Eicher Motors

Stock Opportunities
781

I see OPM of Eicher motors has increased from 8% to 30% and the major contributors for this increase is material cost which was 75% and now hovering around 52% and other costs which was around 10% and now reduced to 7%. I assume they can manage other costs but what led to decline in material cost? How sustainable is this OPM if material cost moves back to 75%.

If anyone can help me understand if current material cost is sustainable ? Thanks

Disc: Tracking

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782

The simple way to look at it is, over the years the material cost has not reduced, the price of bike has increased. For a Harley, the material cost might only be 20%. Royal Enfield has taken price hikes every year for last several years. Shows the brand strength and pricing power they had.

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784

In 10th min he talk about autos
1.Best is behind for autos
2.Valuations are reasonable but growth will take sometime to come back
3.Markets wont rate them again at same rate in near to mid term

My opinion resonates with Kenneth & Leaders of past cycle never become leader in next bull run theory will hold true in autos much more .

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785

Just thought of sharing snippets from eicher annual report 2015-16.

" We are working very hard to transform
Royal Enfield into a truly front-end consumer
and brand-led organisation, rather than what
is typically seen at other automotive firms,
which are engineering or manufacturing
driven"

"Most automotive firms are driven by either
creating differentiated products through modern
technology, or by improving manufacturing
processes so much that they will reap the
benefits in lower cost or better productivity. We
are driven by deep insights into our customer’s
needs (met or unmet) and understanding the
cultural nuances in a way that we can create a
more holistic offering that gives an unparalleled
experience to our customer"

The desire to create an aspirational brand with pricing power is Royal enfields true strength.

Its similar to apple of smartphones.
I like Eicher for there motorcycles not Trucks and I believe most of there growth and margins are going to come from RE

Invested

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788

If you are talking about the stock split then yes it confirmed.

https://archives.nseindia.com/corporate/EICHERMOT_12062020182327_Split.pdf

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791

While talking about Eicher motors I only see people talk about the RE division for it is the most profitable. What about the trucking and large commercial vehicle business? It is a decent business as well. If there is one thing I understand is technology. People talk about electric vehicles being a threat to auto industry. Agreed, but to some extent. One of the most efficient electric truck out there the Tesla semi starts at a 1 crore price tag compared to 20-40 lakhs price tag for Eicher. Now the market cycle for electronics industry moves tandem but not exactly in correlation to Moore’s law. The smallest market cycle that has been seen was in the hard disk drive technology. For electric vehicle, the work started way back in 1990s. Still the problem is just the batteries running them. Battery technology typically have larger market cycles of say 10-15 years to make them efficient (in terms of packing more energy density) and cheap at the same time. Considering all that for next 15-20 years I don’t see the near monopoly of Eicher’s trucking and school bus business to be destroyed. They have already gone through their capacity expansion capex and ready to capitalise on that. While the near term prospect looks dull, transportation is the backbone of a country whose focus now has shifted more towards manufacturing(Make in India). In long run, it will continue to be. It is also more focused on its global ambitions more so than ever. Even though there might be a lot more vehicles on road that there should be, the demand for luxury brand like RE will always be greater than the demand for other brands. The only risk might be brand fatigue. Overall slowdown has helped its price come down near to its intrinsic value. It has an eps of 850 growing at approximately 20+ percent annually. Considering a dcf model with eps at 800, with conservative growth rate of 13% over next 7 years( doubles every 5 years) and 10% for 8 years after that(doubles every 7 years), for the 15 year timeline puts the intrinsic value at around 17000 rupees(discounting back at 8% as long term interest rates lie around 6.5% which in long term seem to be going down globally+ 1.5 for safety). Which I know I am undervaluing because I have not included terminal value for years after that. I have 30 years in front of me and I feel fairly satisfied to hold a good business like that over 30-40 years period rather than holding the likes of Pidilite, Asian paint, Nestle… etc which are all great brands but seem to be 3-5 times overvalued. @ayushmit sir, @hitesh2710 sir, @Donald sir and everyone - Thoughts, criticisms, and insights?

