield shifts production target

Updated: April 3, 2019 7:18:19 AM

To enhance product portfolio and development of new platforms, RE has lined up a capital expenditure of `700 crore for FY20, less than the `800 crore it had earmarked for FY19.

Since August, volumes of RE have been under pressure growing in low single digits. November onwards, volumes declined in the range of 7-15% year-on-year (y-o-y) as vehicles became costlier due to rise in insurance cost and mandatory anti-lock braking system (ABS).

By Pritish Raj

Having failed to meet the FY19 production guidance of 9.5 lakh units amid slowing demand, Royal Enfield (RE) has shifted the target to FY20, saying the company will strengthen its product portfolio and work towards new global platforms.

In a late night statement to the exchanges on Monday, the Eicher Motors-owned company said it “plans a production of 9,50,000 motorcycles for 2019-20”. The Enfield stock, however, rose nearly 2% to close at `20,581 on the Bombay Stock Exchange after the company announced on Monday night Vinod Dasari would be taking over as CEO.
In November last year, RE’s management had cut the full-year (FY19) production guidance by 25,000 units — from 9.5 lakh to 9.25 lakh — because of a nearly two-month labour strike at its Oragadam facility in Tamil Nadu, which led to a production loss of about 28,000 units.

Thereafter, post Q3FY19 results, the management further trimmed the guidance to 8.7 lakh units, citing high inventory and low demand. However, the company could not meet the revised guidance too as production during FY19 stood at around 8.15 lakh units. An over a week strike again at the Oragadam facility in February, which the union members called over wage revision and confirmation of temporary workers, led to a production loss of another 3,000 units.

Since August, volumes of RE have been under pressure growing in low single digits. November onwards, volumes declined in the range of 7-15% year-on-year (y-o-y) as vehicles became costlier due to rise in insurance cost and mandatory anti-lock braking system (ABS).

March saw the steepest decline of 20% y-o-y as a result of which the FY19 volume growth remained almost flat. Analysts attribute the slowdown witnessed in recent months to increasing brand fatigue, no successes beyond the Classic range and steep price hike of around 15% due to insurance cost and mandatory ABS.

“Seasonal weakness in 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 Jefferies noted.

Siddhartha Lal, MD of Eicher Motors, had said during the investor call post-December 2018 quarter earnings 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,” Lal had said.

To enhance product portfolio and development of new platforms, RE has lined up a capital expenditure of `700 crore for FY20, less than the `800 crore it had earmarked for FY19.

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