Eicher Motors

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I have been hesitant to buy Eicher Motors since 5000 levels when it was first suggested and the primary reason was the quality of RE motorcycles. My friends with REs say its like bringing home an expensive wife. You have to go shopping every weekend for her. :slight_smile:

The 250-750 cc motorcycle space is currently ruled by RE, but its quite similar to the reign that Pulsar enjoyed (albeit for a very short time) before Honda came with better technology in the same segment. The clincher for RE IMO will be improved quality, improved mileage and lesser breakdowns.

I agree Eicher Motors is a great story, but I would bank on Volvo helping them grow faster over time vis a vis RE.

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Absolutely Janit , Royal Enfield have had maintenance costs . Perhaps it is a direct play on growing disposable income.

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Agree on high maintenance cost but its not because of quality issues. Its more because RE owners are mostly passionate bikers and in love with their bikes. So, they don’t mind spending on the bike.

Other reason could be that still there is large number of old bullets and people just love them. There is a full industry of buying, restoring and selling old bullets from as back as 1960s.

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I have been a RE biker for several years in the past. Their quality was crap years ago, they seem to have improved a bit but the bikes are no way as reliable as Japanese bikes made under collaboration in India or direct imports.

Yet the RE bikes will continue to sell well as:

  1. they have a significant pricing advantage. Any customer who wants a bike upwards of 300CC and has a budget of not more than Rs. 2 lacs, has no choice but RE.

  2. the bikes have a fan following because of their retro looks

Bikes like a 300 CC Kawasaki Ninja sell for Rs. 3.6 lac. The Honda CBR 250 sells for Rs. 1.6-2 lacs. A 350 CC RE (more powerful on paper) sells for Rs. 1.3 lac. Thatâs a huge price difference. No amount of maintenance headaches can bridge that pricing gap easily.

Now if Hero or TVS comes out with a similar engine capacity bike at around the same price, then the game for RE will change drastically.

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Hi Bomi,

Is it all just about the “engine power” which is the moat for RE(along with retro design)? I mean can a pulsar/CBZ (for example), with a 300 CC engine get the same feel as a RE and compete with RE easily assuming those launches are supported well by marketing spend?

My understanding is, RE is in a category which they call as “Leisure biking”. The Duke’s,Ninja’s,CBR’s of the world are in a category which is anything but “Leisure Biking” , probably performance/executive would be more appropriate for that category ?

I vaguely remember an old interview of Rajiv Bajaj to Mini Menon (of Bloomberg?) given some 2-3 years back, where he mentioned, if all it took was a lower CC engine to win the customer’s in a segment he would have dethroned Hero long back from the splendor segment. I believe the market segmentation has deeper meaning than just engine capacity and looks. Even if TVS/Hero’s of the world come out with 300+ CC bikes, they will be in for learning whole new lessons of market of this segment.

So, in short, i believe the game is not going to change drastically anytime soon, even if hypothetically speaking TVS/Hero/Honda’s of the world launch 300 CC engine bikes tomorrow at same price point.

Suggest reading this old interview “Brand is our lever” -http://www.forbes.com/2009/12/07/forbes-india-rajiv-bajaj-honda-bajaj-auto.html

Sorry if i sound rude in saying that, but that’s not the intention. My point is, we need to spend more time in understanding the moat of this business.

This aside, one funny thing, today i was watching the movie “Zindagi na milegi Dobara” for the nth time on a TV channel. And just this time got curious to take note of the bike brand that Katrina used in Spain to speed back behind the hero’s car to confess her love. Guess what? that was a RE too! and i am almost certain this wasn’t a paid promotion because the RE logo is almost invisible and hard to notice.

Brand as a moat works in very strange ways, difficult to recognize it’s impact/importance until competitors try to snatch customers away from it and don’t succeed for long time even after spending loads of money. One example is ITC (with all it’s marketing reach), trying to do profitable business and failing (in generating profit), in a segment which is so simple and seemingly just uses Atta,Maida,Sugar,flavor - aka biscuits.

Regards

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Guess by putting RE in the same category as Ninjas, CBR, etc. is doing injustice to both these sets of bikes…RE is cult following - the owner typically has pride in being associated with RE - as its not just restricted to bikes, but also gives an opportunity to be a part of the larger group of like minded bike enthusiasts…while others are mostly sports/premium segment bikes, which are more focused on speed/looks/performance - depending on the buyer’s preference. While i agree that RE still has quality issues, if you see the changes in quality that has happened especially over the past 4 years once they moved to UCE platform and the focus in trying to address servicing issues as well are some of the major reasons why one has seen exponential growth in RE over this period. and with more and more production coming from new Oregadam plant (vs. that coming from a 50-yr old plant) will surely improve quality further…and i would reiterate that comparing RE to local players like Hero, Bajaj, etc. which are more in what i would call ‘routine’ biking segment is comparing apples to oranges. RE has a strong cult following…it has strong brand equity…with minimal competition!

Someone earlier mentioned that PUlsar’s reign was ended by Honda…when it introduced new technology or something like that…Pulsar still rules that category by a long shot…obviously you were end up losing market share over time with new players entering…but the fact is that PUlsar still stands as proxy for that segment…In 2-w, brand and positioning are two very important aspects for success…technology is only one part and not everything…

In a nutshell, in my view, while Volvo association will add value, Eicher will continue to be driven more by RE in the years to come!

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Also, I would like to think that its a nice problem to have waiting period of 6 months even after RE has expanded capacity by 6x over past 3 years…goes to show the strength of the brand!

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Good Readhttp://www.latimes.com/business/autos/la-fi-hy-indias-royal-enfield-going-global-20140808-story.html

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Certainly the brand is a huge moat for them. Not to forget, it has been in existence since 1890. Even if competition makes a same power bikes at same price and with as good looks, it wont be easy to displace them.

Recently met an uncle who has booked a Bullet at age 62. It was his desire since younger days but couldn’t due to family responsibilities. Now that all is settled and got his retirement monies, he has fulfilled his dream. His son wanted him to purchase a more expensive model but he says “Beta, agar BULLET nahi likha hoga to gaon mein samjhenge koi aisi hi bike hai”.

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Raj and other forum members,

I totally agree with you about REs moat. My post was not intending to say that the moat is going to go away in the short-term. As long as the company has it, it will post superior numbers.

The point I was trying to make was, if Hero/TVS come out with a leisure bike like RE around the same price point, then things would turn hot. What baffles me is why they have not so far?

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Bajaj Avenger and Yamaha Enticer are already in leisure bike segment for few years now. I am not sure on their sales figures but they don’t seem to have made any significant progress so far.

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The key here I think is to understand the RE is a cult and an altogether different segment, with a very different buyer class…a segment which is much more brand conscious than a ‘normal’ bike segment. and hence for someone like Hero/TVS to make a mark in a new segment will take time to build a brand and prove their products. as someone rightly pointed out that Bajaj and Yamaha have not been able to make any material impact in this segment despite having products for quite sometime now.

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First target - Rich countries - UK,US,Europe, followed by Latin American & ASEAN. The story is still evolving -Eicher

http://economictimes.indiatimes.com/opinion/interviews/will-focus-on-latin-american-south-east-asian-markets-siddharth-lal-eicher-motors/articleshow/41517021.cms

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Hi Raj,

Based on the reference fromhttp://www.business-standard.com/article/companies/eicher-motors-still-a-royal-enfield-show-cvs-yet-to-fire-114092600400_1.html

What are the earnings estimates we can think for FY15, and FY16? Last year EPS was around 103 and currently quoting trailing p/e of 110+.

Story seems to be more unfolding to big geo/countries. Above article mentions about new product/platform – Any idea on the same. Thanks.

-Muthu

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Hi Muthu,

EPS close to ~250 for CY14 (3 months from now) looks achievable to me.

So, ~3 months from now, at this valuation, it will be close to ~45 times trailing earning.

Demand scenario for RE hasn’t changed much. Company looks capable of doing 4.5 lacs RE in CY15 which is 50% growth from here. If you go by Edelweiss report, they think Eicher can do ~450 EPS in CY15 !! which is 25 times forward really. Even more margin expansion!

But am not thinking so far. Just taking things as it unfolds and of course tracking the monthly numbers.

New product platform is not unveiled yet. Will have to wait for more news on that.

Have to keep in mind, RE’s current annual sales are less than monthly sales of a single major player in 2-wheeler like say Bajaj.

I think it’s quite possible that RE can touch 1 milion sales per year in next 3-5

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Eicher Motors Ltd. reported total motorcycles sales of 28,020 units in September 2014, higher by 65 percent than 17,005 units in last September.

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For RE, the monthly sales trend since Jan 2014 as compared to the corresponding month in 2013 is as below

Jan : not readily available, but I remember that it used to be in the 70’s and 80’s

Feb : same

Mar : same

Apr +87%

May +86%

Jun +83%

Jul +80%

Aug +66%

Sep +65%

I was re-re-reading the annual report of 2013 (Letter to Shareholders) and the concall transcript of Q2-FY14 results. The management expects the current expansion plan of the RE business to be completed in CY2015 (they have been investing Rs 600 crores) which will result in a peak production of 50K units per month by mid-2016, give or take a few. For CY14 they expect to reach close to 3,00,000 units production and approx. 30K units by December 2014. In CY15, with starting production of 30K units per month, they expect it to increase to reach 40K per month by Dec â15, resulting in more than 4,00,000 units produced in CY2015

Thus, I expect following production numbers:

CY2013 â 178121

CY2014 â 300000 (growth of 68% over 2013)

CY2015 â 410000 (growth of 37%) CY2016 â 550000 (growth of 34%, assuming no further capacity is added, which is not an accurate assumption, as management has stated that they will continue to increase capacity along the way).

The key point is therefore to continue to monitor the monthly sales numbers (as the growth would be influenced by an increasing base of the previous year) and the plans of the company to keep increasing capacity. I am not so worried about demand as yet, as I think that the company would be easily able to sell whatever it produces. I would also keep monitoring the efficiency of the new capacities added, i.e. the ROA, ROE and ROCE should continue to be maintained/improved as has been managed by the company in the past. An important factor influencing this would be margin expansion, which is possible as the company sells more of its recently launched higher end bikes, and exports more (where realisations are better).

Icing on the cake is the trend of the CV business. Similar monthly growth trends since Jan 2014 over corresponding month of 2013 of sale of CVs is as below:

Jan -30% (minus)

Feb -23%

Mar -12%

Apr -12%

May flat

June +27% (plus)

July +6%

Aug -7%

Sep +11.6%

Although the trend is not yet 100% established, it appears to be on an upward trajectory. While the RE business is running at 100% capacity, requiring more and more investments, the CV investments have already been done and the capacity is ready, but is substantially under utilized and there is a significant level of operating leverage built in. I maintain that this will be the game changer for the company going forward.

I expect CY14 EPS to be around 220-230 and CY15 to be around 350-360 on conservative basis. At Rs 12000 the company is quoting at around 33x one year forward.

Discl. Hold from lower levels, and added recently near the all time high as well as near the bottom of the recent correction.

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Vinay. Thx. A few brokerages pointed to a target of 13 k but if they continue to execute, is it fair to expect 20k by 2016? There was some talk of engine plant and new platform for CVs with new collaboration and they may catch the fancy too

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Kalyan, I had commented on the non-RE business and its drivers in one of my earlier posts, and the thesis remains the same. The new engine plant for Volvo and Eicher Pro platform for CVs are ready and waiting for demand pick-up. If the company continues to post 40-50% growth in RE numbers next year also, backed by additional investments, and the CV portion continues its uptrend, the share price would continue to give handsome returns as in the past. Please note, this is not a recommendation, in line with forum guidelines, hence no price targets being mentioned.

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@Vinay,

Great Analysis.I see this idea as multiyear wealth creating after 3 years profit growth of around 40-50% (very conservatively) and then stabilising at around 25% for next 10 years. The key risk to watch out is the global expansion efforts and success of same. The positive about the company is price tag of product. With around 125,000/- price per RE, it is perfectly placed to take advantage of growing 25-30 years (with 2-3 years work experience and having income of around 50,000-75,000/- per month). Indian Two wheeler industry is more than 1 cr units being sold per annum with average realisation of around 30-40,000/-. So major issue on demand from RE front with cyclical CV business which is expected to observe upward cycle.

One more positive I like is management control with Siddharth Lal, who has revived the RE brand with unique positioning and his young age. The Lal family hold around 55% stake and Siddarth Lal with Age being less than 45 years, we can see clear management focus for at least 10 years.

Disclosure: Recently purchased shares at around 11,500/- prices.