Disc- Invested 8% of my portfolio at 15200 levels giving and approximate 10% discount to intrinsic value.

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792

Why are you dragging Pidilite, Asian Paints, Nestle into an analysis of Eicher Motors. All four are great companies and similarly valued in their respective industries from a P/E perspective. All have amazing ROCEs and Sales Growth, consistent over many years. They are all coffee can stocks that you can buy and forget

Eicher is a great franchise that ticks all the boxes - Great management & Leadership quality & pedigree, Strong brand in the category, Category leader - all these are moats. Buy and forget type of stock. Now don’t get worried by intermediate falls and just hold on to the stock.

794

Quite bullish commentary coming from management. They again have a waiting list i.e. their current production is insufficient to meet demands. Pent up demand or next phase of growth?

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RE interceptor is officially the most selling motorcycle in uk

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Here are things which I came across while further researching on the company……(some of the points were already mentioned above)

  1. Royal Enfield has been working on R&D for electric bikes.
  2. In the month of may their prototype was released and the bike was named as ‘Photon’ with the approval of Siddhartha Lal.
  3. They had also build a prototype of Thunderbird (which I personally did not like by looks) and Vinod Dasari has confirmed that Royal Enfield will release their first electric bike by 2023.
  4. Due to some fault in there brake system Royal Enfield had to call back their 15,200 units from international market.
  5. The demand is back to pre-covid level. The management says that there is a V shaped recovery in demand.
  6. There 1/4th of the demand was pent-up demand as the company had called its customers and collected this data but rest was organic.
  7. A lot of there supply chain is in Chennai so due to further lockdown there the supply chain was hit.
  8. Digital inquiry has increased from 15% to 56%.
  9. But Eicher Motors had also reported 45% drop in their profits.
  10. Royal Enfield started their slide school in USA in collaboration with Johnny Lewis who is the founder of Moto Anatomy (It is a bike training facility).
  11. Even though the world is going through a pandemic their international market keeps growing! They have now entered new countries like Korea, Italy, & Belgium.
  12. One advantage which they have for their Korea market is that they directly export there. This means that the normal delivery time of bikes which is around 2-3 months for international market can be significantly reduced.
  13. Currently 90% of their stores are open.
  14. Eicher Motors expects its capex to go down as all there major capital expenditure is over now. Unless there is super surge in the demand.
  15. Company continues to follow its earlier plan of building up their Studio Stores. No change in play shows that the company is able to cope with the pandemic situation around the world.
  16. Further here is good article for understanding the current situation of auto market. (click here)
  17. Eicher Motors has develped Telematics which is a platform that provides data and helps in tracking their trucks. Truck which are BS IV and above have this feature and such technology will help them to improve their record of repairing trucks within 4 hours 85% of the time.
  18. Supreme Court had ruled that BS-IV vehicles sold after March 31 will be banned from registration. But they had already moved to BS-VI by the end of march this wont affect the company.
  19. Benali has realeased their first new bike after the new norms of BS VI which is price at 1.9 lakh compared to Classic 350 which is at 1.57 lakh & Jawa at 1.6 lakh.
  20. This seems temporary but still Royal Enfield is the most sold bike in the month of June in U.K. Leaving behind BMW.

Little Bit On Threat Of Electric Vehicles…

Threat of Electric Vehicles is very far fetched for truck business, as in that industry there is demand for huge horsepower and that would be difficult for electric vehicles to provide that.

But it can be threat for their Bike business. As there is very high probability that when they make a switch to electric bikes the ‘feel’ which their customers used to get from riding the bike would be gone.

For Example: Many people ride Bullet for the sound it makes while riding it. But it would very difficult to maintain the same style in a electric vehicle.

