Dear Sanjay,
When buying into businesses with deep moat - which have the potential to deliver superior earnings over extended period of time (Page, Eicher for eg.) one must disregard optical metrics like current P/E and focus on the intrinsic value of the business.
I am enclosing a link to one of Prof. Bakshis 2013 presentations which explains why current P/E is not a good metric for valuing such businesses:
Hope this helps.
Best regards,
Aniket.
@Value_Seeker, Thanks for sharing a wonderful link.
Taking learning from Asian Paint Example, I have put very rough cut forecast for Eicher Motor.
I am enclosing my working for this forum for feedback.
Based on my calculation, on 31-12-2014, Eicher Motor shall have market capitalisation of Rs 48,700 Cr vis a vis actual market capitalisaiton on that date of Rs 32,585 Cr.
I have assumed FY16 being for 15 months. PBT figures are estimated cashflow available for shareholder assuming current accumulated cash and investment being sufficient for future capex of the company. I know it is a very big assumption and need to be checked. However, during Dec 2009 to Dec 2013 period, standalone Eicher balance sheet shown gross block + Capital WIP increase of Rs 281 Cr of while standalone sales during same period increased by Rs 1327 Cr giving very high asset turnover ratio of around 5 times. During same period, standalone RE released more than 300 Cr being released from working capital (Debtors+Inventories-Creditors) which is sufficient to fund capex for sales growth.
In view of same, we may use PBT number being fair indication of free cashflow to shareholders.
Views are invited from all members to improve the working.
Dear Dhiraj,
Nice to see you crunching numbers based on Profs. model.
Basically, I feel there should be an upward revision to your assumed PBT / estimated cash flow over the coming years - I believe the numbers could be significantly higher.
Whether we use Prof’s statistical model or go by Buffet’s principle (avoid discounting Earning assumptions whenever a well run business with deep moat and good visiblity of intent to scale presents itself) the ultimate conclusion will be that the business is undervalued today.
All the best.
Although old, not sure whether anyone shared this article about a new lauch by Eicher
Eicher June Quarter results
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=DD4CCB31-BF5D-4F03-9F4E-618041BD3E27&flag=C&type=A&scrip_CD=505200
The consolidated PAT lower partially due to higher depreciation charge of Rs 13 Cr during the quarter. Having said that, we expect better growth from Eicher on bottomline. EBITDA and Topline broadly meet market expectation, but at net level margins are lower due to higher depreciation. Let us wait for tomorrow conference call to understand in details
Eicher’s Q2 consolidated nos look fine to me
Consolidated Q2 numbers
total income 2918 cr vs 2568 vs 2245 (q on q and then y on y)
net profit 257 cr vs 216 cr vs 178 cr (q on q and then y on y)
EPS 81.77 vs 72.04 vs 58.14 (q on q and then y on y)
Dis:invested
Q2CY15 call highlights:
Royal Enfield
• RE order book remains strong at ~5 months – Inflow continues to outpace sales.
• Working on 2 new platforms – going on steadily. 1st new platform will come up in CY16 (6-8 months from now).
• Expanding in India, overseas and also retail merchandise operations (bike gear).
• International operations business plan on track and picking up well. Will start selling directly to US market soon. In emerging markets, its ambition is to have India like MS in bikes – today it has 4% MS in India in bikes. Strategy for emerging market - first become a significant player in middle weight market, then become a leader, then grow the market and eventually become a significant player in bikes overall. Want to be a ‘pull’ brand as in India, dealerships should be well profitable – which will help in expanding retail model manifold. Large part of international efforts have started reflecting in other expenses cost item (mktg, branding, sales overheads, travel, launch functions) and somewhat in staff costs. Other expenses will remain high due to new platforms, international efforts.
• Middle weight market in his sense can go up to 10-15% of market in a decade and RE would want to be the dominant brand in that segment.
• Harris Performance – has expertise in chassis development. Has been working with Royal Enfield for years and now has been acquired by Eicher. It will be a great asset to RE.
• Phase 2 of Oregadam plant coming on stream now…confident of meeting target of 50k units/month by Dec’15 – which will go further up in 2016 to 60k/month. New plant for which land has been acquired, no decision taken yet – once they take decision, it will take 18 months to reach full capacity – so this new plant will be operational only in 2017.
• Capex – 500 cr. for CY15.
• Other income low because of FMP maturity shifted to 3 years in most cases due to tax changes.
• Buyer profile – Majority of buyers are salaried and much younger vs. businessmen and mid age earlier. Median age of 25 years – affordability at entry level jobs going up. Going beyond top cities more and more, still top cities continue to contribute majority sales. Lot of buyers are starting to use it for daily commuting. First time buyers ~15%.
