Royal Enfield banks on exports as domestic demand slows

Published: May 15, 2019 12:27:59 AM

The company’s latest plan assumes significance as volume growth in India has been under pressure since November last year, owing to higher insurance premiums and costlier finance.

Eicher Motors MD Siddhartha LalEicher Motors MD Siddhartha Lal

By Pritish Raj

To make up for the volume losses in the domestic market, Royal Enfield has carved out a strategy for the global markets, which includes creating an affordable leisure biking segment in the 250-650cc engine capacity with new product launches and opening of exclusive stores in new countries, among others.

The company’s latest plan assumes significance as volume growth in India has been under pressure since November last year, owing to higher insurance premiums and costlier finance. 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. In the January-March quarter, sales declined over 13% year-on-year.

According to an insider, the emphasis on exports by Eicher Motors — the parent of Royal Enfield (RE) — has increased over the past few months as the company does not see any major signs of improvement in the domestic market till BS-VI norms get implemented. “There will be after-effects of the new emission norms, too, as prices will go up and the gaps can be filled through incremental volumes in the international market,” the person told FE.

The successive decline in sales since the second half of last year led to significant production cuts by the company to keep the channel inventory under control. However, dealers say while production cuts has improved the stock situation slightly, demand is still way below normal.

Siddhartha Lal, managing director of Eicher Motors, said the company was focused on creating an affordable leisure biking segment in 250-650cc and in the price range of $3,000-7,000.

“Eicher has recently started executing its export strategy based on experiential marketing like it did in India and is opening exclusive stores in markets like Latin America, Indonesia, London, Paris, Madrid and ASEAN countries,” Lal told analysts in an investor call after the Q4 results.

As part of the export strategy, the company will double its exclusive stores count during the ongoing financial year (FY20). Besides, new products will be developed which will be relevant for the export markets. Globally, the size of 250cc-650cc segment is 1 million annually, dominated by sports and street biking segment. Exports from India for premium segment over 150cc is over 5 lakh units annually. However, RE’s exports were just around 20,000 units in FY19.

Analysts said the focus of Eicher Motors would now be on expanding addressable market through improving product quality and new product launches. “The company will be expanding dealership in sync with capacity expansion and driving paradigm change in retail identity, which in turn will improve visibility of sustenance of strong growth,” analysts at Motilal Oswal wrote.

As volumes dwindled, the company’s adjusted profits fell 16% y-o-y in Q4. Further operating margins declined by a good 410 basis points to 27.4% due to factors including higher raw material cost and other expenses. This was the second consecutive quarter since March 2016 that the margin fell below 30%.

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