Multiple growth levers for Eicher


Robust sales growth, as well as prospects for its commercial and two-wheeler segments, have helped the Eicher Motors stock gain 47 per cent since the start of the year, compared to 20 per cent for the Sensex and 27 per cent for the BSE Auto index.

Despite the slowdown in the commercial vehicles (CVs) segment, the company through its joint venture with Volvo, has been able to grow faster than the sector. In addition to the domestic truck business, the joint venture will also supply (medium duty commercial vehicle) engines to Volvo worldwide. While demand in the CV space remains weak (industry volumes for the year-to-date are down 16 per cent year-on-year) and freight rentals are up, the sector is banking on festival demand to spur sales.


While the CV joint venture, given its product range and technology inputs from the world’s second-largest truck player, put it on a strong footing, higher profit growth is likely to come from its two-wheeler and engine businesses, feel analysts. Its two-wheeler business, which makes motorcycles and has a presence in the 250-500cc categories, has been registering strong sales growth.


BETTER SHOW AHEAD In Rs  crore CY11 CY12E CY13E Sales  5,697 6,426 8,200 % change y-o-y 28.9 12.8 27.6 Ebitda  574 629 869 % change y-o-y 50.7 9.6 38.2 Ebitda (%) 10.1 9.8 10.6 BPS change y-o-y 147 -29 81 Net profit  309 366 497 % change y-o-y 63.5 18.4 35.8 P/E (x) – 16.7 12.2 E: Estimates   Consolidated financials    Source: ICICI Securities 


ICICI Securities analysts Sanket Maheshwari and Vijit Jain while cutting earnings estimates for the CV business, say Eicher Motors in not just about CVs but also about motorcycles and engines, both of which will be significantly contributing to its CY13 earnings. At Rs 2,234, the stock trades at a reasonable 12 times CY13 estimates and analysts have target prices ranging Rs 2,400-Rs 2,500.

CVs: Market share gains
While Eicher is a strong player in the 7.5-12 tonnes category (38.8 per cent market share at August-end), it is trying to increase its share in the heavy CV market (3.3 to 7.2 per cent share across heavier categories) and is planning an investment of Rs 1,000 crore over the next couple of years.

The company has set an aggressive target of achieving heavy-duty CV sale of 44,000 units (4,210 units in CY10) and increase its share to 15 per cent on the back of new product launches, sales and distribution network by CY2015.

For its engine business, an 85,000 capacity plant (first phase) is expected to start production in the March quarter of 2013. While Navin Matta of Daiwa Capital expects the engine business to achieve a sales volume of 40,000 over the next two years, research firm Systematix pegs additional revenues from the same to be in the region of Rs 2,500 crore.

Macro worries
The rise in diesel prices and a fall in industrial production will have an impact on the company’s sales in the near-term as reflected in the flat sales year-on-year in August as well as for the current financial year. While the company has gained a 160 basis points market share in the fiscal year-to-date (compared to the year-ago period), the going ahead could be tough as sector volumes are expected to shrink 10 per cent for FY13.

What helped the company was the fact that sales in the 7.5-12 tonnes category (given last mile demand) fared better than other categories that were pegged back by the fall in mining activity, among others. Moreover, in addition to incumbents (Ashok Leyland and Tata Motors) competition in the form of Bharat Benz, Mahindra Navistar and Asia Motor Works (AMW) could make it tough for the company as it tries to gain market share.

Two wheelers: Strong show
The company plans to increase its capacity to 150,000 motorcycles through greenfield expansion by March 2013, which will be able to increase monthly production to 13,000 from 10,000 currently.

At a time when two-wheeler sales have been muted and margins under pressure, Eicher, which produces only premium segment bikes, saw strong volume growth. Its June quarter volumes grew by 48 per cent year-on-year and this coupled with a price rise, soft commodity prices and operating leverage gains helped it achieve 220 basis points increase in margins.

In fact, Ebitda margins at 15.4 per cent in the June quarter were the highest in its history. Analysts expect this to trend up to 18 per cent after the expansion of capacity. The company has also ramped up its components/after sales service business, which now contributes about 10 per cent of revenues from six per cent three years ago. While this business contributes 15 per cent to Eicher’s consolidated topline, its share of profits is over 40 per cent, which will rise further given the faster growth.

Eicher’s margins convey a mixed profitability outlook. While its two-wheeler business has strong margins (15 per cent plus), CV business margins are half of that. Though it outperformed the sector, higher discounts and incentives, market share expansion and the fact that its engine business gets lower margins, CV margins are likely to be subdued.

However, analyst Silky Jain of Nirmal Bang says the company’s robust earnings growth and strong balance sheet (Rs 1,400 crore cash for joint venture and standalone entity put together; and nearly debt-free) will help it to continue its growth story as well as manage the slowdown in an effective manner.