Eicher Investment CallNSE:EICHERMOT
Eicher Motors Limited, incorporated in 1982, is the listed company of the Eicher Group in India and a leading player in the Indian automobile industry and the global leader in middleweight motorcycles. Eicher has a joint venture with Sweden’s AB Volvo to create Volvo Eicher Commercial Vehicles Limited (VECV). VECV is engaged in truck and bus operations, auto components business, and technical consulting services business.
Fundamentals of the company: -
Iconic Brand
It is the owner of the iconic Royal Enfield brand which is focused on mid-sized motorcycles (250-750 cc). Classic, Bullet, Himalayan are some of the brands that come under its Royal Enfield brand. It is sold in 60+ countries globally. It also provides protective riding apparel, urban casual wear, and Motorcycle accessories. It has launched two BS-VI Compliant Motorcycles, i.e. Classic 350 BS-VI and Himalayan BS-VI in FY20.
Commercial Vehicle segment
Its VECV segment makes- light & medium-duty trucks, heavy-duty trucks and buses, engineering components, and aggregates. It is also the manufacturer of medium-duty base engines for Euro VI requirements of the Volvo Group. It has launched India’s first BS-VI compliant CV range in FY20.
Manufacturing Facility
It has 3 Manufacturing Facility around Chennai.
Its VECV’s manufacturing plant in Pithampur, Madhya Pradesh produces medium-duty five- and eight-liter engines.
Its VE PowerTrain plant is the first engine plant in India to produce a Euro-6 compliant base engine.
A new body shop for Pro 2000 and Pro 8000 trucks has been commissioned and installed.
Capacity expansion
Its Phase 1 capacity expansion for the Bhopal plant is 40k vehicles per annum.
Its VE PowerTrain plant current capacity is 50,000 engines, scalable up to 100,000 engines.
Distribution
It has 1889 dealers (989 stores and 900 studio stores) across 1,550 cities. Its network has grown 3 times in the last 5 years.
It has 308 dealers, 27 distributors for its Bus Segment.
It has added 35 new stores across international markets in FY19-20, increasing its overall touchpoints to over 660 stores including 77 exclusive stores and 585 multi-brand outlets.
Market Share
Mid-size Motorcycles segment: >95% in FY20.
VE Commercial Vehicles market share in domestic LMD segment: 29.5% in FY20.
Above 125cc segment: 26.6% in FY20.
Commercial Vehicle: 14.6% in FY20.
Overall Motorcycle segment: 6%.
Eicher HD Trucks Market Share: 5.1% in FY20.
Revenue Mix
Domestic: 91% In FY20.
International: 9.1% in FY20 which was 2.8% in FY16.
Average ROE (Return on Equity) for last 3, 5 and 10 years are 19%, 23% and 24% respectively (all above 15%).
Debt to equity at 0.01 (less than 1 is good), Interest Coverage at 107 (greater than 3 is good), Current ratio at 2.73 (greater than 1.5 is good), FCF to CFO at 51%.
TTM sales growth of 26% and TTM profit growth of 42%.
Dividend yield of 0.71% (consistent dividend payer since 2009).
Borrowings came down to 122cr in September 2021 from 249cr in March 2020.
Details from credit rating report presented by ICRA in Sep'21
Eicher Motors Limited: Ratings reaffirmed
Rationale
The reaffirmation of ratings of Eicher Motors Limited (EML) continues to factor in its strong business profile, as evidenced by its market leadership (>90% share) in the premium middle-weight motorcycle segment (>250cc-800cc) in India, its established Royal Enfield (RE) brand, strong product portfolio and well-developed dealership and aftersales network. The ratings also favourably factor in its strong financial profile, reflected in its healthy return indicators, credit metrices and a superior liquidity position.
In FY2021, the Covid-19 pandemic exacerbated the already weak two-wheeler (2W) demand environment, and additionally disrupted the supply chain ecosystem. Consequently, EML reported a 13% YoY contraction in its consolidated sales volumes in FY2021 vis-à-vis 9% contraction for the overall motorcycle segment (domestic + exports). Nonetheless, improving pace of the vaccination programme, coupled with an increasing premiumisation trend, is expected to augur well for EML. Its strong brand pull, regular product launches/ refreshes supported by expansion of its overseas presence is likely to support its growth strategy.
