Eicher Motors

Hi Hitesh,

Thanks for looking into this. I agree with your points about Gruh & Page and I continue to hold and add them.

The lure of Eicher is in possibility of a higher growth for the next 1-2 years. Growth in range of 40% in earnings is one possibility (Of course it’s not a given), but looking at flat CV demand in CY12 and negative growth in current year, a revival in CV market in next 1-2 years is a decent possibility and that coupled with good growth in RE, higher margins for RE division can result in close to ~40% earnings growth for next 2 years.

It looks very expensive at this price to me, so am not adding now. But it looks a good story to track and add at correction anyone where close to 4k.

Dear Hitesh,

How will be the effect of BASEL 3 norms on banking industry? for that matter on housing finance companies likes of GRUH…

BASEL 3 will effect the earnings of all banks for next 5 years…is the same case with Housing finance companies…if it so then its better to stay away from all banking and housing finance stocks…

Gruh is trading at PE 28ttm…I think its bit expensive…

and how will be the effect of FED tapering on solid stock like Gruh…will it withstand the fED tsunami…or will it follow thw suit like other banking stocks…

This appears to be a beautiful story with

)- iconic products with an aspirational element

)- virtually a monopoly

)- loyal and passionate fan following willing to wait almost half a year to ride a bike (they may say 3-4 months, but the situation on the ground, according to one of my friends who owns it and is looking to buy another, is actually almost 6 months)

)- satisfied users indicating good quality

)- expanding market where demand is outpacing supply

)- management in tune with changing needs

)- improving financials with increasing contribution from higher growth higher margin products

all perfect ingredients for an excellent investment - which is reflected in the price.

Hitesh has made very valid points about relative valuation. The above qualities about a perfect growth stock are similar to page and gruh. I think where an additional kicker can come in is from a turnaround in its CV business (drawing from discussion on Election Punts). The CV business is not bad at all and offers excellent products by itself. Just that it is going through a weak patch. Growth is stagnant and profitability is low, which is dragging consolidated numbers. However, any improvement in this can have a multiplier effect on the company’s performance, something which I feel makes Eicher different from Page and Gruh.

This story sure needs to be dug into further.

Disclosure - page and gruh are among my top holdings. not invested in Eicher. but studying.

More than enfeild… eicher has tie-up with Volvo and they are trying to launch new range on products in commercial space. Volvo is known for quality hence people will be ready to pay the premium.


Will that be a game changer ?

Enfield is just one part of the business

Hi Pankaj,

Thanks for the link,

also can look at the below link to gain more insights into Eicher’s effort’s in CV space.


**Do you think VECV will be able to break the duopoly?
**I can say that the duopoly is not sustainable, particularly when we have major players like the Volvo group and certain other major players coming to India. Itas just a matter of time and Eicher is the leading contender. We are driving modernisation and see no other players coming up.

Hitesh, Raj, Would like to know your comments on this interview ? This is where is looks more optimistic and also market looks much bigger. Breaking of Duoploy market… ttk prestige Vs Hawkins… Exide vs Amararaja… you have been following this and would be in better postion to comment.

Thanks Pankaj for the link.

It adds to what i wrote earlier about positive feedback from all level. A top global partner being happy with a local player over 5 years of partnership and understanding our jugaad attitude really speaks volumes about the kind of leadership Mr. Lal has provided. Volvo sourcing engines for global operations from here and looking to India as a sourcing hub for many export markets is really pleasing.

Coming to your point, if VECV can break the duoploy, i remember a very nice interview of Mr. Andrade which you can read here . Read the answer to first question, it has a gem of an insight.

My learning from that reply is, we don’t really have to be right about 10 years in future to do well in investing. We can invest where the story looks good based on current data, and keep examining incremental data as time passes and keep moving money based on that information.

So, even if Eicher will be able to break the duopoly, it won’t happen over night, it will happen in small tranches of market share gain’s spread over many quarters like it happened in last quarter. Let’s watch then :slight_smile:

@vinay, Agree we have a good story here. My only regret, we didn’t initiate work on this story little earlier when it was available at very reasonable valuation and many here held it in their PF :(. We need more company specific thread’s on vp, once that happens, i have seen people getting enthused and posting updates which leads to many members benefiting.

Few links which can help us to understand this story better:

1). This is case study about the turn around of RE div.

Mr. Lal rode a red bullet in baraat of his marriage :slight_smile: no more question on his passion level!!

2). This case study give fabulous insights into the vecv joint venture, and where the company aims to go on that front.

RE clearly is a strong moat and near monopoly for this company. I don’t think harley is a big competition either given the price difference.

VECV looks promising too.

Only problem with stock - high valuation.

I did some basic back-of-the-envelope calculations as follows (its highly simplified actually):

Bikes business:

Going by past trends, sales growth in year ending 31.12.13 (FY13) could be around 50% and net margin around 15%. This translates into sales of 1575 cr and PAT of 236 cr.

For FY14, assuming sales growth of 40% and PAT margin of 18%, the sales and PAT work out to 2200 cr and 400 cr.

