Lately, investors have been smitten with the business of Eicher Motors, the listed parent of Royal Enfield (RE) that makes the Bullet and Hunter bikes.

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The rising investor interest is evident from the 13 percent gain in the stock in the past month and a 30 percent rally in the past three months. Though the stock suffered a bit of a hit on the exit of chief financial officer Kaleeswaran Arunachalam, year-to-date, the scrip has gained more than 30 percent.

Many analysts are also bullish on the business model of Eicher Motors. They see growth in volumes because of new product launches, a rise in export volume from channel expansion and market share gains.

Additionally, as the operating leverage kicks in, the market is confident about the motorcycle company's operational performance improvement.

Why is the market riding high on Eicher Motors?

New product launches

The RE maker has a strong pipeline of launches planned. Market participants believe the new Hunter 350cc would draw incremental volumes given its attractive price of about Rs 1.5 lakh for the factory model and differentiated product offering that is light in weight, non-cruiser, and urban fit.

The company is focused on getting new customers with the launch of Hunter. During its launch, RE global website visits increased sharply by 48.2 percent to 4.7 million. Analysts noted that RE targets to launch multiple products over the next 18-24 months, providing an upgrade option to its existing customers.

To factor in improved demand momentum from Hunter, HDFC Securities raised its estimates for FY23 and FY24 by 3 percent each.

Eicher management realised that there is a set of customers who are RE enthusiasts, but none of the RE bikes suits their needs. Such customers wanted cruiser bikes, but those that are lighter than RE, much more accessible and could be manoeuvred smoothly. Hence, it conceptualised the Hunter in 2016, which is almost 13 kg lighter in weight and easy to handle.

Axis Securities said, “Launch of Hunter 350 at lower price raises the accessibility of RE, while its agile and light features fill the gap in RE’s portfolio, which the company believes will lead to increase in volumes from an exclusive customer base who likes RE as a brand but wants an affordable and light motorcycle”.

Even HDFC Securities thinks RE could be a key beneficiary of the premiumisation trend in India because of its dominant position in the >250cc market in India.

Despite operational headwinds, RE has delivered healthy operating cash flow over the last few years. The average operating cash flow for the last four years was Rs 16 billion.

RE has been forced to take an almost 30 percent price hike in the last three years due to regulatory compulsion and a sharp rise in input costs which seems to have weighed on volumes slightly, analysts believe.

Given this backdrop, RE is now looking at a re-balancing strategy, wherein they intend to secure a balance between growth and profitability.

RE dominates the market share of more than 85 percent in the 250cc+ segment in India, and it has increased its market share to 36 percent in the first quarter of FY23 from around 33 percent in the first quarter of FY22 in the 125cc+ segment. The company now holds the first position in the 125cc+ market, Axis Securities highlighted.

Demand remains strong for RE’s Classic and Meteor, analysts pointed out.

RE continues to maintain around 85 percent of the market share in the 250cc category. It has gained share in the >125cc segment as well from approximately 33 percent sequentially to about 36 percent currently.

UBS, meanwhile, downgraded the stock rating to neutral as post the stock rally, the brokerage sees limited upside potential.

Exports

The bullet manufacturer sees a strong demand pull from its key markets. Regarding exports, the firm believes that RE is in a stage where it was in the domestic market in FY11 and expects to see sustained growth in the coming years.

Prabhudas Lilladher noted that RE recorded its highest quarterly exports of around 29,000 units in the first quarter of FY23 against about 25,000 in the fourth quarter of FY22.

“We expect export business to witness significant growth over the next few years (we build in 30 percent volume CAGR over FY22-24E) led by channel expansion and market share gains,” Prabhudas Lilladher said in a note.

Ease in semiconductor shortage and the EV story

The management of the Indian multinational automotive company indicated ease in the supply chain situation and softness in commodity prices. It expects a gradual improvement in production from hereon to help further improve margin.

Eicher Motors’ management indicated that they currently understand the electric vehicle (EV) technology and how it could be introduced in RE bikes without disturbing the DNA of the product.

However, the management has also indicated that any tangible EV product from RE is at least 3-5 years away.

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First Published:Aug 26, 2022 10:51 AM IST