• Network – 400 dealers in India at the start of CY15 – will go up to 500 by CY15 end. Will continue to increase by 100 dealers p.a. for 2 years. In large cities, 80% of market is reached by dealers so by CY16-17, it will be saturated in terms of incremental dealers, which is when incremental dealers will be added in smaller cities.
• For International markets, dealer strategy would be very market specific. For instance in Columbia, going for full standalone dealers (like in India) – started with 2 dealers and will add another 3-4 dealers in CY15. The focus will be on dealer viability. In developed markets, may continue with multi brand dealers and in few big cities will go for standalone dealers.
• No internal limit on margin beyond which they will reinvest in the business. It will all be need based.
• Institutional sales in RE is marginal (<1%).
• While India MS is 4% for RE, it will be beyond 10% for a few cities.
• R&D expenses will stay in the 1-1.2% range.
VECV
• VECV – LMCV MS increased for Eicher from 32% to 33% YoY. HCV – MS at 3.9% vs. 4.1% YoY. Buses – MS up from 19.5% to 20.5%
• Exports – 39% drop in exports YoY
• Volvo trucks – 40% up from 189 units to 265 units
• Pro Series range of trucks and buses especially in HCV segment (Pro Series 6000) has received very good initial response. Over time with better product availability and expanding network, volumes will pick up considerably.
• Discounting is pretty much constant – remains at elevated levels.
• Average realization benefited from higher Volvo truck sales and medium duty engines.
• VECV tax rate for CY15 would be less than 20%.
• VECV capex for CY15 at 500 cr.
• Medium duty engines exports (supplies to Volvo’s global requirements) up 35% yoy from 3225 units to 4353 units in Q2CY15. Captive numbers going in Pro Series is very small. Business remains a high potential one.
• Eicher Polaris JV – launched Multix – 4w personal utility vehicle – will be manufactured in Kukas, Rajasthan. It’s a 3 in 1 vehicle – space for 5 people, great boot space for cargo and luggage and can generate power (up to 3kw of power can be generated with a generator). Target audience – independent businessmen. Sales will begin in Aug’15 through 30 dealers. Already seeing lot of inquiries and good buzz in the market for the product. Capacity of 5k units/month in phase 1 and ability to double the capacity based on demand. Till date brought in 400 cr. of equity in the JV of which 200 cr. is Eicher’s share – large part of this goes towards Kukas plant and machinery and product development and some in initial market development. Will position it as a personal vehicle, which provides additional cargo utility to businessmen and which in turn will give pricing power – very different from a 3w.
Thanks. I attended call and the above trasncript covers almost all issue except one about Chinese development in CV. Siddhath Lal said over call that in China, with new comfortable CV launches, old time CV disappeared from the market. He envisage same development in India and product like pro series are expected to be major beneficiary.
Also, he also confirmed RE order book being 4-5 months for most of the models. Sales of accessories is very small and Institutional sales (mainly to militrary) is less than per cent.
Good update Bhaumik. Thanks.
This fits well with my thesis that they can reach a MS of 10% on all India basis. Though affordability of their bikes by 10% might be questionable in cat IV,V cities, I think 10% target is achievable in CAT II,III cities. Let’s see how it pans out.
Read a news item on ET Now saying,
Sid Lal will be relocating to London to concentrate more on Global business of RE.
Yes, here is the news article
In response to a query at a concall on Wednesday, Lal said: “I want to make Royal Enfield one of the top contenders in the global premium bike market. We have entered traditional markets, such as the US, Australia, the UK and Japan, and recently forayed into newer markets, such as Colombia and Dubai, in a small way. Our international sales currently contribute less than 5% to overall sales and I seek to make it big.”
some more hosanna for Sid and this time it is from, err…who else…but Forbes
http://www.theanswerisalwaysyes.co/#the-journey
Campaigns like these where Royal Enfield gets superb free publicity will help it especially to make a dent in global markets. Do note the passion with which the rider describes the bike.
Another fantastic interview from Sid Lal. Worth hearing.
Himalayan Spied images
Very good interview: Key point I like:
Hi Dhiraj, I have seen you following this stock very closely and your updates about each move the comapany is upto, is really helping all us investors.
I am chasing this stock for a long time, over six months and still could not buy yet 
Is there stock split on the Cards? Usually the promoters like to keep the volatility at bay, hence they are not keen on split any time soon. But whats the future i am still speculating… WIll its price movement will become like that of MRF?
I want to buy 3 qtys, but regretting of getting only 3 qtys at a cost of 60k something… 
. PLease help your fellow investor.
