Jeffries: Maintain ‘hold’on Eicher on volume, margin uncertainty

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Published: September 17, 2019 2:47:14 AM

In this cycle, Bajaj started the trend with the launch of Pulsar Neon which was also priced at a significant discount to its standard variant.

Jeffries, Eicher, Royal Enfield, Classic S, Bullet X, Pulsar Neon, market newsOver the last year, price of Royal Enfield’s flagship Classic 350 has increased by more than Rs 20,00 (10-15%). (Reuters)

Royal Enfield has launched cheaper variants of its flagship brands viz. Bullet X in August & Classic S last week to combat the unusually high price inflation over last year. Unlike Pulsar Neon though, we do not expect the move to be brand dilutive in the medium term. On the other hand, near-term impact on volume could also be much lower.

With volumes continuing to remain weak, RE now seems more willing to let go of some of its still high per unit margins. Over the last year, price of Royal Enfield’s flagship Classic 350 has increased by more than Rs 20,00 (10-15%).

In August, RE launched variants of its entry-level brand Bullet named Bullet X which were cheaper by Rs 10,000 on-road (~7%). It has now launched Classic S which is priced Rs 9,000 cheaper on-road (5%) than the standard variant. We note that while there were only cosmetic changes to Bullet X compared to the standard variant suggesting reasonable dilutive impact on margin (Rs 4,500-5,000 per unit based on our estimate), the differences in Classic S seem to be more material viz. rear drum brake vs. disc & single channel ABS vs dual channel in the standard variant, which could mean much lower adverse margin impact.

In this cycle, Bajaj started the trend with the launch of Pulsar Neon which was also priced at a significant discount to its standard variant. We believe RE’s case is a little different as Pulsar Neon targeted 125cc motorcycle segment being priced only slightly above them; this is not the case with Bullet X or Classic S which continue to be at a significant premium to most other motorcycles and are only aimed at offsetting, perhaps temporarily, the unusual price hike which have taken place over the last 12 months. We maintain ‘hold’ on the stock noting continued uncertainty around both volumes and margins in the near-term and the likelihood of further cuts to consensus earnings estimates.

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