In my opinion company should not venture into 250 CC segment as the price will be lower and affordable for many people and then it will no longer be “ROYAL”. The competition is also very stiff in this segment.
The name and brand will loose its charm if every bike standing besides Hero or TVS is a Royal En field.
Royal Enfield should represent a class rather then mass.
Disclosure : Not invested but tracking, valuations appear to be in higher side
Its a classic dilemma faced by every niche/premium product manufacturer. As long as they are in niche segment, they can charge premium. But on the flip side, size of the segment is small. So after few years, only way to grow will be to enter in mass segments. That would bring in higher volume at lower margins. But biggest risk is dilution of the “brand”. Hence many companies have multi brand strategy where they try to keep mass and premium brands separate. Its fraught with risks and more companies fail than succeed. So it would be almost a case study to see how RE approach this dilemma.
Disclosure - not invested, but watching closely.
Hi
Something I had shared few months ago. I find it an irony that Bajaj regrets not being in the 350cc> category earlier and is envious of RE and now RE wants to go into the higher end commuter category like Bajaj.
As you move on the left side of the X axis in chart below mileage as a feature gains top spot, then followed by maintenance cost and replacement costs. The basic architecture of the staple 350cc RE engines are not designed for mileage.
Engine Type: For the 350cc twinspark engine mileage is ~35-40kmpl, bajaj dominar is similar though its engine displacement is higher, a ktm 390 is also 30-35 kmpl. So this will be a key differentiator in the 250cc segment when they move in. Apart from the Interceptor where it is too early to say all models of RE have oil leakage problems. So that area is not sorted for decades.
Maintenance: As per manual it requires service every 3 months barring the first which is at 1.5 months.
Resale: Is pretty good. But parts are costlier compared to commuter bikes but I assume this will be brought down.
Just my views on the product pipeline. I could be grossly incorrect.
Rgds
Government’s push to electrify under 150 CC will benefit the company as this will move young buyers to 150+ segment which would advantage RE.
But New model launch is critical for the company to continue their leadership in 300CC+ segment. Generally people change bikes after 10 to 12 years / 80K to 100K kms. The current RE owners will look to change bikes in the next 2 to 5 years (2010 to 2012 owners). It is very unlikely for everyone to buy the same model again. If RE fail to introduce another classic/Thunderbird kind of model it may lose a segment of its existing owners.
The success of Hero in 100CC was its ability to hold its existing customers with its new launches. We could find several people who owned more than one of these models (Splendor , Splendor+, Passion, Passion Pro).
Eicher Motors reported 24% yoy decline in consolidated EBITDA in 1QFY20 led by weak volume growth and margin pressures in both VECV and Royal Enfield businesses. Standalone revenues declined by 8% yoy led by 19% yoy decline in volumes and 14% yoy increase in ASPs. Significant cost increase and economic slowdown led to decline in RE volumes. Expect volume pressure to persist over the next two years due to (1) shift towards BS-VI engines and (2) increase in competitive intensity.
Due to steep slowdown in urban areas, the company will aggressively expand into the hinterland as a part of its strategy to make inroads into underpenetrated areas. The company will open 500 small format stores by September-end as against the original plan of opening 350 small format stores by FY2020-end.
Pardon me if it is already answered on the thread before.
Will this be applicable for RE also? Do they have any advantage in electric bikes over the competition?
I think RE will have to ot only find an EV product but they also have to build an EV that can mimic the RE sound or come up with something similar in the EV world.
There is a certain appeal and feel factor when riding a RE. Wonder if a silent EV version of the bike would continue to draw the same aspirational consumer.
Thanks for the reply. Would be very helpful if you can throw some light on a RE bike features. I have three specific queries:
1/ Does the sound and all the x factor of an RE bike comes from the engine or other components in the bike?
2/ Do they need to replace these components for an EV? If yes, then how difficult/easy is it for them? Do they have the required R&D capability?
3/ Have they started building the Electric bike prototypes for all their models i.e are they ahead of the curve?
I am trying to understand if EV is an opportunity/threat/neutral for them vs competition (including foreign players like HD)
Thanks much
I think this has been taken care by the “Revolt RV 400” where you can change the exhaust sound via app. Its not yet launched but had read about it. The feel and the engine vibrations is what will be missed.