Some companies have tried and come up with electric noise for the cars. Here is one video of Audi. As silent cars can be dangerous for pedestrians.

If Royal Enfield can successful create electric sound as close to as their normal bikes then there might be the change of retaining the demand. But this has very less probability of happening.

I think we should also consider that by the time electric bikes will come to India people’s mindset could change about the sound. They might be interested in less noisy bike. But this is all speculation!

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797

Does anybody have any thoughts on Royal Enfield’s competitor JAWA bikes?

I recently watched that Jawa bikes were being used for the famous Indian TV show Roadies. I think that could be a problem as it would help Jawa create a quite good brand image.

800

Since auto business is capital intensive I was looking at asset based ratios for different motorcycle companies of India. Since Eicher commands a higher profit margin per bike I was expecting significantly Better Return on assets(ROA) for eicher compared to Hero MotoCorp. But incidentally hero has a higher ROA
5 Years ROA Hero 30.10%
5 Years ROA Eicher 29.6%

On deeper inspections of this anomaly I found out that
Hero has cash reserve of 4600cr where as Eicher has 5500cr despite being a smaller company .To put things into perspective annually Eicher does one third the sales of Hero but has higher cash reserve.This higher Cash on books brings down ratios like ROA ROCE.
I wanted to know for a given factory investment how much return each of them earn. So I calculated Return on fixed assets. Eicher just destroys Hero in this ratio comparison.

Anybody know why Eicher maintains much higher cash position compared to hero. Do they have any immediate CAPEX plans?

Disc:Invested

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Not particularly related to this thread, but I generally calculate RoIC like below:

Cashflow from Operations / Core Operating Capital

Cashflow from Operations: Only the cash generated from operations. Nothing else like interest income, investment appreciation, dividends and so on.

Core Operating Capital: Equity + Reserves + Debt (Long and Short term both) + Working Capital - Liquid Cash

Working Capital: Non-cash Current Assets - Non-debt Current Liabilities

Liquid Cash: Assets that can be converted into cash within 1 year / short notice

This gives you the true picture of the core business itself and ignores the noise of the activities not related to the core operations. With this, you can do a head-to-head with any comparable competitor (Although in this case, I doubt Eicher and Hero are comparable).

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802

Being a businessman, I personally feel that businesses should retain good bank balances & cash equivalents in their accounts. It helps make the balance sheet much stronger & helps tide over crises like the current pandemic.

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803

Wanted to share this news. It seems struggle of JAWA has begun. XD

804

There are numerous instances of RE being at the receiving end of customers wrath.We shouldnt judge any company by singling out incidents is my opinion.Lets hope that both companies improve their processes so that such incidents don’t happen.In long run customer experience is what matter.

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we wish to inform you that VE Commercial Vehicles Limited (“VECV”), a
subsidiary of Eicher Motors Limited (“Company” or “EML”) has entered into a Business Transfer
Agreement dated August 12, 2020 (“Business Transfer Agreement”), with Volvo Group India
Private Limited (“VGIPL”) for acquisition, as a going concern on slump sale basis, of the bus
business of VGIPL for manufacture, assembly, distribution, and sale of the Volvo buses in India, and
other rights forming part of the said business, for a consideration of INR 1,005,000,000/- (Rupees One
Thousand and Five Million), which is subject to adjustments as provided under the Business Transfer
Agreement.

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Could someone shed some light whether this acquisition help Eicher to grow or it would cut them off from any further technology which Volvo group brings in?

(This segment is out of my understanding)

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Hi all

PFA the presentation.

401f151a-1452-49d1-a7d1-853a9842c3e2.pdf (3.8 MB)

The company is doing very well with the Interceptor sales in this environment. It is indeed trying to be the middleweight leader on a global stage. Let us see how things evolve.

Also would like to link to the teambhp forums on the Jawa vs RE debate. I think there should be no debate now going further.

Rgds

disc: invested

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