@Dhiraj: While we all are optimistic about Eicher, we should remember not to look at it as 10-12 year story. The current Mcap if doubles in 2 years become 60,000 Cr. To expect 25% for 10 years after that will be 6 lakh Cr Mcap. I think that expectation is too stretched.
I think Eicher can be held till RE growth is intact and VECV growth kicks in & continues. That could be 3-5 years timeframe.
Disc - Invested
I agree with Nikhil, Itâs too early to assume, Eicher will continue to grow at rate of 25% for next decade. Plus personal vehicle industry doesnât lend well to that kind of extrapolation ?
Also once the growth moderates, the valuation can be expected to come to the range of what is given to other major 2-wheeler players like Bajaj/Hero, somewhere close to 20-26 trailing PE in current times.
If growth kicks in for VECV, then we can expect profit growth greater than sales growth for few more years before it stabilizes.
@Raj and Nikhil:
While I take your point about being realistic in growth projection,find enclosed my rationale for projected growth rate of 25% at revenue for a decade.
Eicher is almost at the level where total motor cycle industry was in say 1973-74 at around 3,00,000 units. So while the projection of sales at 25% appears optimistic, with 17% volume growth (asobservedfor Motor cycle in 1970s) and 5% price growth, it shall not be impossible.
During 2005, household with income >1 mn, were only 1.2 million, expected to go up 3.3 million in 2015, and further 9.5 million in 2025. The CAGR of same over decade is also around 11%. Further with the target segment not so price concious, thecompanyshall able to increase price byinflationaryrate. Also once threshold per capita income crossed, there would be significant jump in demand (as observed in Car with >1,000 USD per capita income).
While making these estimate, I do understand that 25% compounding it too huge, but still believe that Eicher has all potential to achieve same at current juncture.
Feel free to provide your view, even if you do not agree. It may assist me to challenge my rationale and would assist me in revising downward revenue projection. I intend to make Eicher my largest holding over next 3-6 months.
Haley-Davison-Financial.xlsx (9.8 KB)
@Nikhil, My projection was on Revenue and Profit growth and not market capitisation. However, if the company grow constantly at 20% p.a., I believe the Market Cap has no other option but to follow at higher rate 20%. In case of Eicher, PE expansion has already being broadly over. However, even on current scale, if net earing grow by 25%, for which I have provided my rationale, why shall Market capitalisation shall not increase at above rate? The main question is about 10 years, CAGR revenue and profit growth at 25% p.a. to which I agree with your point.
It may of great help if any of us have Hero Honda, Sales and Net profit figure for 1985, 1995, 2005. That would real so the potential of two wheeler. I might be very optimistic, but then so is the companyâs performance in last three years 
Good discussion. Gives some perspective regarding potential â of growth rates and market size. Historical analogies in different time and different geography can certainly give broad ideas. Just one point that the decade of 1992-2002 was a golden decade for India in which pent up potential of last 3-4 decades was released in relatively quick time. I am doubtful whether those times will be seen again.
As with any of my other holdings â whether they are multi year structural growth stories, or cyclical turnarounds â I would blissfully try to envisage the long term picture, but keep reviewing the story every year or half year. I would view the quality points made by Dhiraj in this perspective. I can sense that, while there may be different opinion regarding the company over 10 years, there is relatively broad consensus regarding the next 2-3 years. Which is all one needs at any point in time. At the same time, I will continue to look at Eicher as a cyclical stock as long as CVs continue to contribute to the majority of the sales. Yes, down the line, if RE makes up 80% of the sales turnover (not profit), only then one can view and draw comparisons with other local and international bike cos. But even then, the element of cyclicality cannot be done away with as it will be still be a consumer non-discretionary business, tied to economic cycles.
@dhiraj: Great links. Thanks a lot specially for Harleyâs financials.
Letâs monitor Eicher story year on year.
For market cap, I have some prejudices. Hero selling 6 lakh bikes a month has Mcap of 56,000 Cr, Bajaj 68,000 Cr. Even Tata motors with all itâs Jaguar growth commands 167,000 Cr (USD 28 billion). Globally the largest auto maker Toyota has Mcap of $200 billion and Harley $12 billion.
At some point, size and market cap starts getting too big for consistent growth. I find it difficult too imaging Eicher at 6 lakh Cr ($100 billion) Mcap even after 12 years. Too few auto companies have achieved that globally. And our largest company TCS has Mcap of $80 billion today.
Just my point of view.
While broadly agree with you that after doubling from 30,000 Cr to 60,000 Cr it would be difficult to grow at 25% CAGR in Market capitilisation. However, at the same would like to bring to your notice my analysis of Motilal Oswal Wealth creation studies over the year. The only company which has appear maximum number of time i.e. 18 time is Hero Motorcorp(Again this is based on my interpretation of data and could have scope for errors in compilation).I am enclosing excel sheet providing wealth creation CAGR (measured by Market Cap) and Absolute Market Cap over during every study five years from 1991-1996 onward for Hero Motors.I have divided 5 years market capitalisation growth by 5 to get average Market Cap growth per annum for Hero Motor and then added same over 18 years. The total wealth growth during 1996-2013 period translate to Rs 32,371 Cr. (The better approach would have been to check Market Cap in 31-3-96 and 31-3-2013 and do CAGR of same. However, do not have that data so used this as an second best indicator). In 1996, who could have believe that in next 18 years, the company would increase market capitalisation by 32,000 odd crores? Compare this India GDP of Rs 11,05,102 Cr at Current Price during FY1996, which increased to Rs 82,76,665 Cr at Current price in FY2012. Only point I am making is that if growth in sales and profit is likely to grow at 20-25%, nothing can stop market cap to grow by same number. However, there is a BIG "if" of consistent 20-25% growth in topline and bottom line in next 10 years, which very few say, around 50 companies out of 5,000 odd listed companies would be able to achieve.
In the second excel sheet, I have listed table again from Motilal Oswal Study on consistent wealth creaters in 10 studies during 2004 to 2013 period with PAT CAGR, Market Cap CAGR, ROE and P/E. The point is that market cap follow growth in profit and efficient use of Capital (measured by ROE). The company with growth in ROE over period with higher growth in PAT have observed P/E Expansion (like Asian Paint) while with declining ROE has maintained PE (like Hind Zinc and Axis Bank).
While it is not right to be look into past and predict future, but then, I comfortable about growth rate of 20% (revising downward from 25% which I mentioned in previous post) at least in next decade with operating leverage resulting marginally higher growth say 22-24% for PAT, CV/Engire business growth being additional and hence becoming optimistic about prospect of Eicher.I am convinced that Eicher is on the correct growth path and would continue to monitor performance over the period. The more consistent the growth, higher conviction at my side.If my understanding is correct, I see Eicher as future Hero Motorcorp.
Other name in same league are HDFC (17 times), Wipro, Asian Paints, ITC, Cipla, GSK Pharmaceutical (appearing 16 times), Nestle, M&M, Ambuja Cement, Dr Readdyâs Lab and Infosys (appearing 15 times) in Motilal Oswal Wealth Study as per my analysis.
As usual, appreciate your revert (which also brought my growth expectation down from 25% p.a. to 20% p.a.on topline growth) and eager to get your as well other members view. Please let me know in case I have read too much from data or generlise the growth on straight line.
Hero-Motororp-MOST-Study-analysis.xlsx (13.4 KB)
Hi Dhiraj,
I must thank you again for detailed study and numbers. Great job. Iâll try to put my general thoughts on Indian two wheeler market and Royal Enfield. My numbers are just approximations and not accurate to the point.
1). For FY2013 Indian two wheeler market was 1.6 Cr. 1.2 Cr bikes and 40L scooters. Assume FY14 to be similar figure. RE will sell 3 lakh bikes which is just 2.5% of bike sales.
2). As Vinay pointed out, 1992-2002 was golden decade for motorcycles. India already is largest two wheeler market in world. So I would like to take volume growth of 10% for coming 10 years.
3). That takes number of bikes to 3.1 Cr per year in 2024.
4). Now this is really a very wild guess but some of us agree that RE can take 5-6% share in domestic bike sales. Which gives us around 15-18 lakh bikes per year.
5). Export volume depends purely on international success. But lets again assume that RE is huge success in international markets and is able to sale 5-6 lakh bikes per year in 10 years time.
6). All this gives us RE volume of 20-24 lakh. Considering 6L volume in 2016 the volume CAGR for 2017-2024 shall be 16-19% which is very good on volume basis. Including inflation of 6% the revenue might achieve 22-25% CAGR.
7). So your case of 25% CAGR might play out. It just needs great success in international as well as domestic markets.
8). VECV is cyclical part of the business but has lot of potential and considering exports, that part will grow volumes at 12-15% over 10 years too. But itâs just a guess at this point.