CV business:

For FY13 assuming sales degrowth of 5% and margin of 3%, sales and PAT are 5075 cr and 150 cr.

For FY14, assuming moderate sales growth of 10% (NaMo?)and margin of 4%, the sales and profit are 5600cr and 225cr

Consolidated sales and profit for FY14 are 7800cr and 625cr. This translates into sales growth of 17% and margin of 8%. EPS on 2.7cr shares is approx. 230 (HDFC Sec report projects 212). AT CMP of 4800, this translates into consolidated PE of 21x (1 year forward).

We can look at it another way:

Bikes business FY14 eps is 400cr/2.7cr = 150 (rounding off). For this business, we can pay PE of around 20-25x. So this business is valued at Rs. 3000-3750.

Similarly applying PE of 8-10x for CV business EPS of 80, the value of this business is 640-800.

Consolidated sum-of-parts valuation is in the range of 3640-4550. The stock is trading at about 10% above the upper range of this.

Views invited.

Base case (sensitivity):

If company delivers bike sales growth of only 30% (against 40% assumed above, and much below its past trend) and margin of 17% (nominal improvement), and CV sales growth of only 5% and flat margin of 3.5%, the consolidated EPS works out to around 200 and PE to 24x at market price of 4800.

If growth is sustainable at these levels for FY15 as well, then the stock appears to be on the cheaper side. Any improvement will provide more comfort.

One thing which can provide a positive spin to the margins in the 2 wheeler segment is the export of it’s Cage GT model, which as per the company is doing better than “expectation”.

Company is selling the Cafe GT model in Europe for 6000 Euro’s which is close to 5lac at current exchange rate. The same is selling for 2.05 lac in India. There must be some additional expenses on selling in Europe like higher dealer margins, transportation cost, taxes etc… but am expecting the net realization for Eicher to be higher vis a vis bikes sold in India.

Let me play devil’s advocate here. I think the improvements are already baked into the price. Historically 18-20 is the safe PE for this stock. That means an EPS of 250 (at the bottom end)to justify the current price which in turn means Earnings of 675 cr. Assuming improved margins of 8% as highlighted by you (which I doubt), it would require sales of 8400 cr, a growth of approx 20% over expected year close.

So an out of ordinary 8% net margin and 20% increased sales next year would justify the price to pay today. There is no margin of safety.

Disc: I hold the stock averaged at 1800, most of it bought 2 yrs back. Now evaluating to sell.

I agree that the stock looks fairly priced with sales growth of 20% and margin of 8% for FY14 built into the price. The stock price has gone up from 1500-odd in Jan’12 to 5000+ in 2 years, whereas PAT has increased from 324 cr in FY12 to expected 400 cr in FY13 (23%) and 650 cr in FY14 (estimated; which is a huge 62% over 2013). Margin of safety looks limited.

The company at present has all characteristics of a growth stock (brand, market share, pricing power, profitability, demand outpacing supply) with the kicker of economic turnaround thrown in (the CV business).

In bikes, if the next year growth is in the price, what is it that the company can do to maintain its superlative growth the next year, and the year after that. If its production capacity is online, and it is able to meet demand (reduce the waiting time), will there be enough demand so as to enable it to post 40% plus growth in its bikes business? If not, then is it just a 2 year story where growth will moderate (from current levels) at which time the price will look really expensive even from today;s level.

The part which interests me more is the non-bikes business. and here, the question I am grappling with is this - The CV business can compensate partly for this moderation in bikes as it has been a drag on the performance of last 2-3 years, and here is where there is opportunity. If it can improve CV (and other ancillary business ie excluding bikes) by even 10-15% as against degrowth/flat growth of last 2 years, with improvement in margins due to operating leverage, the picture could change drastically. Management itself isnt very confident of how this will pan out. Their expectation of festival sales improvement did not come about. From what i gather, all they are saying is - IF there is econonomic turnaround, we are prepared. The products, processes, systems, distribution network etc are all in place to capitalise on this.

Latest Interview of Mr. Lal.

We will enter countries where we can lead the market and grow it: Siddhartha Lal

Free publicity for Eicher. saving them probably 100 crores in endorsement fees :slight_smile:

While there was a birthday bash that was organised for Salman Khan, he not only managed to find time for Bigg Boss finale but also was even spotted biking at his Panvel farmhouse with Sajid Nadiadwala. Here are some images.

Good read on eicherhttp://www.nytimes.com/2014/01/04/business/international/a-cult-bike-from-india-takes-on-the-world.html?_r=1&

This article from Forbes about Harley discusses some of the tail winds for this industry.


The article nowhere mentioned RE bikes. In my point of view RE will be the main competitor in 500cc. Any reason author does not mention anything about it ? Deliberate ?

http://www.forbes.com/sites/greatspeculations/2014/01/16/harley-davidsons-street-750-debuts-in-india/ Link: http://www.forbes.com/sites/greatspeculations/2014/01/16/harley-davidsons-street-750-debuts-in-india/

Yup, I too noticed that omission. But what to say!! The author decides what he wants to include & omit :slight_smile: