A big driver for this is plugging of geographical gaps (rural/exports), leveraging on resounding success of the recent 650 cc Twins for its future product offerings, and growing non-motorcycle revenue.
We attended Eicher Motors’ investor meet in the UK. Notwithstanding the current sluggishness in Royal Enfield (RE) volume, the company is well placed to leverage on all its efforts over last decade for an even stronger next decade. A big driver for this is plugging of geographical gaps (rural/exports), leveraging on resounding success of the recent 650 cc Twins for its future product offerings, and growing non-motorcycle revenue. The seed of all this remains the cult RE brand, the legacy of which no competitor can replicate.
We came back confident on long-term outlook, and believe market has overreacted to slowdown concerns (not structural in our view). We still foresee a healthy ~14% FY19-21 earnings CAGR (highest among OEMs). Maintain Buy with TP of Rs 23,703; 22x FY21e PE (10% below historical average).
The next decade: While the last decade was about ramping up product offerings, developing competent technologies and increasing scale, the next decade will be all about using this platform to build a truly global brand and expanding its India motorcycle market share of 6% by penetrating its under-indexed states. Bullish on premiumisation, management aspires to grow 2x the motorcycle industry over the next 10 years (enough levers for that, in our view).
Demand outlook: The current weakness is due to a confluence of factors impacting at the same time (not just RE, but also the industry). Also, demand impact is mainly from non-salaried class customers (60% of RE buyers) who have deferred purchases post demonetisation, GST, etc. However, conversion rate (enquiries to bookings and bookings to sales) remains largely unchanged for the company.
New CEO Vinod Dasari has three goals: (i) To expand RE market much deeper in India; (ii) prepare for smoother transition to BS6; and (iii) reimagine the brand – making it a global motorcycling brand. RE is now focusing on a few markets outside of major Indian cities where propensity for >125 cc motorcycles is less. It has aggressive plans to expand its network in an innovative manner in these markets. Company will also leverage work already done on the digital front and improve it further. Going forward, RE will also look at capturing more value from other opportunities like insurance, finance, spares and service, etc.
Margin outlook: While management refrains from giving margin guidance (given that it is more of an outcome), there are some margin expansion levers – namely raw material cost softness, reduction in ABS procurement cost over time, rising share of gears/spares/accessories, and continuous cost-cutting initiatives.