9). Realization per bike today is 100,000 on P&L account per Q2 CY14 results. With 6% inflation 2024 will have realization of 180,000 (better with volume tilting towards higher end bikes). At 20L units sales can be 36,000 Cr and with PAT margin of 20% (18% today), PAT of 7,200 Cr
10). VECV sales of 5000 Cr in CY14 with 12% CAGR for 10 years can be taken at 15,000 Cr. And PAT with net margin of 6+% will be 1000 Cr. We will have to just ignore this if RE really grows as per above dreams.
11). Assuming PE of 25-30 on PAT of 7200 Cr gives us Mcap of 1.8-2.16 lakh Cr. PE of course assumes that growth moderates a lot.
What do you think? I know itâs lot and lot of assumptions without any real basis.
Nikhil /Dhiraj
Lets assume that all your assumptions hold true and the MCap does shoot up to 180K crore. So that should give you a return of 19% CAGR, which is about 8-9% risk premium. With such high PEG and no margin of safety, the risk premium IMHO is very low. We are not even considering the heavy CAPEX needed to expand capacity by 5x.
Thanks - PJM
@ Nikhil
While P/E of 70 is very high, if the growth of 45% for next 2 years and 22-25% for following ten years (with certainity), I am more than happy to hold this investment even at 11,500 price. The impact of compounding would come in the later years. Please refer to Hora Honda Market Cap growth in my previous comment. Average Market Cap Growth during last 4 years is around Rs 4,000 Cr p.a. (2010 to 2013) as against 405 cr p.a. during 1997 to 2000 period. Nothing but compounding mathematics. Further, what is most important factor would be penetration from 2.5% to 5-6%. In case of penetration increase even by Âą1%, it would make a huge increase/decline in market capitalisation.
@Punit,
Please calculate PEG ratio, it is not high, 70% Profit growth with PE of 70% is 1 time PEG which I do not consider high. Secondly, I am more than happy with certain 20% CAGR growth over next 10 years. While it is expensive, it is because of potential proven track record. I would also request if you can suggest couple of other ideas (also with at least 2 years proven growth> 40% in earning and reasonable certainty of decade growth of 20% p.a. ) which is available with good margin of safety. I would love to invest in them. Further, while I understand risk premium, please let me know what IMHO?
Having said that, I appreciate your view and no denial that margin for safety is very low at current level.
@Punit: Hold Eicher with 2-3 years view and re-evaluate the thesis every year. Thats the way to ride a growth stock. For 10 years view I think Gruh Finance is best company in Indian market.
Hi Nikhil / Dhiraj,
Firstly I must admit that I have been fan MO wealth studies, I have written about them as well in case you are inclined - http://www.tankrich.com/2014-2-is-predicting-winning-stocks-possible/
Coming to the question can Eicher be Next Hero ? the important question for me would be
| Questions | Eicher | Hero |
| Can product become or is affordable to regular middle class ? | Unlikely | Likekly |
| Will the number of people who can afford products increase in future ? | Likekly | Likekly |
| Will brand to continue to pull next generation? | Likekly | Likekly |
| Can product retain its pricing power ? |
Likekly | Unlikely |
| Is management is competent to sustain growth | Likekly | Likekly |
and then buy :) when market acts irrational
Disclosure - Invested
Very good perspective. I would just like it see the thing in context of increasing spending power with age group 20-30s (youngster with Graduation 2 years plus experience). I understand from Conference call of Eicher is that the largest city accounting for RE Sales, is Bangalore which I believe Gujarat/Maharashtra for aggregate Two wheeler industry.
http://acma.in/docmgr/Press_Releases/ACMA_ppt_Feb_8_ver_4_0_Edit.pdf
Banglore being Hub of IT industry, the young working class (mostly single) want to show their attitude/style to the world. That is what drive RE sales with average realisation being 1.25 Lakhs. I see that class growing at 30% p.a. for reasonable long years (say 10 years) and being driver to volume.
The next question is why then RE did not flourish during late 1990s when IT was at peak. Probably, there was no marketing. The niche marketing by company by way of various ride in mountain and difficult hilly area has addedsignificantaffection from these class. So for me, main question is whether the trend is sustainable or it is one time.
Since the sales in last three years has been fantastic, onlyrationaleway to believe the shift from RE would be when sales growth decline <15% p.a. So in that way, I agree with Nikhil that to be invested with constant watch on numbers. Further supporting tailwind from CV angle which would drive the growth in sales as well as earning. That is what excite me most in this company !!!