They are moving to higher CC bikes… See 71% jump in engines with more than 350 cc and also exports is going up also with very high %… So total Volume might be down but revenue might not down by the same %.
But export and bike with more then 350 CC constitute less then 15% of the total volumes. major market in India is for RE 350 CC…
Don’t see the volume, see in term of value term, as 650 cc twins will get more money/unit… So in Volume term it might not grow but we should focus on value term and 650 cc twins will add more volume and value going forward and we might see 50:50 of 350 cc and 350 cc and above by end of
the year or so…
I think the volume growth for > 350 cc is very impressive. The base is not that small.
Anyways, the takeaway is that there is a market if you give consumers something desirable/different. Other examples. 1. Creta is still doing close to 10k per month. 2. Venue got 50k bookings in just 2 months. 3. Hector sold out for the year.
Trying to put some numbers to Eicher’s next wave of growth. I think there are two growth triggers in place for Eicher: Exports and 650cc bikes.
Exports:
Lets try to think on what kind of automobiles Indian families would have. As the affordability increases, how would their vehicles change. I have simplified it into five steps below. I understand it is a lot more complicated than that but believe this is a good step to start with.
Market for basic 2W upto 125cc is very huge, 1 crore motorcycles + 66 lakh scooters => 166 lakhs.
Market for basic 4W upto 4 metres is 75% * total number of car sales => 25 lakhs.
Market for 2W between 125cc and 250cc => 25 lakhs
Market for larger cars above 4 metres => 8 to 9 lakhs
Market for 250cc+ bikes => 8 to 9 lakhs
This helps me conclude that RE’s market is clearly saturated. And all the volume growth they would get would be from India’s growth story but not their niche / brand. Their niche / brand equity would just protect them. Their market share is already 90%-95%, so can’t capture more. From now on, we should expect RE’s domestic sales to move with the regular auto industry. The management clearly understands this and hence the reason on why they are after export markets and their 2030 vision fully focusses on being a global consumer automotive brand.
| Month | Exports Share (fraction) | |
|---|---|---|
| Jan19 | 0.02515783827 | |
| Feb19 | 0.0409388472 | |
| Mar19 | 0.03940425112 | |
| Apr19 | 0.05951112454 | |
| May19 | 0.03463147937 | |
| Jun19 | 0.05582886234 | |
| Jul19 | 0.09233182615 |
The performance in exports so far has been satisfactory and sales contribution to exports is increasing with time. If the 9% number from July is sustainable for few more months, then it means this is a good story we will be riding on.
650cc Bikes:
While exports is more about volume growth (though it can lead to value growth as well), 650cc bikes are more about value growth. 650cc bikes are priced at almost 2x of original bikes. So few years down the line, if we have 33% sales contributing to the top-line from these 650cc bikes with same number, then we are already sitting on 1.33 times current revenues.
| Month | 350cc+ Share (fraction) |
|---|---|
| Jan19 | 0.06583128155 |
| Feb19 | 0.08942998563 |
| Mar19 | 0.09799279972 |
| Apr19 | 0.1170024969 |
| May19 | 0.1048243575 |
| Jun19 | 0.1141774799 |
| Jul19 | 0.1687551906 |
Above trend is extremely encouraging. Its less than a single year and 16% sales (by volume) are contributed by 500cc+ segment to total sales in July. If this trend continues, we might sit on 33% volume sales from 500cc+ segment in FY21 itself.
Notes:
Market for basic 4W upto 4 metres is 75% of total number of cars according to Maruti Suzuki Chairman (read AR FY18).
Market for various cc bikes can be obtained by dividing RE’s sales with its market share in those segments. RE’s market share in those segments can be obtained in Eicher’s Annual Reports.
Disclosure: Initiated 2% position in Eicher Motors in last 30 days. Might consider buying more in the following months. Investor shall do his own due diligence before taking his decision and understand that this is not a buy / sell recommendation
Extending my research further on exports…
Given that the market for premium cars and 250cc+ bikes is almost similar in terms of volume, lets try to understand how markets like South East Asia and South America are, which RE management claims to be similar to India.
Firstly, I’m listing the size of car markets in five of those countries.