The ratings continue to factor in the strong financial profile of the company, evidenced by its healthy profitability (average OPBDITA and ROCE of ~27% and over ~35%, respectively, over the past five years) and cash accruals, negative net debt position and robust liquidity profile (cash, cash equivalent and investments of ~Rs. 7, 790 crore as on March 31, 2021). While commodity price headwinds and semiconductor chip shortages may constrain profitability in the near-term, ICRA expects EML’s cost rationalisation initiatives, better product mix and increasing exports to support its profitability. The company is expected to fund its capacity expansion/ new product development plans from internal accruals/ cash balances, thereby keeping its dependence on external borrowings negligible.
EML’s commercial vehicle (CV) business under VE Commercial Vehicles Limited (or VECV, a 54.4% subsidiary of EML) has improved its presence in the domestic market over the last few years, despite operating in a highly cyclical industry, prone to stiff competition. This had been aided by continuous product launches/ refreshes, technology advancements, expanding dealer and after-sales networks, and targeted marketing efforts.
ICRA expects the Government’s thrust on construction and infrastructure projects, coupled with the potential implementation of a fleet modernisation and scrappage programme, to support demand for VECV over the medium term. The company continues to maintain a strong liquidity position, which is likely to limit any funding support requirements from EML.
The Stable outlook on EML’s long-term rating reflects ICRA’s expectation that it will continue to maintain its leadership position in the Indian premium motorcycle sub-segment, aided by its established brand and product portfolio, regular investments in new model launches and extensive dealership network. The same is likely to help the company successfully navigate through the uncertainties caused by the pandemic and maintain a robust credit profile.
The company’s volumes grew at a CAGR of ~10% over FY2015- FY2021 vis-à-vis marginal decline for the overall domestic motorcycles segment. Despite the increasing competition from domestic and international OEMs, RE is expected to maintain its stronghold in the target sub-segment over the medium term, backed by its niche brand and value proposition, expansive dealership, and after-sales service network (2,0711 domestic
touchpoints in June 2021 against 527 in FY2016).
Regular new launches and product variations underpin RE’s technical prowess. With launch of the Himalayan (early 2016), The Twins (FY2019) and Meteor (FY2021), it has demonstrated its capability to develop new models from the ground up, incorporating new engines as well as a platform. This has given the existing RE users a chance to upgrade and helped ramp up its presence in export markets.
EML’s liquidity is superior as reflected by its cash, cash equivalents and investments (MF’s) of ~Rs. 7,790 crore as on March 31, 2021. The company does not have any long-term loans on its balance sheet. Healthy cash flows from operations coupled with negligible debt obligations and favourable working capital cycle, have enabled EML to maintain a superior liquidity profile, despite a large capex undertaken in the last few years. In line with its track record, the entire capex for FY2022 (estimated at around Rs. 500-600 crore) is also expected to be funded through internal accruals. Despite near-term demand uncertainties, ICRA expects the company to continue to maintain a strong liquidity profile.
Risks
RE’s product portfolio, concentrated in the >250cc to 650cc sub-segment, caters to a niche clientele. Despite YoY improvement over the years, the >250-800cc sub-segment constituted only 6% of the total 2W market in India (in FY2021). Further, within the sub-segment also, the company relies heavily on the Classic brand/models, which accounts for over 60% of the motorcycles sold. While the company has launched new brands
(within the same sub-segment) over the past few years, there scale-up remain to be seen. Lack of segment diversification and product concentration remains a credit sensitivity for the company. Furthermore, several domestic and international players have entered the premium sub-segment with new products in the past few years. The increasing competition could limit the pricing power of the company to some extent.
While RE’s export volumes in FY2021 had increased at a CAGR of 33% in FY2015-2021 on a YoY basis, these accounted for only ~6% of total volumes sold during FY2021. Thus, the company remains exposed to geographical concentration risk, with India remaining its key market. However, over the past few years the company has expanded its distribution network in over 60 international markets. The company established one assembly facility in Argentina in August 2020 and its Columbia facility became operational in August 2021. In addition, it is working towards setting up assembly operations in Thailand, Brazil, and certain other locations to improve its competitiveness. The 650cc Twin motorcycles and newly launched Meteor 350 have been well received in the mature markets. The company’s ability to increase exports could offer a significant scope of market expansion and, thereby, help mitigate the impact of any slowdown in the domestic market.
Why is it a good buy right now?
on weekly charts NSE:EICHERMOT is trading at a confluence zone of 3 resistances and 3 supports. Also, it is trading near its 10-year average PE of 41 (current PE is 42).