@ Dhiraj
For calculating PEG, i take expected EPS growth rate for next 5 years, which probably is not 70%. Even though it has a proven track record, margin of safety should be of utmost importance to any investor. We constantly look and calculate upside without weighing all the downsides, which is key for capital preservation. So even though it has a proven track record and we feel that it has a high probability of growing we should not invest at such valuations. In case of Eicher, with a slight hiccup it will be quickly re-rated downwards as the valuations are rich and stock price with come down very quickly as well. Like every stock there will definitely be an opportunity to enter this stock at the right price, so we just need to sit tight and wait. There are other stocks with better predictable earnings such as Page Industries, AIA Engineering, Gruh Finance, Repco etc (though some of them are richly valued) but have better attributes to become consistent long term wealth creators. This has been mentioned before but may be a good qst to ask is âWould you buy the whole company or put all your wealth in Eicher at these prices?â
IMHO is just saying âIn my humble opinionâ
@ Nikhil
Totally agree with you that a better way to play Eicher is track it YoY basis, but i highlighted 10 years growth rate because people on the forum were predicting MCAP, sales, PAT etc in 10 years time. More importantly, i feel it is more profitableto invest in names where you can reasonably predict earnings over a long period of time. If you can get a sense of longer term earnings (especially on a conservative basis), you can reap huge upsides as people usually focus on short-term and miss out on earnings surprises, re-ratings, PE expansions etc. If you want to play 1-2 year story of any stock then you should be looking at names which are sure to be multi-baggers because that again provides asymmetrical returns with ample margin of safety.
Having said that, it may very well be possible that Eicher churn out 60-70% CAGR in bottom line for next 2-3 years and the PE stays at reasonably high level, meaning more than 2x on the stock.
@Punit
IMHO, you have a point about predictability of growth. I find Eicher well placed to become Hero Motors in next 10 years for the reason cited in previous comments. While Eicher can not show 60% growth in next 5 years, with tailwind in favour from CV business, RE growth of at 45% next two years, the earnings are very clear to me. I also hold Page, and realise that price reached Rs 1,000 in June 2010. From there increase to 5,000 was in around November 2013 (I entered in October 2013 at around 4,900). However, interesting to note is that during October 2013 to 2014 period, price jump from 4,900 to around 9,000. So jump of Rs 4,000 in 3 years, now in 1 year. Partially it would be due to sentiment change, but the point I learn that in high growth stock even if you enter late, your CAGR yield would decline, absolute wealth growth would be reasonable. I expect something similar in Eicher and today, it is among top 5 investment holding of my (with highest investment cost).
On Gruh and Repco, I have personally taken a call for next investing in finance company as my future are linked to same industry and hence want to diversify. Thanks for providing your valuable inputs and it was pleasure to interact with you.
Do look forward to more such interaction in future.
Are you trying to say that Page returns of INR 4100 (83% in bull market) from Oct 13 to Oct 14 is better than return of INR4000 (4x or 80% CAGR in flat/bear market) between 2010-2013. Absolute stock price should not matter, but percentage returns should. It is always better to own growth stocks at lower PE (as the company story is still unknown in the market) as you get exponential returns as the earnings grow and PE expands (as the story unfolds and brokers start tracking the company). As PE goes up dramatically (as in case of Eicher, Page etc) even if growth stays high, your returns will only track the underlying growth in earnings as there is not much room for PE expansion. On the contrary, prices fall very quickly for growth stock on any sign of slowdown in growth. Over the long run returns will replicate the underlying earnings and PE gets normalised.
I agree with you that Eicher returns are predictable for next 2-3 years and as such you can expect a decent return. In fact the PE may continue to expand with growth in sentiments (and speculative activity).
I hope you do well with your investments and I also look forward for more such interactions in future.
Latest investor presentationhttp://www.eicher.in/Downloads/AnalystPresentation/Investors_presentation_2014.pdf
Figure for October 2014 RE Sales 26039, as against September Sale of 28020, Aug Sales, 26643 units and Oct 2013 sale of 17659. Jan to Oct 2014 Sales: 75% higher at 246,415. The decline from September 2014 monthly sales needs further explanation.
With waiting period of 4-6 months, the only plausible explanation would be lower no. of working days in Oct due to festive season and hence lower production.
Figure for October 2014 RE Sales 26039, as against September Sale of 28020, Aug Sales, 26643 units and Oct 2013 sale of 17659. Jan to Oct 2014 Sales: 75% higher at 246,415. The decline from September 2014 monthly sales needs further explanation.
Hi Bhaumik,
The assumed low production of october due to more holidays should ideally have an impact in the future deliveries but not for the current month.My thought is due to Fesitval season (Dussera on OCT 3), there might be more sales (deliveries)registered in Sep month.
Thanks & Regards,
Anil Konda.