Thailand: 8 lakhs
Indonesia: 12 lakhs
Philippines: 4 lakhs
Argentina: 6 lakhs
Brazil: 25 lakhs
This turns out to be around 50-60 lakhs cars. Given that RE sales in India are almost same as premium cars, how many of those 50 lakhs are premium cars? In India, we have noticed 25% are premium, now that these countries have relatively higher purchasing power than India, we can expect it to be more than that. But if you want to take a conservative estimate, we can go with 25%.
This suggests an export market of 10-15 lakhs for RE bikes. I have been only conservative in my estimates as I have ignored a) Growth of these markets by the time exports in RE increase, b) Haven’t considered all the countries in those regions (took five countries for simplicity), c) Completely ignored North America and Europe where 650cc bikes have a good potential for hit / success.
One should never forget that these bikes would have much higher realisations than what we had in India.
Disclosure: Initiated 2% position in Eicher Motors in last 30 days. Might consider buying more in the following months. Investor shall do his own due diligence before taking his decision and understand that this is not a buy / sell recommendation
Excellent analysis. You’ve addressed the revenue growth part of the business very well. Having read your VP Chinthan Baithak presentation, how do you think Eicher stands on the PE expansion, Margin Growth metrics?
On the revenue growth part you addressed, I still think the sales volume is very much derived through the over-indexed states like TN, Kerala, etc. So, the success in under-indexed states where the small format stores are opened could be a new avenue.
I have been trying to look at the 350 and 650 twins retail prices abroad and it looks to be sold at a significant price premium, hence the export contributions and increased 650 twins contribution in the revenue mix, I’m assuming, should help improve margins further unless the 250cc variant becomes a reality and dilutes margins. Any thoughts on that?
Moreover, the space in 250-650 CC is becoming very crowded with multiple options now and with Sid Lal mentioning that they will take a wait and watch approach to EV and will more likely be an “early follower” than a first mover in the space. Don’t you think this might mute the PE expansion for several years until the RE story gets exciting again?
Having said that, the aura around the brand is indeed hard to replicate, even with all the niggles surrounding owning one. And an excellent management, one of the few capable ones, to possibly succeed at building a global consumer brand from India.
Disc: Invested.
Thanks @ashkrithik!
On the margins front, Eicher is already going through operating de-leverage phase and its margins are coming down. You can observe it in Q1FY20 results. So when the growth phase is back, margins will expand. And the revenue mix from exports and 650cc twins will only push the margins further up. I think the revenue mix from exports and 650cc twins will more than compensate for the margins of 250cc bike, if they will launch it.
Regarding EV, I’ll keep an eye but I’m not super worried. The first ones to be affected would be the bikes below 150cc, then 150cc to 250cc and finally 250cc+ versions. So Eicher will have time in its pockets. Good for us! And having spent some time on studying Ashok Leyland, I believe Vinod Dasari is an insane innovation engine and will eventually sail through this. He has developed a new technology called iEGR for BS-IV transition which is very Indian market specific while other players just copied SCR from Europe and implemented it in India. You can go through my post on his innovation at Ashok Leyland here to find out more: Ashok Leyland - A major CV player
On PE Expansion, I think there is some scope for it from current levels. Both Eicher and Maruti are very richly valued by the market given their historic track record. If they trade at 20 PE even during such bad times and uncertainty, shouldn’t they be trading at much higher valuations when the good times are back? Another way to think is if a company is showing good revenue growth and margin growth, wouldn’t it PE ratio expand?
Though the story looks excellent to me, one thing to remember is there are not many players in Indian automobile history to have succeeded outside India in exports, including good companies like Maruti Suzuki, Ashok Leyland. Bajaj is doing well in both 2W and 3W and that gives me some hope.
Disclosure: Initiated 2% position in Eicher Motors in last 30 days. Might consider buying more in the following months. Investor shall do his own due diligence before taking his decision and understand that this is not a buy / sell recommendation
Bingo! Not even many FMCG or even Services company have done well in exports. IT being major exporter has survived only on cost arbitrage. So exactly what are we betting on? Seems on the management capability and past track record. Point to remember is that in India, it was an inspirational product with negligible competition in its segment so far, until recently. Not sure about the competition in export markets, aspirations of people there, plan of governments and direction of their economy…well too many variables as compared to only India. That’s why all export oriented firms struggle unless they become an integral part of those individual country like how HUL became for India and it took decades to achieve that. Just my thoughts, i maybe wrong. Thanks
